UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x
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Quarterly
Report Pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934
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For
the quarterly period ended September 30, 2008
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or
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o
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Transition
Report Pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934
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For
the transition period from
to
Commission
File Number 1-8610
AT&T
INC.
Incorporated
under the laws of the State of Delaware
I.R.S.
Employer Identification Number 43-1301883
208 S.
Akard St., Dallas, Texas 75202
Telephone
Number: (210) 821-4105
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer,” “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
|
[X]
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Accelerated
filer
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[ ]
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Non-accelerated
filer
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[ ]
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(Do
not check if a smaller reporting company)
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Smaller
reporting company
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[ ]
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
At October
31, 2008, there were 5,893 million common shares outstanding
Financial
Data
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AT&T
Inc.
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Consolidated
Statements of Income
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Dollars
in millions except per share amounts
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Unaudited
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Three Months Ended
September
30,
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Nine
Months Ended
September 30,
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2008
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2007
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2008
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2007
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Operating
Revenues
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Wireless service
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$ |
11,227 |
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$ |
9,834 |
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$ |
32,726 |
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$ |
28,417 |
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Voice
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9,313 |
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10,164 |
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28,525 |
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30,997 |
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Data
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6,144 |
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5,880 |
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18,170 |
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17,281 |
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Directory
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1,333 |
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1,240 |
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4,114 |
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3,417 |
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Other
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3,325 |
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3,014 |
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9,417 |
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8,467 |
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Total Operating Revenues
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31,342 |
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30,132 |
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92,952 |
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88,579 |
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Operating
Expenses
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Cost of services and sales (exclusive of
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depreciation and amortization shown separately below)
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13,070 |
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11,736 |
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36,972 |
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34,816 |
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Selling, general and administrative
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7,676 |
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7,770 |
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22,976 |
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22,497 |
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Depreciation and amortization
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4,978 |
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5,322 |
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14,839 |
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16,354 |
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Total Operating Expenses
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25,724 |
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24,828 |
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74,787 |
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73,667 |
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Operating
Income
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5,618 |
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5,304 |
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18,165 |
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14,912 |
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Interest
Expense
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858 |
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887 |
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2,577 |
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2,639 |
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Equity
in Net Income of Affiliates
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257 |
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162 |
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712 |
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545 |
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Other
Income (Expense) - Net
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(81 |
) |
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(17 |
) |
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(91 |
) |
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614 |
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Income
Before Income Taxes
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4,936 |
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4,562 |
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16,209 |
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13,432 |
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Income
Taxes
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1,706 |
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1,499 |
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5,746 |
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4,617 |
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Net
Income
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$ |
3,230 |
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$ |
3,063 |
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$ |
10,463 |
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$ |
8,815 |
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Basic
Earnings Per Share
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$ |
0.55 |
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$ |
0.50 |
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$ |
1.76 |
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$ |
1.43 |
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Diluted
Earnings Per Share
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$
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0.55 |
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$ |
0.50 |
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$ |
1.75 |
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$ |
1.42 |
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Weighted
Average Number of Common |
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Shares Outstanding - Basic (in millions)
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5,893 |
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6,088 |
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5,938 |
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6,152 |
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Dividends
Declared Per Common Share
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$ |
0.400 |
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$ |
0.355 |
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$ |
1.200 |
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$ |
1.065 |
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See
Notes to Consolidated Financial Statements. |
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Financial
Data
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AT&T
Inc.
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Consolidated
Balance Sheets
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Dollars
in millions except per share amounts
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September
30,
2008
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December
31,
2007
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(Unaudited)
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Assets
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Current
Assets
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Cash
and cash equivalents
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$ |
1,594 |
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$ |
1,970 |
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Accounts
receivable - net of allowances for
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uncollectibles of $1,328 and $1,364
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16,395 |
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16,185 |
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Prepaid
expenses
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1,657 |
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1,524 |
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Deferred
income taxes
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1,560 |
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2,044 |
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Other
current assets
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2,239 |
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2,963 |
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Total
current assets
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23,445 |
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24,686 |
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Property,
Plant and Equipment
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215,420 |
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210,518 |
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Less: accumulated depreciation and amortization
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117,649 |
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114,648 |
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Property,
Plant and Equipmant - Net |
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97,771 |
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95,890 |
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Goodwill
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71,537 |
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70,713 |
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Licenses
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46,931 |
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37,985 |
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Customer
Lists and Relationships - Net
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11,495 |
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14,505 |
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Other
Intangible Assets - Net
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5,816 |
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5,912 |
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Investments
in Equity Affiliates
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2,839 |
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2,270 |
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Postemployment
Benefit
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18,164 |
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17,291 |
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Other
Assets
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6,530 |
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6,392 |
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Total Assets
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$ |
284,528 |
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$ |
275,644 |
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Liabilities
and Stockholders' Equity
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Current
Liabilities
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Debt
maturing within one year
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$ |
17,419 |
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$ |
6,860 |
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Accounts
payable and accrued liabilities
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18,690 |
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21,399 |
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Advanced
billing and customer deposits
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3,896 |
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3,571 |
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Accrued
taxes
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2,976 |
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|
5,027 |
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Dividends
payable
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2,357 |
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|
2,417 |
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Total
current liabilities
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45,338 |
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39,274 |
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Long-Term
Debt
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59,355 |
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57,255 |
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Deferred
Credits and Other Noncurrent Liabilities
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Deferred
income taxes
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27,776 |
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24,939 |
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Postemployment
benefit obligation
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25,493 |
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24,011 |
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Other
noncurrent liabilities
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14,048 |
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|
14,798 |
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Total
deferred credits and other noncurrent liabilities
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67,317 |
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63,748 |
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Stockholders'
Equity
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Common
shares issued ($1 par value)
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|
6,495 |
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|
6,495 |
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Capital
in excess of par value
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|
91,684 |
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|
91,638 |
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Retained
earnings
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|
36,613 |
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|
33,297 |
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Treasury
shares (at cost)
|
|
(21,412 |
) |
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|
(15,683 |
) |
Accumulated
other comprehensive income(loss)
|
|
(862 |
) |
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|
(380 |
) |
Total
stockholders' equity
|
|
112,518 |
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|
115,367 |
|
Total
Liabilities and Stockholders' Equity
|
$ |
284,528 |
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$ |
275,644 |
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See Notes to Consolidated Financial Statements.
Financial
Data
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AT&T
Inc.
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Consolidated
Statements of Cash Flows
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Dollars
in millions increase (decrease) in cash and cash
equivalents
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Unaudited
|
Nine
Months Ended
September 30,
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|
2008
|
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|
2007
|
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Operating
Activities
|
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Net
income
|
$ |
10,463 |
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|
$ |
8,815 |
|
Adjustments
to reconcile net income to
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|
net cash provided by operating activities:
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Depreciation and amortization
|
|
14,839 |
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|
16,354 |
|
Undistributed earnings from investments in equity
affiliates
|
|
(572 |
) |
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|
(434 |
) |
Provision for uncollectible accounts
|
|
1,297 |
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|
1,142 |
|
Deferred income tax expense
|
|
4,063 |
|
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|
486 |
|
Net gain on sales of investments
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|
(2 |
) |
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|
(29 |
) |
Gain on license exchange
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|
- |
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|
(409 |
) |
Changes in operating assets and liabilities:
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Accounts receivable
|
|
(1,597 |
) |
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|
(1,253 |
) |
Other current assets
|
|
616 |
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|
(661 |
) |
Accounts payable and accrued liabilities
|
|
(5,958 |
) |
|
|
(46 |
) |
Stock-based compensation tax benefit
|
|
(15 |
) |
|
|
(149 |
) |
Other - net
|
|
(361 |
) |
|
|
529 |
|
Total adjustments
|
|
12,310 |
|
|
|
15,530 |
|
Net Cash Provided by Operating Activities
|
|
22,773 |
|
|
|
24,345 |
|
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Investing
Activities
|
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Construction
and capital expenditures
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Capital expenditures
|
|
(14,388 |
) |
|
|
(12,124 |
) |
Interest during construction
|
|
(455 |
) |
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|
(125 |
) |
Acquisitions,
net of cash acquired
|
|
(10,086 |
) |
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|
(233 |
) |
Dispositions
|
|
1,444 |
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|
993 |
|
Proceeds
from sale of securities, net of investments
|
|
(103 |
) |
|
|
584 |
|
Sale
of other investments
|
|
436 |
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|
- |
|
Other
|
|
33 |
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|
28 |
|
Net
Cash Used in Investing Activities
|
|
(23,119 |
) |
|
|
(10,877 |
) |
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Financing
Activities
|
|
|
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Net
change in short-term borrowings with
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|
original maturities of three months or less
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|
5,188 |
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|
(4,279 |
) |
Issuance
of long-term debt
|
|
10,924 |
|
|
|
7,898 |
|
Repayment
of long-term debt
|
|
(3,143 |
) |
|
|
(3,008 |
) |
Purchase
of treasury shares
|
|
(6,077 |
) |
|
|
(8,912 |
) |
Issuance
of treasury shares
|
|
317 |
|
|
|
1,736 |
|
Dividends
paid
|
|
(7,150 |
) |
|
|
(6,584 |
) |
Stock-based
compensation tax benefit
|
|
15 |
|
|
|
149 |
|
Other
|
|
(104 |
) |
|
|
(172 |
) |
Net
Cash Used in Financing Activities
|
|
(30 |
) |
|
|
(13,172 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
(376 |
) |
|
|
296 |
|
Cash
and cash equivalents beginning of year
|
|
1,970 |
|
|
|
2,418 |
|
Cash
and Cash Equivalents End of Period
|
$ |
1,594 |
|
|
$ |
2,714 |
|
|
|
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|
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|
Cash paid
during the nine months ended September 30
for: |
$ |
3,068 |
|
|
$ |
2,518 |
|
Interest
|
|
|
|
|
|
|
|
Income
taxes, net of refunds
|
$ |
5,217 |
|
|
$ |
2,028 |
|
See
Notes to Consolidated Financial Statements. |
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|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
Dollars
and shares in millions, except per share amounts
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Nine
months ended
|
|
|
|
September
30, 2008
|
|
|
|
Shares
|
|
|
Amount
|
|
Common
Stock
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
6,495 |
|
|
$ |
6,495 |
|
Balance
at end of period
|
|
|
6,495 |
|
|
$ |
6,495 |
|
|
|
|
|
|
|
|
|
|
Capital
in Excess of Par Value
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
|
|
|
$ |
91,638 |
|
Issuance
of shares
|
|
|
|
|
|
|
87 |
|
Stock
based compensation
|
|
|
|
|
|
|
(41 |
) |
Balance
at end of period
|
|
|
|
|
|
$ |
91,684 |
|
|
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
|
|
|
$ |
33,297 |
|
Net
income ($1.75 per diluted share)
|
|
|
|
|
|
|
10,463 |
|
Dividends
to stockholders ($1.20 per share)
|
|
|
|
|
|
|
(7,090 |
) |
Other
|
|
|
|
|
|
|
(57 |
) |
Balance
at end of period
|
|
|
|
|
|
$ |
36,613 |
|
|
|
|
|
|
|
|
|
|
Treasury
Shares
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(451 |
) |
|
$ |
(15,683 |
) |
Purchase
of shares
|
|
|
(164 |
) |
|
|
(6,077 |
) |
Issuance
of shares
|
|
|
13 |
|
|
|
348 |
|
Balance
at end of period
|
|
|
(602 |
) |
|
$ |
(21,412 |
) |
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss), net of tax
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
|
|
|
$ |
(380 |
) |
Other
comprehensive income (loss) (see Note 2)
|
|
|
|
|
|
|
(482 |
) |
Balance
at end of period
|
|
|
|
|
|
$ |
(862 |
) |
See
Notes to Consolidated Financial Statements.
|
|
AT&T
INC.
