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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for SBC Communications Inc. (Note: The input metadata lists "AT&T INC.", but the filing text explicitly identifies the registrant as SBC Communications Inc.). SBC operates in the communications services industry, providing wireline and wireless telecommunications services, directory advertising, and publishing services. The company operates five reportable segments: Wireline, Cingular (wireless joint venture), Directory, International, and Other.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 1.8% to $10,333 million, driven by the loss of retail access lines due to below-cost Unbundled Network Element-Platform (UNE-P) wholesale requirements, a weak U.S. economy, and increased competition. This was partially offset by a change in directory accounting methodology.
• Operating Income: Operating income declined 13.0% to $1,898 million. The decline was attributed to revenue losses from UNE-P, increased pension and postretirement costs, and competition. Without the positive impact of the directory accounting change, operating income would have declined 32%.
• Net Income Surge: Reported Net Income jumped to $5,003 million from a loss of $193 million in the prior year. This is primarily due to a $2,548 million non-cash gain from the cumulative effect of accounting changes (adoption of FAS 143 and directory accounting changes) and a $1,574 million pre-tax gain from the sale of the company's interest in Cegetel S.A.
• Adjusted Performance: Excluding accounting changes, income before taxes increased 50.9% to $3,663 million, largely due to the Cegetel sale gain.
• Segment Performance:
  • Wireline: Operating income fell 27.9% due to access line losses and pension costs.
  • Directory: Operating income rose 87.1% to $582 million, primarily due to the shift from "issue basis" to "amortization" accounting.
  • Cingular: Operating income increased 7.3% to $716 million, driven by reduced selling and billing expenses.
  • International: Segment income dropped 49.7% due to lower equity income from affiliates (e.g., Telmex, Belgacom) and the sale of Cegetel.

Guidance, Outlook, and Risks

• Capital Expenditures: SBC expects 2003 capital spending to be between $5,000 and $6,000 million (excluding Cingular), a reduction from prior years due to economic and regulatory pressures.
• Pension Costs: Management expects combined net pension and postretirement costs for 2003 to be between $1,800 and $2,000 million ($0.36 to $0.40 per share). This increase is driven by lower expected returns on plan assets, reduced discount rates, and rising medical costs.
• Regulatory Risks: The FCC's Triennial Review regarding UNE-P regulations remains a significant uncertainty. If current rules persist or worsen, SBC anticipates further declines in access-line revenues and potential reductions in capital expenditures and employment.
• WorldCom Bankruptcy: SBC has filed claims totaling approximately $641 million against WorldCom. A revised contract with WorldCom's subsidiary UUNET is expected to reduce second-quarter data revenues by approximately $18 million.
• Dividends: The company declared a quarterly dividend of $0.2825 per share and an additional one-time dividend of $0.05 per share.

Investor Verification Checklist

• Accounting Changes: Verify the impact of the FAS 143 adoption (asset retirement obligations) and the directory accounting change on future quarters, as Q1 2003 results are significantly boosted by these non-cash adjustments.
• UNE-P Impact: Monitor the FCC's final text on the Triennial Review to assess the long-term viability of the wireline segment's revenue model.
• Pension Assumptions: Review the sensitivity of future earnings to changes in the assumed rate of return on plan assets and medical cost trend rates.
• Cegetel Proceeds: Confirm the deployment of the $2,270 million cash proceeds from the Cegetel sale (used for debt reduction and operations).
• WorldCom Exposure: Track the recovery rate on the $641 million claim and the impact of the UUNET contract revision on data revenues.