Business Context and Reporting Period
This Form 10-Q covers SBC Communications Inc. for the quarterly and nine-month periods ended September 30, 1995. SBC is a major telecommunications provider, with its largest subsidiary being Southwestern Bell Telephone Company. The reporting period is characterized by a significant accounting change: the discontinuance of regulatory accounting (FAS 71) by its telephone subsidiary due to increased competition and price-based regulation.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 1995) | Value ($ Millions) | Prior Year Value ($ Millions) |
|---|---|---|
| Total Operating Revenues | 9,108.4 | 8,410.9 |
| Operating Income | 2,372.4 | 2,022.6 |
| Income Before Extraordinary Loss | 1,371.5 | 1,224.0 |
| Extraordinary Loss (FAS 71 Discontinuance) | (2,819.3) | - |
| Net Income (Loss) | (1,447.8) | 1,224.0 |
| Net Cash Provided by Operating Activities | 2,929.5 | 2,596.3 |
| Cash and Cash Equivalents (End of Period) | 454.6 | 431.0 |
| Total Debt (Short-term + Long-term) | 7,497.4 | 7,516.9 |
| Debt Ratio | 54.97% | 47.58% |
Per Share Data (Nine Months): Earnings before extraordinary loss were $2.25 per share. Net loss per share was $(2.38) due to the extraordinary charge. Dividends declared were $1.2375 per share.
Material Changes Versus Prior Period
- Revenue Growth: Operating revenues increased 8.3% year-over-year to $9.1 billion. This was driven by a 30.0% increase in wireless local service revenues and 9.7% growth in interstate network access. Conversely, long-distance service revenues declined 9.5% due to competition.
- Operating Profitability: Income before extraordinary loss rose 12.1% to $1.37 billion, reflecting strong demand for services and products despite rising operating expenses (up 5.4%).
- Extraordinary Loss: The company recorded a non-cash, after-tax extraordinary loss of $2.82 billion. This resulted from the discontinuance of FAS 71, requiring a write-down of telephone plant assets to reflect shorter economic lives and the elimination of regulatory assets/liabilities.
- Affiliate Earnings: Equity in net income of affiliates dropped 52.8% to $99.3 million, impacted by losses in UK cable operations and the decline in the Mexican peso affecting earnings from Telmex.
Guidance, Outlook, and Risks
- Management Commentary: Management does not expect a significant increase in depreciation expense in the near future resulting from the FAS 71 change. The settlement of the Oklahoma rate dispute is not expected to significantly impact earnings as costs were previously accrued.
- Regulatory Risks: In Missouri, a court reversed a settlement agreement regarding rate reviews and capital investment, though current rates remain unaffected. The company and regulators have appealed this decision. In Oklahoma, a settlement resolved a long-standing rate dispute, deferring some rate reductions to 1996 and 1997.
- Foreign Currency Risk: Future earnings from the Telmex investment remain sensitive to fluctuations in the value of the Mexican peso.
- Unusual Items: SBC expects to record an after-tax gain of approximately $110 million in the fourth quarter of 1995 from combining its UK cable operations with Tele-West Communications.
Investor Verification Checklist
- Impact of FAS 71 Discontinuance: Verify the long-term effect of the $2.8 billion write-down on future depreciation schedules and asset valuations.
- Wireless Growth Sustainability: Assess whether the 30% growth in wireless revenues can be maintained given the slight decline in average revenue per customer.
- Long-Distance Competition: Monitor the continued erosion of long-distance message volumes and the effectiveness of offsetting access revenue growth.
- Regulatory Settlements: Track the implementation of deferred rate reductions in Oklahoma and the outcome of the Missouri court appeal.
- Liquidity Position: Confirm the utilization of the $1.17 billion in available lines of credit and the stability of commercial paper borrowings ($1.47 billion).