SEPTEMBER
30, 2008
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
Dollars
in millions except per share amounts
NOTE
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation
Throughout this document, AT&T Inc. is referred to as “AT&T,” “we” or
the “Company.” The consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission that
permit reduced disclosure for interim periods. We believe that these
consolidated financial statements include all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the results for the
interim periods shown. The results for the interim periods are not necessarily
indicative of results for the full year. You should read this document in
conjunction with the consolidated financial statements and accompanying notes
included in our Annual Report on Form 10-K for the year ended
December 31, 2007.
The
consolidated financial statements include the accounts of the Company and our
majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates
operate in the communications services industry both domestically and
internationally, providing wireless and wireline communications services and
equipment, managed networking, wholesale services and directory advertising and
publishing services.
All
significant intercompany transactions are eliminated in the consolidation
process. Investments in partnerships and less than majority-owned subsidiaries
where we have significant influence are accounted for under the equity method.
Earnings from certain foreign equity investments accounted for using the equity
method are included for periods ended within up to one month of our year
end.
Statement
of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS
157) requires disclosures for financial assets and liabilities that are
remeasured at fair value at least annually. FAS 157 establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value.
These tiers include: Level 1, defined as observable inputs such as quoted prices
in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined
as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions. Substantially all of our
available-for-sale securities are valued using quoted market prices (referred to
as Level 1). Adjustments to fair value are recorded in other comprehensive
income until the investment is sold (see Note 2). The fair market value of these
securities was $2,196 at September 30, 2008.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes, including estimates of probable losses and expenses. Actual
results could differ from those estimates. We have reclassified certain amounts
in prior-period financial statements to conform to the current period’s
presentation.
Valuation and Other
Adjustments In accordance with Statement of Financial Accounting
Standards No. 112, “Employers’ Accounting for Postemployment Benefits,” (FAS
112) we establish obligations for expected termination benefits provided under
existing plans to former or inactive employees after employment but before
retirement. These benefits include severance payments, workers’ compensation,
disability, medical continuation coverage and other benefits. At September 30,
2008, we had severance accruals under FAS 112 of $220, of which $23 were
established as merger-related severance accruals. At December 31, 2007, we had
severance accruals of $127.
Included
in the current liabilities reported on our consolidated balance sheet are
accruals established under Emerging Issues Task Force (EITF) Issue No. 95-3,
“Recognition of Liabilities in Connection with a Purchase Business Combination”
(EITF 95-3). The liabilities include accruals for severance, lease terminations
and equipment removal costs associated with our acquisitions of AT&T Corp.,
BellSouth Corporation (BellSouth) and Dobson Communications Corporation.
Following is a summary of the accruals recorded under EITF 95-3 at December 31,
2007, cash payments made during 2008 and the adjustments thereto.
AT&T
INC.
SEPTEMBER
30, 2008
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
|
|
12/31/07
|
|
|
Cash
|
|
|
|
|
|
9/30/08
|
|
|
|
Balance
|
|
|
Payments
|
|
|
Adjustments
|
|
|
Balance
|
|
Severance
accruals paid from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
funds
|
|
$ |
540 |
|
|
$ |
(201 |
) |
|
$ |
8 |
|
|
$ |
347 |
|
Pension
and postemployment
benefit
plans
|
|
|
129 |
|
|
|
(24 |
) |
|
|
- |
|
|
|
105 |
|
Lease
terminations
|
|
|
425 |
|
|
|
(78 |
) |
|
|
96 |
|
|
|
443 |
|
Equipment
removal and other related costs
|
|
|
161 |
|
|
|
(52 |
) |
|
|
4 |
|
|
|
113 |
|
Total
|
|
$ |
1,255 |
|
|
$ |
(355 |
) |
|
$ |
108 |
|
|
$ |
1,008 |
|
New
Accounting Standards
Split Dollar Life Insurance In
2007, the EITF ratified the consensus on EITF 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements” (EITF 06-4) and EITF 06-10 “Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements” (EITF 06-10). EITF 06-4 and
EITF 06-10 cover split-dollar life insurance arrangements (where the company
owns and controls the policy) and provides that an employer should recognize a
liability for future benefits in accordance with Statement of Financial
Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions” (FAS 106). These are effective for fiscal years beginning
after December 15, 2007. We adopted EITF 06-4 and EITF 06-10 on January 1, 2008,
recording additional postretirement liabilities of $101 and a decrease to
retained earnings of $63.
FSP 157-3 On
October 10, 2008, the FASB issued FASB Staff Position 157-3, “Determining the
Fair Value of a Financial Asset When the Market of that Asset is not Active”
(FSP 157-3). FSP 157-3 provides an example that clarifies and reiterates certain
provisions of the existing fair value standard, including basing fair value on
orderly transactions and usage of management and broker inputs. FSP 157-3 is
effective immediately but is not expected to have a material impact on our
financial position or results of operations.
AT&T
INC.
SEPTEMBER
30, 2008
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
NOTE
2. COMPREHENSIVE INCOME
The
components of our comprehensive income for the three and nine months ended
September 30, 2008 and 2007 include net income, adjustments to stockholders’
equity for the foreign currency translation adjustment, net unrealized gain
(loss) on available-for-sale securities, net unrealized gain (loss) on cash flow
hedges and defined benefit postretirement plans. The foreign currency
translation adjustment was due to exchange rate fluctuations in our foreign
affiliates’ local currencies and the reclassification adjustment on cash flow
hedges was due to the amortization of losses from our interest rate forward
contracts.
Following
is our comprehensive income:
|
|
Three
months ended
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
3,230 |
|
|
$ |
3,063 |
|
|
$ |
10,463 |
|
|
$ |
8,815 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(142 |
) |
|
|
(14 |
) |
|
|
(37 |
) |
|
|
4 |
|
Net
unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
(losses)
|
|
|
(220 |
) |
|
|
(15 |
) |
|
|
(284 |
) |
|
|
134 |
|
Less
reclassification adjustment realized in net income
|
|
|
(12 |
) |
|
|
3 |
|
|
|
(28 |
) |
|
|
(37 |
) |
Net
unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
(losses)
|
|
|
44 |
|
|
|
(15 |
) |
|
|
(55 |
) |
|
|
(51 |
) |
Reclassification
adjustment for losses on cash flow hedges
included in net
income
|
|
|
4 |
|
|
|
5 |
|
|
|
13 |
|
|
|
13 |
|
Defined
benefit postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial (gain) loss and prior service
benefit included in net income
|
|
|
(31 |
) |
|
|
52 |
|
|
|
(90 |
) |
|
|
156 |
|
Other
|
|
|
(1 |
) |
|
|
- |
|
|
|
(1 |
) |
|
|
(1 |
) |
Other
comprehensive income (loss)
|
|
|
(358 |
) |
|
|
16 |
|
|
|
(482 |
) |
|
|
218 |
|
Total Comprehensive
Income
|
|
$ |
2,872 |
|
|
$ |
3,079 |
|
|
$ |
9,981 |
|
|
$ |
9,033 |
|
AT&T
INC.
SEPTEMBER
30, 2008
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
NOTE
3. EARNINGS PER SHARE
Reconciliations
of the numerators and denominators of basic and diluted earnings per share for
net income for the three and nine months ended September 30, 2008 and 2007
are shown in the table below:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerators
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,230 |
|
|
$ |
3,063 |
|
|
$ |
10,463 |
|
|
$ |
8,815 |
|
Dilutive potential
common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other stock-based compensation
|
|
|
2 |
|
|
|
2 |
|
|
|
7 |
|
|
|
6 |
|
Numerator
for diluted earnings per share
|
|
$ |
3,232 |
|
|
$ |
3,065 |
|
|
$ |
10,470 |
|
|
$ |
8,821 |
|
Denominators
(000,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
5,893 |
|
|
|
6,088 |
|
|
|
5,938 |
|
|
|
6,152 |
|
Dilutive potential
common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
6 |
|
|
|
26 |
|
|
|
12 |
|
|
|
25 |
|
Other stock-based
compensation
|
|
|
22 |
|
|
|
15 |
|
|
|
21 |
|
|
|
19 |
|
Denominator
for diluted earnings per share
|
|
|
5,921 |
|
|
|
6,129 |
|
|
|
5,971 |
|
|
|
6,196 |
|
Basic
earnings per share
|
|
$ |
0.55 |
|
|
$ |
0.50 |
|
|
$ |
1.76 |
|
|
$ |
1.43 |
|
Diluted
earnings per share
|
|
$ |
0.55 |
|
|
$ |
0.50 |
|
|
$ |
1.75 |
|
|
$ |
1.42 |
|
At
September 30, 2008, we had issued and outstanding options to purchase
approximately 206 million shares of AT&T common stock. The exercise prices
of options to purchase a weighted average of 173 million shares in the third
quarter and 131 million for the first nine months exceeded the average market
price of AT&T stock. Accordingly, we did not include these amounts in
determining the dilutive potential common shares for the respective period. At
September 30, 2008, the exercise price of 34 million share options was below
market price.
At
September 30, 2007, we had issued and outstanding options to purchase 241
million shares of AT&T common stock. The exercise prices of options to
purchase a weighted average of 73 million shares in the third quarter and 100
million for the first nine months exceeded the average market price of AT&T
stock. Accordingly, we did not include these amounts in determining the dilutive
potential common shares for the respective period.
AT&T
INC.
SEPTEMBER
30, 2008
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
NOTE
4. SEGMENT INFORMATION
Our
segments are strategic business units that offer different products and services
over various technology platforms and are managed accordingly. We analyze our
various operating segments based on segment income before income taxes. Interest
expense and other income (expense) – net are managed only on a total company
basis and are, accordingly, reflected only in consolidated results. Therefore,
these items are not included in the calculation of each segment’s percentage of
our consolidated results. We have four reportable segments: (1) wireless,
(2) wireline, (3) advertising & publishing and
(4) other.
The
wireless segment provides wireless voice and advanced data communications
services.
The wireline segment provides landline voice and
data communications services, managed networking to business customers, AT&T
U-verseSM TV,
high-speed broadband and voice services (U-verse) and satellite television
services through our agency arrangements.
The
advertising & publishing segment includes our directory operations, which
publish Yellow and White Pages directories and sell directory and Internet-based
advertising. Results for this segment are shown under the amortization method,
which means that revenues and direct expenses are recognized ratably over the
life of the directory title, typically 12 months. However, consolidated results
for 2007 directory operations acquired in our BellSouth acquisition are treated
differently in accordance with Statement of Financial Accounting Standards No.
141, “Business Combinations” (FAS 141).
Under FAS
141, BellSouth deferred revenue and expenses from directories published during
the twelve-month period ending with the December 29, 2006 acquisition date were
not recognized in 2007 consolidated results. Accordingly, our consolidated
revenue and expenses in 2007 related to directory operations were lower. Because
management assesses the performance of the segment including the revenue and
expenses associated with those directories, for segment reporting purposes, our
2007 advertising & publishing segment results include revenue of $196 in the
third quarter and $911 for the first nine months of 2007 and expenses of $64 in
the third quarter and $291 for the first nine months of 2007. These amounts are
eliminated in the consolidation and elimination column in the reconciliation
below.
The other
segment includes results from Sterling Commerce Inc., customer information
services and all corporate and other operations. This segment includes our
portion of the results from our international equity investments. Also included
in the other segment are impacts of management decisions affecting the entire
company for which management does not evaluate the individual operating
segments.
In the
following tables, we show how our segment results are reconciled to our
consolidated results reported in accordance with GAAP. The Wireless, Wireline,
Advertising & Publishing and Other columns represent the segment results of
each operating segment. The Consolidation and Elimination column adds in those
line items that we manage on a consolidated basis only: interest expense and
other income (expense) – net. This column also eliminates any
intercompany transactions included in each segment’s results as well as the
advertising & publishing revenue and expenses in the third quarter and for
the first nine months of 2007 as noted above.
Segment
assets for the nine months ended September 30, 2008 are materially unchanged
from the year ended December 31, 2007 with the exception of the wireless and
other segment assets. Our wireless segment assets totaled $126,563, which
increased $20,610, or 19.5%, primarily due to the acquisition of wireless
spectrum. Our other segment assets totaled $219,043, which increased $35,968, or
19.7%, primarily due to an increase in value of our investments in our
subsidiaries.
AT&T
INC.
SEPTEMBER
30, 2008
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
For
the three months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
&
|
|
|
|
|
|
Consolidation
and
|
|
|
Consolidated
|
|
|
|
Wireless
|
|
|
Wireline
|
|
|
Publishing
|
|
|
Other
|
|
|
Elimination
|
|
|
Results
|
|
Revenues
from external customers
|
|
$ |
12,571 |
|
|
$ |
17,003 |
|
|
$ |
1,333 |
|
|
$
|
435 |
|
|
$ |
- |
|
|
$ |
31,342 |
|
Intersegment
revenues
|
|
|
47 |
|
|
|
547 |
|
|
|
17 |
|
|
|
66 |
|
|
|
(677 |
) |
|
|
- |
|
Total
segment operating revenues
|
|
|
12,618 |
|
|
|
17,550 |
|
|
|
1,350 |
|
|
|
501 |
|
|
|
(677 |
) |
|
|
31,342 |
|
Operations
and support expenses
|
|
|
8,838 |
|
|
|
11,482 |
|
|
|
735 |
|
|
|
369 |
|
|
|
(678 |
) |
|
|
20,746 |
|
Depreciation
and amortization expenses
|
|
|
1,401 |
|
|
|
3,331 |
|
|
|
194 |
|
|
|
51 |
|
|
|
1 |
|
|
|
4,978 |
|
Total
segment operating expenses
|
|
|
10,239 |
|
|
|
14,813 |
|
|
|
929 |
|
|
|
420 |
|
|
|
(677 |
) |
|
|
25,724 |
|
Segment
operating income (loss)
|
|
|
2,379 |
|
|
|
2,737 |
|
|
|
421 |
|
|
|
81 |
|
|
|
- |
|
|
|
5,618 |
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
858 |
|
|
|
858 |
|
Equity
in net income of affiliates
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
257 |
|
|
|
- |
|
|
|
257 |
|
Minority
interest
|
|
|
(57 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
57 |
|
|
|
- |
|
Other
income (expense) – net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(81 |
) |
|
|
(81 |
) |
Segment
income before income taxes
|
|
$ |
2,322 |
|
|
$ |
2,737 |
|
|
$ |
421 |
|
|
$
|
338 |
|
|
$ |
(882 |
) |
|
$ |
4,936 |
|
For
the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
&
|
|
|
|
|
|
Consolidation
and
|
|
|
Consolidated
|
|
|
|
Wireless
|
|
|
Wireline
|
|
|
Publishing
|
|
|
Other
|
|
|
Elimination
|
|
|
Results
|
|
Revenues
from externa l customers
|
|
$ |
36,333 |
|
|
$ |
51,149 |
|
|
$ |
4,114 |
|
|
$
|
1,356 |
|
|
$ |
- |
|
|
$ |
92,952 |
|
Intersegment
revenues
|
|
|
143 |
|
|
|
1,633 |
|
|
|
60 |
|
|
|
201 |
|
|
|
(2,037 |
) |
|
|
- |
|
Total
segment operating revenues
|
|
|
36,476 |
|
|
|
52,782 |
|
|
|
4,174 |
|
|
|
1,557 |
|
|
|
(2,037 |
) |
|
|
92,952 |
|
Operations
and support expenses
|
|
|
23,750 |
|
|
|
34,213 |
|
|
|
2,293 |
|
|
|
1,729 |
|
|
|
(2,037 |
) |
|
|
59,948 |
|
Depreciation
and amortization expenses
|
|
|
4,327 |
|
|
|
9,770 |
|
|
|
609 |
|
|
|
133 |
|
|
|
- |
|
|
|
14,839 |
|
Total
segment operating expenses
|
|
|
28,077 |
|
|
|
43,983 |
|
|
|
2,902 |
|
|
|
1,862 |
|
|
|
(2,037 |
) |
|
|
74,787 |
|
Segment
operating income (loss)
|
|
|
8,399 |
|
|
|
8,799 |
|
|
|
1,272 |
|
|
|
(305 |
) |
|
|
- |
|
|
|
18,165 |
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,577 |
|
|
|
2,577 |
|
Equity
in net income of affiliates
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
707 |
|
|
|
- |
|
|
|
712 |
|
Minority
interest
|
|
|
(186 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
186 |
|
|
|
- |
|
Other
income (expense) – net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(91 |
) |
|
|
(91 |
) |
Segment
income before income taxes
|
|
$ |
8,218 |
|
|
$ |
8,799 |
|
|
$ |
1,272 |
|
|
$
|
402 |
|
|
$ |
(2,482 |
) |
|
$ |
16,209 |
|
AT&T
INC.
SEPTEMBER
30, 2008
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
For
the three months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
&
|
|
|
|
|
|
Consolidation
and
|
|
|
Consolidated
|
|
|
|
Wireless
|
|
|
Wireline
|
|
|
Publishing
|
|
|
Other
|
|
|
Elimination
|
|
|
Results
|
|
Revenues
from external customers
|
|
$ |
10,911 |
|
|
$ |
17,472 |
|
|
$ |
1,436 |
|
|
$ |
509 |
|
|
$ |
(196 |
) |
|
$ |
30,132 |
|
Intersegment
revenues
|
|
|
26 |
|
|
|
469 |
|
|
|
21 |
|
|
|
53 |
|
|
|
(569 |
) |
|
|
- |
|
Total
segment operating revenues
|
|
|
10,937 |
|
|
|
17,941 |
|
|
|
1,457 |
|
|
|
562 |
|
|
|
(765 |
) |
|
|
30,132 |
|
Operations
and support expenses
|
|
|
7,262 |
|
|
|
11,646 |
|
|
|
755 |
|
|
|
478 |
|
|
|
(635 |
) |
|
|
19,506 |
|
Depreciation
and amortization expenses
|
|
|
1,709 |
|
|
|
3,334 |
|
|
|
238 |
|
|
|
40 |
|
|
|
1 |
|
|
|
5,322 |
|
Total
segment operating expenses
|
|
|
8,971 |
|
|
|
14,980 |
|
|
|
993 |
|
|
|
518 |
|
|
|
(634 |
) |
|
|
24,828 |
|
Segment
operating income (loss)
|
|
|
1,966 |
|
|
|
2,961 |
|
|
|
464 |
|
|
|
44 |
|
|
|
(131 |
) |
|
|
5,304 |
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
887 |
|
|
|
887 |
|
Equity
in net income of affiliates
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
159 |
|
|
|
- |
|
|
|
162 |
|
Minority
interest
|
|
|
(43 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43 |
|
|
|
- |
|
Other
income (expense) – net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17 |
) |
|
|
(17 |
) |
Segment
income before income taxes
|
|
$ |
1,926 |
|
|
$ |
2,961 |
|
|
$ |
464 |
|
|
$ |
203 |
|
|
$ |
(992 |
) |
|
$ |
4,562 |
|
For
the nine months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
&
|
|
|
|
|
|
Consolidation
and
|
|
|
Consolidated
|
|
|
|
Wireless
|
|
|
Wireline
|
|
|
Publishing
|
|
|
Other
|
|
|
Elimination
|
|
|
Results
|
|
Revenues
from external customers
|
|
$ |
31,254 |
|
|
$ |
52,432 |
|
|
$ |
4,328 |
|
|
$ |
1,476 |
|
|
$ |
(911 |
) |
|
$ |
88,579 |
|
Intersegment
revenues
|
|
|
75 |
|
|
|
1,494 |
|
|
|
50 |
|
|
|
182 |
|
|
|
(1,801 |
) |
|
|
- |
|
Total
segment operating revenues
|
|
|
31,329 |
|
|
|
53,926 |
|
|
|
4,378 |
|
|
|
1,658 |
|
|
|
(2,712 |
) |
|
|
88,579 |
|
Operations
and support expenses
|
|
|
20,826 |
|
|
|
34,750 |
|
|
|
2,281 |
|
|
|
1,548 |
|
|
|
(2,092 |
) |
|
|
57,313 |
|
Depreciation
and amortization expenses
|
|
|
5,410 |
|
|
|
10,076 |
|
|
|
743 |
|
|
|
125 |
|
|
|
- |
|
|
|
16,354 |
|
Total
segment operating expenses
|
|
|
26,236 |
|
|
|
44,826 |
|
|
|
3,024 |
|
|
|
1,673 |
|
|
|
(2,092 |
) |
|
|
73,667 |
|
Segment
operating income (loss)
|
|
|
5,093 |
|
|
|
9,100 |
|
|
|
1,354 |
|
|
|
(15 |
) |
|
|
(620 |
) |
|
|
14,912 |
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,639 |
|
|
|
2,639 |
|
Equity
in net income of affiliates
|
|
|
12 |
|
|
|
- |
|
|
|
- |
|
|
|
533 |
|
|
|
- |
|
|
|
545 |
|
Minority
interest
|
|
|
(143 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
143 |
|
|
|
- |
|
Other
income (expense) – net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
614 |
|
|
|
614 |
|
Segment
income before income taxes
|
|
$ |
4,962 |
|
|
$ |
9,100 |
|
|
$ |
1,354 |
|
|
$ |
518 |
|
|
$ |
(2,502 |
) |
|
$ |
13,432 |
|
AT&T
INC.
SEPTEMBER
30, 2008
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
NOTE
5. PENSION AND POSTRETIREMENT BENEFITS
Substantially
all of our employees are covered by one of various noncontributory pension and
death benefit plans. We also provide certain medical, dental and life insurance
benefits to substantially all retirees under various plans and accrue
actuarially determined postretirement benefit costs as employees earn these
benefits. Our objective in funding these plans, in combination with the
standards of the Employee Retirement Income Security Act of 1974, as amended
(ERISA), is to accumulate assets sufficient to meet the plans’ obligations to
provide benefits to employees upon their retirement. No significant cash
contributions are required under ERISA regulations during 2008.
The
following details pension and postretirement benefit costs included in operating
expenses (in cost of sales and selling, general and administrative expenses) in
the accompanying Consolidated Statements of Income. We account for these costs
in accordance with Statement of Financial Accounting Standards No. 87,
“Employers’ Accounting for Pensions” and FAS 106. In the following table, gains
are denoted with parentheses and losses are not.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Pension
(benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost – benefits earned
during the period
|
|
$ |
294 |
|
|
$ |
314 |
|
|
$ |
880 |
|
|
$ |
943 |
|
Interest cost on projected
benefit obligation
|
|
|
830 |
|
|
|
803 |
|
|
|
2,489 |
|
|
|
2,411 |
|
Expected return on
assets
|
|
|
(1,400 |
) |
|
|
(1,367 |
) |
|
|
(4,201 |
) |
|
|
(4,101 |
) |
Amortization of prior service
cost
|
|
|
34 |
|
|
|
36 |
|
|
|
100 |
|
|
|
107 |
|
Recognized actuarial loss
|
|
|
1 |
|
|
|
61 |
|
|
|
7 |
|
|
|
181 |
|
Net pension
benefit
|
|
$ |
(241 |
) |
|
$ |
(153 |
) |
|
$ |
(725 |
) |
|
$ |
(459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost – benefits earned
during the period
|
|
$ |
108 |
|
|
$ |
127 |
|
|
$ |
322 |
|
|
$ |
381 |
|
Interest cost on accumulated
postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
obligation
|
|
|
637 |
|
|
|
644 |
|
|
|
1,912 |
|
|
|
1,931 |
|
Expected return on
assets
|
|
|
(331 |
) |
|
|
(336 |
) |
|
|
(995 |
) |
|
|
(1,010 |
) |
Amortization of prior service
benefit
|
|
|
(92 |
) |
|
|
(90 |
) |
|
|
(271 |
) |
|
|
(270 |
) |
Recognized actuarial
loss
|
|
|
- |
|
|
|
72 |
|
|
|
- |
|
|
|
220 |
|
Postretirement benefit
cost
|
|
$ |
322 |
|
|
$ |
417 |
|
|
$ |
968 |
|
|
$ |
1,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined net pension and postretirement cost
|
|
$ |
81 |
|
|
$ |
264 |
|
|
$ |
243 |
|
|
$ |
793 |
|
Our
combined net pension and postretirement cost decreased $183 in the third quarter
and $550 for the first nine months of 2008. This decline was primarily due to
the decrease in amortization of the unrecognized actuarial losses recorded under
Statement of Financial Standards No. 158 “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” in Other Comprehensive Income.
As allowed under GAAP, we amortize gains and losses only when the net gains or
losses exceed 10 percent of the greater of the projected benefit obligation or
the market-related value of assets.
We have
varying types of pension programs providing benefits for certain non-U.S.
operations. In addition to the pension and postretirement costs above, we
recorded net pension cost for non-U.S. plans of $4 in the third quarter and $11
for the first nine months of 2008 and $3 in the third quarter and $11 for the
first nine months of 2007.
We also
provide senior- and middle-management employees with nonqualified, unfunded
supplemental retirement and savings plans. Net supplemental retirement pension
benefits cost, which is not included in the table above was $45 in the third
quarter and $136 for the first nine months of 2008, of which $35 and $106 was
interest cost, respectively. Net supplemental retirement pension benefits cost
was $50 in the third quarter and $146 for the first nine months of 2007, of
which $37 and $109 was interest cost, respectively.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operation
Dollars
in millions except per share amounts
RESULTS OF
OPERATIONS
For ease
of reading, AT&T Inc. is referred to as “we,” “AT&T,” or the “Company”
throughout this document and the names of the particular subsidiaries and
affiliates providing the services generally have been omitted. AT&T is a
holding company whose subsidiaries and affiliates operate in the communications
services industry in both the United States and internationally providing
telecommunications services and equipment as well as directory advertising and
publishing services. You should read this discussion in conjunction with the
consolidated financial statements, accompanying notes and management’s
discussion and analysis of financial condition and results of operations
included in our Annual Report on Form 10-K for the year ended
December 31, 2007. In the tables throughout this section, percentage
increases and decreases that are not considered meaningful are denoted with a
dash.
Consolidated
Results Our financial results in the third quarter and for the
first nine months of 2008 and 2007 are summarized as follows:
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Operating
revenues
|
|
$ |
31,342 |
|
|
$ |
30,132 |
|
|
|
4.0 |
% |
|
$ |
92,952 |
|
|
$ |
88,579 |
|
|
|
4.9 |
% |
Operating
expenses
|
|
|
25,724 |
|
|
|
24,828 |
|
|
|
3.6 |
|
|
|
74,787 |
|
|
|
73,667 |
|
|
|
1.5 |
|
Operating
income
|
|
|
5,618 |
|
|
|
5,304 |
|
|
|
5.9 |
|
|
|
18,165 |
|
|
|
14,912 |
|
|
|
21.8 |
|
Income
before income taxes
|
|
|
4,936 |
|
|
|
4,562 |
|
|
|
8.2 |
|
|
|
16,209 |
|
|
|
13,432 |
|
|
|
20.7 |
|
Net
Income
|
|
|
3,230 |
|
|
|
3,063 |
|
|
|
5.5 |
|
|
|
10,463 |
|
|
|
8,815 |
|
|
|
18.7 |
|
Overview
Operating income Our operating
income increased $314, or 5.9%, in the third quarter and $3,253, or 21.8%, for
the first nine months of 2008, reflecting continued growth in wireless service
and data revenues. Our operating income margin increased from 17.6% to 17.9% in
the third quarter and from 16.8% to 19.5% for the first nine months. Reported
results in 2008 include directory revenue and expenses from directories
published by BellSouth Corporation (BellSouth) subsidiaries. In accordance with
U.S. generally accepted accounting principles (GAAP), our reported results in
2007 did not include deferred revenue of $196 in the third quarter and $911 for
the first nine months and expenses of $64 in the third quarter and $291 for the
first nine months from BellSouth directories published during the 12-month
period ending with the December 29, 2006 date we acquired BellSouth. Had our
2007 directory results included this deferred revenue and expenses, operating
income would have increased $182 in the third quarter and $2,633 for the first
nine months of 2008, as compared to 2007. See our “Advertising & Publishing
Segment Results” section for discussion of this purchase accounting
treatment.
Operating
revenues Our operating revenues increased $1,210, or 4.0%, in
the third quarter and $4,373, or 4.9%, for the first nine months primarily due
to continuing growth in wireless subscribers. Revenues in the third quarter and
for the first nine months also reflect an increase in data revenues, primarily
related to Internet Protocol (IP) data, partially offset by the continued
decline in voice revenues. As discussed above, purchase accounting treatment for
directories published 12 months prior to the BellSouth acquisition also
increased revenues in the third quarter and for the first nine months of 2008
when compared to 2007.
Our
operating revenues also reflect the continued decline in our retail access lines
due to increased competition, as customers disconnected both primary and
additional lines and switched to competitors’ wireless, Voice over Internet
Protocol (VoIP) and cable offerings for voice and data. The slower national
economy also adversely affected the ability of our consumer wireline customers
to purchase our services. While we lose the voice revenues, we have the
opportunity to increase wireless service revenues should the customer choose us
as their wireless provider.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation
-Continued
Dollars
in millions except per share amounts
Operating
expenses Our operating expenses increased $896, or 3.6%, in
the third quarter and increased $1,120, or 1.5%, for the first nine months. The
increase in the third quarter was primarily due to an increase of $782 in
equipment costs related to the successful launch of the iPhone 3G and increased
sales of PDA devices. Also increasing expenses were higher commissions and
residuals from the growth in wireless, as well as hurricane-related expenses
affecting both the Wireless and Wireline segments. Partially offsetting these
increases were merger integration costs recognized in 2007 and not in 2008, and
lower amortization expense on intangible assets in 2008.
The
increase for the first nine months was primarily due to increased wireless
equipment sales, a $374 charge taken in the first quarter of 2008 for workforce
reductions and the purchase accounting treatment of the BellSouth deferred
directory expenses discussed above. Partially offsetting these increases were
merger integration costs recognized in 2007 and not in 2008, and lower
amortization expense on intangible assets in 2008.
Interest expense decreased
$29, or 3.3%, in the third quarter and $62, or 2.3%, for the first nine months
of 2008. Interest expense remained relatively unchanged with a decrease in our
weighted average interest rate and changes in interest charged during
construction offset by an increase in our average debt balances. Future interest
expense will continue to reflect increased interest during construction related
to preparing spectrum purchases for service.
Equity in net income of
affiliates increased $95, or 58.6%, in the third quarter and $167, or
30.6%, for the first nine months of 2008. The increase is primarily due to
improved results from our investment in América Móvil S.A. de C.V. (América
Móvil), Telmex and Telmex Internacional.
Other income (expense) –
net We had other expense of $81 in the third quarter and $91
for the first nine months of 2008, as compared to other expense of $17 in the
third quarter and other income of $614 for the first nine months of 2007.
Results in the third quarter of 2008 primarily included expenses of $59 related
to minority interest expenses, $46 for the sale of administrative buildings and
other non-strategic assets and $44 related to asset impairments, partially
offset by $54 of interest and dividend income. Results in the third quarter of
2007 primarily included $43 in minority interest expenses and $24 from the loss
on sale of cost investments, partially offset by interest income of
$44.
Results
for the first nine months of 2008 primarily included expenses of $188 related to
minority interest expenses, $89 loss on the sale of land and other non-strategic
assets and $75 related to asset impairments, partially offset by $177 of
interest, dividend and leveraged lease income and $79 gain on sale of
investments. Results for the first nine months of 2007 primarily included gains
of $409 related to a wireless spectrum license exchange, $127 for the sale of
administrative buildings and other non-strategic assets, $118 of interest income
and $29 for the sale of cost investments. These gains were partially offset by
$143 in minority interest expenses.
Income taxes increased $207,
or 13.8%, in the third quarter and $1,129, or 24.5%, for the first nine months
of 2008. The increase in income taxes in the third quarter and for the first
nine months was primarily due to higher income before income taxes. Our
effective tax rates were 34.6% in the third quarter of 2008 compared to 32.9% in
the third quarter of 2007, and 35.4% for the first nine months of 2008 compared
to 34.4% for the first nine months of 2007. The increase in our effective
tax rates in 2008 was primarily due to an increase in income before income
taxes. The effective tax rate for the third quarter of 2007 reflects a benefit
related to adjustments to our unrecognized tax benefits partially offset by the
impact of a state law change.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
Selected
Financial and Operating Data
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Wireless
customers (000)
|
|
|
74,871 |
|
|
|
65,666 |
|
Consumer
revenue connections (000) 1,2
|
|
|
47,548 |
|
|
|
49,598 |
|
Network
access lines in service (000) 2
|
|
|
57,191 |
|
|
|
62,871 |
|
Broadband
connections (000) 2,3
|
|
|
14,841 |
|
|
|
13,760 |
|
Video
connections (000) 4
|
|
|
2,963 |
|
|
|
2,112 |
|
Debt
ratio 5
|
|
|
40.6 |
% |
|
|
35.3 |
% |
Ratio of
earnings to fixed charges 6
|
|
|
5.15 |
|
|
|
5.34 |
|
Number
of AT&T employees
|
|
|
303,530 |
|
|
|
303,670 |
|
1 |
Consumer revenue
connections includes retail access lines, U-verse voice over IP
connections, broadband and video. |
2 |
Represents services
by AT&T’s local exchange companies (ILECs) and
affiliates. |
3 |
Broadband
connections include DSL, U-verse high-speed Internet access and satellite
broadband. |
4 |
Video connections
include customers that have satellite service under our agency
arrangements and U-verse video connections of 781 in 2008 and 126 in
2007. |
5 |
See our “Liquidity
and Capital Resources” section for discussion. |
6 |
See Exhibit
12. |
Segment
Results
Our
segments represent strategic business units that offer different products and
services over various technology platforms and are managed accordingly. Our
operating segment results presented in Note 4 and discussed below for each
segment follow our internal management reporting. We analyze our various
operating segments based on segment income before income taxes. Interest expense
and other income (expense) – net are managed only on a total company basis and
are, accordingly, reflected only in consolidated results. We have four
reportable segments: (1) wireless, (2) wireline, (3) advertising
& publishing, and (4) other.
The
wireless segment provides wireless voice and advanced data communications
services.
The wireline segment provides landline voice and data communications
services, managed networking to business customers, AT&T U-verseSM TV, high-speed broadband
and voice services (U-verse) and satellite television services through our
agency arrangements.
The
advertising & publishing segment includes our directory operations, which
publish Yellow and White Pages directories and sell directory and Internet-based
advertising. See Note 4 for a discussion of FAS 141.
The other
segment includes results from Sterling Commerce Inc. (Sterling), customer
information services and all corporate and other operations. The other segment
includes our portion of the results from our international equity investments.
Also included in the other segment are impacts of management decisions affecting
the entire company for which management does not evaluate the individual
operating segments.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
The
following tables show components of results of operations by segment.
Significant segment results are discussed following each table. Capital
expenditures for each segment are discussed in “Liquidity and Capital
Resources.”
Wireless
Segment
Results
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Segment
operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
$ |
11,273 |
|
|
$ |
9,860 |
|
|
|
14.3 |
% |
|
$ |
32,869 |
|
|
$ |
28,492 |
|
|
|
15.4 |
% |
Equipment
revenues
|
|
|
1,345 |
|
|
|
1,077 |
|
|
|
24.9 |
|
|
|
3,607 |
|
|
|
2,837 |
|
|
|
27.1 |
|
Total
Segment Operating Revenues
|
|
|
12,618 |
|
|
|
10,937 |
|
|
|
15.4 |
|
|
|
36,476 |
|
|
|
31,329 |
|
|
|
16.4 |
|
Segment
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and equipment sales
|
|
|
4,989 |
|
|
|
4,079 |
|
|
|
22.3 |
|
|
|
13,261 |
|
|
|
11,690 |
|
|
|
13.4 |
|
Selling,
general and administrative
|
|
|
3,849 |
|
|
|
3,183 |
|
|
|
20.9 |
|
|
|
10,489 |
|
|
|
9,136 |
|
|
|
14.8 |
|
Depreciation
and amortization
|
|
|
1,401 |
|
|
|
1,709 |
|
|
|
(18.0 |
) |
|
|
4,327 |
|
|
|
5,410 |
|
|
|
(20.0 |
) |
Total
Segment Operating Expenses
|
|
|
10,239 |
|
|
|
8,971 |
|
|
|
14.1 |
|
|
|
28,077 |
|
|
|
26,236 |
|
|
|
7.0 |
|
Segment
Operating Income
|
|
|
2,379 |
|
|
|
1,966 |
|
|
|
21.0 |
|
|
|
8,399 |
|
|
|
5,093 |
|
|
|
64.9 |
|
Equity
in Net Income of Affiliates
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
5 |
|
|
|
12 |
|
|
|
(58.3 |
) |
Minority
Interest 1
|
|
|
(57 |
) |
|
|
(43 |
) |
|
|
(32.6 |
) |
|
|
(186 |
) |
|
|
(143 |
) |
|
|
(30.1 |
) |
Segment
Income
|
|
$ |
2,322 |
|
|
$ |
1,926 |
|
|
|
20.6 |
% |
|
$ |
8,218 |
|
|
$ |
4,962 |
|
|
|
65.6 |
% |
1
|
Minority
interest is reported as “Other Income (Expense) – Net” in the consolidated
statements of income.
|
Operating
Income and Margin Trends
Our
wireless segment operating income increased $413, or 21.0%, in the third quarter
and $3,306, or 64.9%, for the first nine months of 2008, reflecting an increase
in our customer base and a decline in merger-related expenses as our wireless
operations now have been largely integrated. Our wireless segment operating
income margin was 18.9% in the third quarter and 23.0% for the first nine months
of 2008, which improved over margins of 18.0% in the third quarter and 16.3% for
the first nine months of 2007. The higher margin in 2008 was primarily due to
revenue growth of $1,681, or 15.4%, in the third quarter and $5,147, or 16.4%,
for the first nine months of 2008, partially offset by increased operating
expenses of $1,268, or 14.1%, in the third quarter and $1,841, or 7.0%, for the
first nine months. The majority of the improvement in our results was due to the
increase in our customer base of 9.2 million since September 30, 2007. This
increase includes 1.7 million customers related to our acquisition of Dobson
Communications Corporation (Dobson) in November 2007 and 182,000 related to our
acquisition of Edge Wireless, LLC in April 2008. As of September 30, 2008, we
served 74.9 million wireless customers. Contributing to our customer base
increase was improvement in the postpaid customer turnover (churn) rate.
Customer net additions for the first nine months of 2008 were adversely affected
by approximately 330,000 disconnections related to the shut down of our Time
Division Multiple Access (TDMA) wireless network operations, which was completed
in February 2008. Results also benefited from merger integration costs
recognized in 2007 and not reoccurring in 2008 and from lower amortization
expense on intangible assets in 2008. Wireless operating margins were also
pressured by higher costs of equipment, selling, general and administrative
expenses due in part to strong sales of advanced handsets including the iPhone
3G.
Average
service revenue per user/customer (ARPU) in the third quarter of 2008 remained
consistent with the third quarter of 2007. Data services ARPU grew 31.7% in the
third quarter of 2008, offset by a decline in voice service ARPU of 7.2%. We
expect continued growth from data services as more customers purchase advanced
handsets, such as the iPhone 3G, and laptop cards and as our third-generation
network continues to expand. The decline in voice service ARPU is the result of
a decrease in postpaid voice overage charges, increases in our Family Talk,
prepaid and reseller customers, which have lower ARPU than traditional postpaid
customers, lower roaming revenues due to acquisitions and rate negotiations as
part of roaming cost savings initiatives, slowing international growth and lower
regulatory cost recovery charges. We expect continued pressure on voice service
ARPU.
Our total
churn rate remained stable and was 1.7% in the third quarter of 2008 and 2007.
Our postpaid churn rate declined to 1.2% compared to 1.3% in the third quarter
of 2007.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
Operating
Results
Service revenues are comprised
of voice, data and other revenue. Service revenues increased $1,413, or 14.3%,
in the third quarter and $4,377, or 15.4%, for the first nine months of 2008.
The increase in service revenues primarily consisted of:
·
|
Data
revenue increases of $915, or 50.5%, in the third quarter and $2,609, or
53.0%, for the first nine months primarily due to the increased number of
data users and an increase in data ARPU of 31.7% in the third quarter and
33.5% for the first nine months. Data revenue growth was primarily driven
by strong increases in wireless internet access, messaging, e-mail and
data access revenues. This primarily resulted from increased use of more
advanced handsets, including the iPhone 3G, which can provide for the data
services previously mentioned. Data service revenues represented 24.2% of
wireless service revenues in the third quarter and 22.9% for the first
nine months of 2008, up from 18.4% in the third quarter and 17.3% for the
first nine months of 2007.
|
·
|
Voice
and other revenue increases of $498, or 6.2%, in the third quarter and
$1,768, or 7.5%, for the first nine months, primarily due to an increase
in the average number of wireless customers of 14.4%, partially offset by
a decline in voice ARPU of 7.2% in the third quarter and 6.3% for the
first nine months.
|
Equipment revenues increased
$268, or 24.9%, in the third quarter and $770, or 27.1%, for the first nine
months of 2008. The increase was due to higher handset revenues reflecting
increased retail customer gross additions of 14.3% in the third quarter and
12.6% for the first nine months with a greater proportion of those gross
additions and customer upgrades opting for more advanced handsets than in prior
periods.
Cost of services and equipment
sales expenses increased $910, or 22.3%, in the third quarter and $1,571,
or 13.4%, for the first nine months of 2008 with greater than 85% of the
increases attributable to higher equipment sales expense. This equipment cost
increase was due to the overall increase in sales as well as an increase in
sales of higher-cost, advanced handsets, including the iPhone 3G, and
accessories. Total equipment costs continue to be higher than equipment revenues
due to the sale of discounted handsets to customers.
Cost of
services increased $128 in the third quarter and $156 for the first nine months.
Interconnect, USF, reseller and network systems expenses increased $234 in the
third quarter partly offset by declines in roaming, long-distance and property
tax expenses of $106. Interconnect, USF, reseller and other service expenses
increased $376 for the first nine months partly offset by declines in roaming,
long-distance and network systems expenses of $220.
Selling, general and administrative
expenses increased $666, or 20.9%, in the third quarter and $1,353, or
14.8%, for the first nine months of 2008 and included the
following:
·
|
Increases
in upgrade commissions and residual expenses, customer support costs and
other general and administrative costs of $508 in the third quarter and
$1,116 for the first nine months primarily due to increases in handset
upgrade activity and related commission rates (including those related to
the iPhone 3G) and prepaid plan gross addition costs. These increases were
partially offset by a decline in billing expenses as a result of cost
savings initiatives and to a lesser degree for the quarter, lower bad debt
expense.
|
·
|
Increases
in direct and indirect commissions as well as other selling expenses of
$221 in the third quarter and $394 for the first nine months primarily due
to increases in sales volume and commission rates, including those
associated with the iPhone 3G, as well as limited workforce increases in
retail locations. These increases were partially offset by lower branding
advertising expenses.
|
Depreciation and amortization
expenses decreased $308, or 18.0%, in the third quarter and $1,083, or 20.0%,
for the first nine months of 2008. Amortization expense decreased $162 in the
third quarter and $618 for the first nine months primarily due to lower
amortization of intangibles related to our acquisition of BellSouth’s 40%
ownership interest in AT&T Mobility due to the use of accelerated
amortization methods, which result in lower expense each year as the remaining
useful life of the asset decreases. These decreases in amortization were
slightly offset by the amortization of intangibles related to our acquisition of
Dobson.
Depreciation
expense decreased $146, or 13.9%, in the third quarter and $465, or 14.5%, for
the first nine months primarily due to certain network assets becoming fully
depreciated (including TDMA assets), partially offset by increased expense
related to ongoing capital spending for network upgrades and expansion as well
as increase in the depreciable asset base due to the acquisition of
Dobson.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
Wireline
Segment
Results
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Segment
operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
9,515 |
|
|
$ |
10,356 |
|
|
|
(8.1 |
)% |
|
$ |
29,191 |
|
|
$ |
31,619 |
|
|
|
(7.7 |
)% |
Data
|
|
|
6,401 |
|
|
|
6,076 |
|
|
|
5.3 |
|
|
|
18,893 |
|
|
|
17,918 |
|
|
|
5.4 |
|
Other
|
|
|
1,634 |
|
|
|
1,509 |
|
|
|
8.3 |
|
|
|
4,698 |
|
|
|
4,389 |
|
|
|
7.0 |
|
Total
Segment Operating Revenues
|
|
|
17,550 |
|
|
|
17,941 |
|
|
|
(2.2 |
) |
|
|
52,782 |
|
|
|
53,926 |
|
|
|
(2.1 |
) |
Segment
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
8,128 |
|
|
|
7,778 |
|
|
|
4.5 |
|
|
|
23,908 |
|
|
|
23,396 |
|
|
|
2.2 |
|
Selling,
general and administrative
|
|
|
3,354 |
|
|
|
3,868 |
|
|
|
(13.3 |
) |
|
|
10,305 |
|
|
|
11,354 |
|
|
|
(9.2 |
) |
Depreciation
and amortization
|
|
|
3,331 |
|
|
|
3,334 |
|
|
|
(0.1 |
) |
|
|
9,770 |
|
|
|
10,076 |
|
|
|
(3.0 |
) |
Total
Segment Operating Expenses
|
|
|
14,813 |
|
|
|
14,980 |
|
|
|
(1.1 |
) |
|
|
43,983 |
|
|
|
44,826 |
|
|
|
(1.9 |
) |
Segment
Income
|
|
$ |
2,737 |
|
|
$ |
2,961 |
|
|
|
(7.6 |
)% |
|
$ |
8,799 |
|
|
$ |
9,100 |
|
|
|
(3.3 |
)% |
Operating
Income and Margin Trends
Our
wireline segment operating income decreased $224, or 7.6%, in the third quarter
and $301 or 3.3%, for the first nine months of 2008. Our wireline segment
operating income margin decreased in the third quarter from 16.5% in 2007 to
15.6% in 2008 and for the first nine months decreased from 16.9% in 2007 to
16.7% in 2008. Operating income continued to be pressured by access line
declines due to increased competition, customers switching to alternative
technologies such as wireless and VoIP, and the slowing national economy. Our
strategy is to offset these line losses by increasing non-access-line-related
revenues from customer connections for data, including VoIP and video.
Additionally, we have the opportunity to increase wireless segment revenues if
customers choose AT&T Mobility as an alternative provider. The decline in
segment voice revenue was partially offset by continued growth in data revenue
and lower amortization of intangibles related to the AT&T Corp. (ATTC) and
BellSouth acquisitions due to the use of accelerated amortization methods, which
result in lower expense each year as the remaining useful life of the asset
decreases. Operating margins were also pressured by hurricane-related costs of
approximately $90 in the third quarter of 2008.
Operating
Results
Voice revenues decreased $841,
or 8.1%, in the third quarter and $2,428, or 7.7%, for the first nine months of
2008 primarily due to declining demand for traditional voice services. Included
in voice revenues are revenues from local voice, long-distance and local
wholesale services. Voice revenues do not include VoIP revenues, which are
included in data revenues.
·
|
Local
voice revenues decreased $460, or 7.5%, in the third quarter and $1,297,
or 7.0%, for the first nine months of 2008. The decrease was driven
primarily by a decline in access lines of approximately $340 in the third
quarter and $840 for the first nine months of 2008 and by expected
declines in revenues from ATTC’s mass-market customers of approximately
$75 in the third quarter and $365 for the first nine months of 2008. We
expect our local voice revenue to continue to be negatively affected by
increased competition from alternative technologies, the disconnection of
additional lines and the slowing
economy.
|
·
|
Long-distance
revenues decreased $314, or 8.2%, in the third quarter and $854, or 7.4%,
for the first nine months of 2008. The decrease was primarily due to a net
decrease in demand for long-distance service, due to expected declines in
the number of ATTC’s mass-market customers, which decreased approximately
$175 in the third quarter and $535 for the first nine months and decreased
demand from global and consumer customer revenues of approximately $155 in
the third quarter and $340 for the first nine months of
2008.
|
·
|
Local
wholesale revenues decreased $67, or 15.2%, in the third quarter and $277,
or 19.2%, for the first nine months of 2008. The decrease was primarily
due to declining number of competitive providers using Unbundled Network
Element-Platform (UNE-P) lines. However, we expect this revenue trend to
stabilize since industry consolidation and UNE-P line loss has
slowed.
|
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
Data revenues increased $325,
or 5.3%, in the third quarter and $975, or 5.4%, for the first nine months of
2008. Data revenues accounted for approximately 36% of wireline operating
revenues in the third quarter and for the first nine months of 2008 and 33% of
wireline operating revenues in the third quarter and for the first nine months
of 2007. Data revenues include transport, IP and packet-switched data
services.
IP data
revenues increased $393, or 16.2%, in the third quarter and $1,176, or 16.8%,
for the first nine months of 2008 primarily due to growth in consumer and
business broadband, virtual private networks (VPN) and managed Internet
services. Broadband high-speed Internet access increased IP data revenues
approximately $105 in the third quarter and $400 for the first nine months of
2008. The increase in broadband revenues was partially offset by the decline in
shared revenue due to the renegotiation of our Yahoo! agreement. VPN increased
approximately $130 in the third quarter and $385 for the first nine months of
2008, and various other IP data services such as U-verse video and dedicated
Internet access services contributed approximately $140 to the increase in the
third quarter and $375 for the first nine months of 2008. The increase in IP
data revenues reflects continued growth in the customer base and migration from
other traditional circuit-based services.
Our
transport services, which include DS1s and DS3s (types of dedicated
high-capacity lines) and SONET (a dedicated high-speed solution for multisite
businesses), increased $47, or 1.6%, in the third quarter and $98, or 1.1%, for
the first nine months of 2008. Transport services revenues increased primarily
due to continuing high-speed volume growth in Ethernet (types of high capacity
switched lines), ISDN and international private lines. These increases were
partially offset by pressure from usage-based transport services used by our
largest business customers.
Our
traditional circuit-based services which include frame relay, asynchronous
transfer mode and managed packet services, decreased $115, or 15.1%, in the
third quarter and $299, or 13.1%, for the first nine months of 2008. This
decrease is primarily due to lower demand as customers continue to shift to
IP-based technology such as VPN, DSL and managed Internet services. We expect
these traditional services to continue to decline as a percentage of our overall
data revenues.
Other operating revenues
increased $125, or 8.3%, in the third quarter and $309, or 7.0%, for the first
nine months of 2008. Integration services and customer premises equipment,
government-related services and managed services account for more than 60% of
total other revenue for all periods. Managed services, which includes wholesale
revenue from agreements we announced last year, increased $129 in the third
quarter and $323 for the first nine months. Government professional services
revenue increased $25 in the third quarter and $80 for the first nine months
driven by growth across various contracts. Partially offsetting these increases,
revenue from equipment sales and related network integration decreased by $33 in
the third quarter and $90 for the first nine months primarily due to less
emphasis on the sale of lower-margin equipment.
Cost of sales expenses
increased $350, or 4.5%, in the third quarter and $512, or 2.2%, for the first
nine months of 2008.
Cost of
sales increased due to the following:
·
|
Higher
nonemployee-related expenses, such as contract services, materials and
supplies costs, of $402 in the third quarter and $690 for the first nine
months.
|
·
|
Higher
employee compensation related to annual merit increases and bonuses of
$127 in the third quarter and $149 for the first nine
months.
|
·
|
Higher
cost of equipment sales and related network integration services of $37 in
the third quarter and $26 for the first nine months primarily due to
increased U-verse customers partially offset by reductions due to less
emphasis on sales of lower-margin
equipment.
|
·
|
Higher
employee levels increased expenses (primarily salary and wages) by $36 in
the third quarter and $148 for the first nine
months.
|
·
|
Higher
other wireline support charges of $32 in the third
quarter.
|
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
Offsetting
these increases, cost of sales decreased due to:
·
|
Lower
traffic compensation expenses (for access to another carrier’s network) of
$188 in the third quarter and $351 for the first nine months primarily due
to reduced portal fees from renegotiation of our agreement with Yahoo!,
continued migration of long-distance calls onto our network and a lower
volume of calls from ATTC’s declining national mass-market customer
base.
|
·
|
Lower
net pension and postretirement cost, which reduced expense $97 in the
third quarter and $290 for the first nine months, reflecting the decrease
in amortization of unrecognized actuarial
losses.
|
Selling, general and administrative
expenses decreased $514, or 13.3%, in the third quarter and $1,049, or
9.2%, for the first nine months of 2008.
Selling,
general and administrative expenses decreased due to:
·
|
Lower
other wireline support costs of $199 in the third quarter and $436 for the
first nine months primarily due to higher advertising costs incurred in
2007 for brand advertising and re-branding related to the BellSouth
acquisition.
|
·
|
Lower
legal expenses of $185 in the third quarter and for the first nine
months.
|
·
|
Lower
net pension and postretirement cost, which reduced expense $58 in the
third quarter and $173 for the first nine months, reflecting the decrease
in amortization of unrecognized actuarial
losses.
|
·
|
Lower
nonemployee-related expenses, such as contract services, materials and
supplies costs, of $73 in the third quarter and $22 for the first nine
months.
|
·
|
Lower
employee levels decreased expenses (primarily salary and wages) by $69 in
the third quarter and $154 for the first nine
months.
|
Partially
offsetting these decreases, selling, general and administrative expenses
increased due to higher provision for uncollectible accounts, primarily related
to our business and wholesale customers, of $32 in the third
quarter.
Depreciation and amortization
expenses decreased $3 in the third quarter and $306, or 3%, for the first nine
months of 2008. The decrease was primarily due to lower amortization of
intangibles, which decreased $76 in the third quarter and $430 for the first
nine months of 2008. Intangibles related to the 2006 acquisition of BellSouth
and the 2005 acquisition of ATTC are amortized using an accelerated method,
which means that we record lower expenses as the remaining useful life of the
asset decreases. The decrease was slightly offset by amortization of the
customer lists acquired from Yahoo!, which began in the second quarter of
2008.
Depreciation
expense for property, plant, and equipment increased $73 in the third quarter
and $124 for the first nine months of 2008 due to more plant being added to
service than the offsetting reduction due to the attrition of the existing plant
base.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
Supplemental
Information
Telephone,
Broadband and Video Connections Summary
Our
switched access lines and other services provided by our local exchange
telephone subsidiaries at September 30, 2008 and 2007 are shown below and trends
are addressed throughout this segment discussion.
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
%
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
Switched
Access Lines 1
|
|
|
|
|
|
|
|
|
|
Retail
Consumer
|
|
|
31,751 |
|
|
|
35,770 |
|
|
|
(11.2 |
)% |
Retail
Business 2
|
|
|
22,159 |
|
|
|
23,004 |
|
|
|
(3.7 |
) |
Retail
Subtotal 2
|
|
|
53,910 |
|
|
|
58,774 |
|
|
|
(8.3 |
) |
Percent
of total switched access lines
|
|
|
94.3 |
% |
|
|
93.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold
to ATTC
|
|
|
146 |
|
|
|
320 |
|
|
|
(54.4 |
) |
Sold to
other CLECs 2,3
|
|
|
2,996 |
|
|
|
3,507 |
|
|
|
(14.6 |
) |
Wholesale
Subtotal 2
|
|
|
3,142 |
|
|
|
3,827 |
|
|
|
(17.9 |
) |
Percent
of total switched access lines
|
|
|
5.5 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payphone
(Retail and Wholesale) 4
|
|
|
139 |
|
|
|
270 |
|
|
|
(48.5 |
) |
Percent
of total switched access lines
|
|
|
0.2 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Switched Access Lines
|
|
|
57,191 |
|
|
|
62,871 |
|
|
|
(9.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Broadband Connections 2,5
|
|
|
14,841 |
|
|
|
13,760 |
|
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite
service 2,6
|
|
|
2,182 |
|
|
|
1,986 |
|
|
|
9.9 |
% |
U-verse
video
|
|
|
781 |
|
|
|
126 |
|
|
|
- |
|
Total
Video Connections
|
|
|
2,963 |
|
|
|
2,112 |
|
|
|
40.3 |
% |
1
Represents access lines served by AT&T’s ILECs and affiliates.
2 Prior
period amounts restated to conform to current period reporting
methodology.
3
Competitive local exchange carriers (CLECs).
4 Revenue
from retail payphone lines is reported in the Other segment.
5
Broadband connections include DSL, U-verse high-speed Internet access and
satellite broadband.
6
Satellite service includes connections under our agency and resale
agreements.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share
amounts
Advertising
& Publishing
Segment
Results
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Total
Segment Operating Revenues
|
|
$ |
1,350 |
|
|
$ |
1,457 |
|
|
|
(7.3 |
)% |
|
$ |
4,174 |
|
|
$ |
4,378 |
|
|
|
(4.7 |
)% |
Segment
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
461 |
|
|
|
417 |
|
|
|
10.6 |
|
|
|
1,321 |
|
|
|
1,214 |
|
|
|
8.8 |
|
Selling,
general and administrative
|
|
|
274 |
|
|
|
338 |
|
|
|
(18.9 |
) |
|
|
972 |
|
|
|
1,067 |
|
|
|
(8.9 |
) |
Depreciation
and amortization
|
|
|
194 |
|
|
|
238 |
|
|
|
(18.5 |
) |
|
|
609 |
|
|
|
743 |
|
|
|
(18.0 |
) |
Total
Segment Operating Expenses
|
|
|
929 |
|
|
|
993 |
|
|
|
(6.4 |
) |
|
|
2,902 |
|
|
|
3,024 |
|
|
|
(4.0 |
) |
Segment
Income
|
|
$ |
421 |
|
|
$ |
464 |
|
|
|
(9.3 |
)% |
|
$ |
1,272 |
|
|
$ |
1,354 |
|
|
|
(6.1 |
)% |
Accounting
Impacts from the BellSouth Acquisition
FAS 141
requires that BellSouth deferred revenue and expenses from directories published
during the 12-month period ending with the December 29, 2006 acquisition date
not be included in our consolidated results. However, for management reporting
purposes we continued to amortize these balances over the life of the directory
(typically 12 months). Thus, for segment disclosure purposes, our advertising
& publishing segment results included revenue of $196 and expenses of $64 in
the third quarter of 2007, and revenue of $911 and expenses of $291 for the
first nine months of 2007. See Note 4 for a discussion of FAS 141.
Operating
Results
Our
advertising & publishing operating income margin was 31.2% in the third
quarter of 2008, compared to 31.8% in the third quarter of 2007 and 30.5% for
the first nine months of 2008 compared to 30.9% for the first nine months of
2007.
Operating revenues decreased
$107, or 7.3%, in the third quarter and $204, or 4.7%, for the first nine months
of 2008 largely driven by continuing declines in print revenue of $119 in the
third quarter and $307 for the first nine months and lower sales agency revenue
of approximately $33 in the third quarter and $70 for the first nine months due
to the sale of a sales agency business. This decrease was partially offset by
increased Internet revenue of $44 in the third quarter and $148 for the first
nine months.
Operating expenses decreased
$64, or 6.4%, in the third quarter and $122, or 4.0%, for the first nine months
of 2008 largely driven by decreased depreciation and amortization of $44 in the
third quarter and $134 for the first nine months, resulting from use of an
accelerated method of amortization for the customer list acquired as part of the
BellSouth acquisition, and employee, professional and contract related expenses.
These expense decreases were partially offset by increased YELLOWPAGES.COM
expansion costs.
Other
Segment
Results
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Total
Segment Operating Revenues
|
|
$ |
501 |
|
|
$ |
562 |
|
|
|
(10.9 |
)% |
|
$ |
1,557 |
|
|
$ |
1,658 |
|
|
|
(6.1 |
)% |
Total
Segment Operating Expenses
|
|
|
420 |
|
|
|
518 |
|
|
|
(18.9 |
) |
|
|
1,862 |
|
|
|
1,673 |
|
|
|
11.3 |
|
Segment
Operating Income (Loss)
|
|
|
81 |
|
|
|
44 |
|
|
|
84.1 |
|
|
|
(305 |
) |
|
|
(15 |
) |
|
|
- |
|
Equity
in Net Income of Affiliates
|
|
|
257 |
|
|
|
159 |
|
|
|
61.6 |
|
|
|
707 |
|
|
|
533 |
|
|
|
32.6 |
|
Segment
Income
|
|
$ |
338 |
|
|
$ |
203 |
|
|
|
66.5 |
% |
|
$ |
402 |
|
|
$ |
518 |
|
|
|
(22.4 |
)% |
Our other
segment operating results consist primarily of Sterling, customer information
services (primarily operator services and payphone), corporate and other
operations. Sterling provides business-integration software and
services.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share
amounts
Segment operating revenues
decreased $61, or 10.9%, in the third quarter and $101, or 6.1%, for the first
nine months of 2008 primarily due to reduced revenues from our operator services
and our retail payphone operations.
Segment operating expenses
decreased $98, or 18.9%, in the third quarter and increased $189, or 11.3%, for
the first nine months of 2008. The decrease in the third quarter was primarily
due to the reduction of employee related accruals and reduced operating expenses
from our operator services and retail payphone operations. The increase for the
first nine months was primarily due to a charge in the first quarter of $374
associated with our announced workforce reduction, primarily management
employees in non-customer facing areas of the business as a result of the
restructure of our operations from a collection of regional companies to a
single national approach. This was partially offset by a reduction in
reserves held at our captive insurance company and by decreased operating
expenses from our operator services and retail payphone operations.
Our other
segment also includes our equity investments in international companies, the
income from which we report as equity in net income of affiliates. Our earnings
from foreign affiliates are sensitive to exchange-rate changes in the value of
the respective local currencies. Our foreign investments are recorded under
GAAP, which include adjustments for the purchase method of accounting and
exclude certain adjustments required for local reporting in specific
countries.
Equity in net income of
affiliates increased $98, or 61.6%, in the third quarter and $174, or
32.6%, for the first nine months of 2008. Equity investments in foreign
countries include adjustments not only for initial purchase price accounting,
but also ongoing differences in treatment of certain items between US GAAP and
local GAAP. For our investments in Mexico, these ongoing differences
include depreciation, minority interest and tax accounting. Our investment
in América Móvil increased $45 in the third quarter and $96 for the first nine
months primarily due to improved operating results and tax treatment. Our
investments in Telmex and Telmex Internacional increased $53 in the third
quarter and $83 for the first nine months, reflecting lower depreciation and
minority interest partially offset by lower operating results.
OTHER BUSINESS
MATTERS
Market
Conditions During 2008, the securities markets and the banking
system in general have experienced significant declines in value and liquidity.
The U.S. Congress, the U.S. Treasury Department, the Federal Reserve system and
various other regulators have worked together to adopt plans to restore
liquidity and stability to the securities markets and to the banking system.
Among other actions, the U.S. government will provide capital to financial
institutions and will ensure access to short-term borrowings for companies with
high credit ratings, such as AT&T. We are not yet able to determine the
outcome of these plans.
Included
on our consolidated balance sheets are assets held by benefit plans for the
payment of future benefits. The losses associated with the securities markets
declines during 2008 are not expected to have an impact on the ability of our
benefit plans to pay benefits. However, because our pension plans are subject to
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended (ERISA), a continued weakness in the markets could require us to make
contributions to the pension plans in order to maintain minimum funding
requirements as established by ERISA. In addition, losses on investments in the
pension and other postretirement plans would be reflected in future earnings,
potentially to a material amount. To the extent that market volatility also
increases interest rates, we will also experience an increase in our discount
rate for measuring our retirement liabilities which would decrease future
expense. The extent of the impact on future earnings cannot be known until the
end of the year when annual returns and rates are measured.
The
growing weaknesses in the securities and credit markets are also affecting
portions of our customer base although, at this time, we are unable to quantify
the effect. We are seeing lower demand for our services from traditional
residential wireline customers although business revenues remained relatively
stable this past quarter. Our wireless business continues to grow, reflecting
both an increased demand for advanced services, as evidenced by our successful
launch of the iPhone 3G and increased sales of other advanced handsets, as well
as a shift in demand from our traditional wireline services. Should the economy
continue to weaken, we may experience pressure on pricing and margins as we
compete for both wireline and wireless customers who will have less
discretionary income.
U-verse Services We are
continuing to expand our deployment of U-verse TV, high-speed broadband and
voice services. As of September 30, 2008, we have passed approximately 14
million living units. As we expand our deployment, we expect to continue to use
contracted outside labor in addition to our employees as installers; our rate of
expansion will be slowed if we cannot hire and train an adequate number of
qualified contractors and technicians to keep pace with customer demand or if we
cannot obtain all required local building permits in a timely fashion. Our
deployment plans also could be delayed if we do not receive required equipment
and software on schedule.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share
amounts
We
believe that our U-verse TV service is subject to federal oversight as a “video
service” under the Federal Communications Act. However, some cable providers and
municipalities have claimed that certain IP video services should be treated as
a traditional cable service and therefore subject to the applicable state and
local cable regulation. Certain municipalities have refused us permission to use
our existing right-of-ways to deploy or activate our U-verse-related services
and products, resulting in litigation. Pending negotiations and current or
threatened litigation involving municipalities could delay our deployment plans
in those areas. In July 2008, the U.S. District Court for Connecticut affirmed
its October 2007 ruling that AT&T’s U-verse TV service is a cable service in
Connecticut. We have appealed that decision on the basis that state legislation
rendered the case moot. If courts having jurisdiction where we have significant
deployments of our U-verse services were to decide that federal, state and/or
local cable regulation were applicable to our U-verse services, it could have a
material adverse effect on the cost, timing and extent of our deployment
plans.
NSA
Litigation There are 24 pending lawsuits that allege that we
and other telecommunications carriers unlawfully provided assistance to the
National Security Agency (NSA) in connection with intelligence activities that
were initiated following the events of September 11, 2001. In the first filed
case, Hepting et al v.
AT&T Corp., AT&T Inc. and Does 1-20, a purported class action
filed in U.S. District Court in the Northern District of California, plaintiffs
allege that the defendants have disclosed and are currently disclosing to the
U.S. Government content and call records concerning communications to which
Plaintiffs were a party. Plaintiffs seek damages, a declaratory judgment, and
injunctive relief for violations of the First and Fourth Amendments to the
United States Constitution, the Foreign Intelligence Surveillance Act, the
Electronic Communications Privacy Act, and other federal and California
statutes. We filed a motion to dismiss the complaint. The United States asserted
the “state secrets privilege” and related statutory privileges and also filed a
motion asking the court to dismiss the complaint. The Court denied the Motions
to Dismiss of both parties.
We and
the U.S. Government filed interlocutory appeals. The case was argued before a
panel of the U.S. Court of Appeals for the Ninth Circuit in August 2007. On
August 21, 2008, the court remanded the case to the district court without
deciding the issue in light of the passage of the FISA Amendments Act discussed
below.
In July
2008, the President signed into law, the FISA (Foreign Intelligence Surveillance
Act) Amendments Act of 2008 (the Act), a provision of which addresses the
allegations in these pending lawsuits (immunity provision). The immunity
provision requires the pending lawsuits to be dismissed if the Attorney General
certifies to the court either that the alleged assistance was undertaken by
court order, certification, directive, or written request or that the telecom
entity did not provide the alleged assistance. On September 19, 2008, the
Attorney General filed his certification and asked the court to dismiss all of
the lawsuits pending against the telecommunications companies. On October 16,
2008, the plaintiffs filed an opposition to the certification and motion to
dismiss arguing that the Act is unconstitutional and, alternatively, that the
government failed to meet its burden of justifying dismissal. We believe that
the immunity provision is constitutional, that the government has met its burden
of proof, and that the lawsuits pending against us will eventually be
dismissed.
In
addition, a lawsuit seeking to enjoin the immunity provision’s application on
grounds that it is unconstitutional was filed the day after the Act was signed
by the President. That case has been referred to the Joint Panel on
Multidistrict Litigation, which has conditionally transferred the case to the
Northern District of California, the court referred to above that is considering
the Attorney General’s certification and motion to dismiss.
Management
believes these actions are without merit and intends to vigorously defend these
matters.
Broadcom Patent
Dispute A number of our handsets, as well as those provided by
other wireless carriers, have been subject to a patent dispute at the U.S.
International Trade Commission (ITC) between Broadcom Corporation and Qualcomm
Incorporated (Qualcomm). On October 14, 2008, the Court of Appeals for the
Federal Circuit vacated and remanded the ITC's finding that Qualcomm had
infringed a Broadcom patent and vacated the ITC’s limited exclusion order
applicable to certain handsets containing Qualcomm technology. The Court held
that the ITC did not have authority to issue a limited exclusion order affecting
handset suppliers and retailers, such as AT&T, unless those parties were
also named in the lawsuit. While this ruling would allow us to continue to sell
to our customers handsets using the disputed Qualcomm chips, we do not currently
offer any such handsets.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share
amounts
DIRECTV
Agreement On September 26, 2008, we announced an agreement to
market and sell DIRECTV's service as a co-branded satellite television service
after Jan. 31, 2009. We will offer, market and sell co-branded
AT&T | DISH Network services through Jan. 31, 2009. After
that date, existing AT&T | DISH Network customers will
continue to receive service.
COMPETITIVE AND REGULATORY
ENVIRONMENT
AT&T
subsidiaries operating within the U.S. are subject to federal and state
regulatory authorities. AT&T subsidiaries operating outside the U.S. are
subject to the jurisdiction of national and supranational regulatory authorities
in the markets where service is provided, and regulation is generally limited to
operational licensing authority for the provision of services to enterprise
customers.
In the
Telecommunications Act of 1996 (Telecom Act), Congress established a national
policy framework intended to bring the benefits of competition and investment in
advanced telecommunications facilities and services to all Americans by opening
all telecommunications markets to competition and reducing regulation. Since the
Telecom Act was passed, however, the Federal Communications Commission (FCC) and
some state regulatory commissions have maintained regulatory requirements
applicable to our traditional wireline subsidiaries. Where appropriate, we are
pursuing additional legislative and regulatory measures to reduce regulatory
requirements that inhibit our ability to compete effectively in providing
services to our customers. For example, we are supporting regulatory and
legislative efforts that would offer a streamlined process for new video service
providers to compete with traditional cable television providers. In addition,
states representing a majority of our local service access lines have adopted
legislation that enables new video entrants to acquire a statewide or
state-approved (as opposed to municipal-approved) franchise to offer video
services. We also are supporting efforts to update regulatory treatment for
retail services. Passage of legislation is uncertain and depends on many
factors.
Our
wireless operations are likewise subject to certain governmental regulation.
Wireless communications providers must be licensed by the FCC to provide
communications services at specified spectrum frequencies within specified
geographic areas and must comply with the rules and policies governing the use
of the spectrum as adopted by the FCC. While wireless communications providers’
prices and service offerings are generally not subject to state regulation, an
increasing number of states are attempting to regulate or legislate various
aspects of wireless services, such as in the area of consumer protection. We
believe that the wireless industry is characterized by innovation,
differentiation and competition among handset manufacturers, carriers and
applications and that additional regulation is unnecessary given the state of
competition and may be appropriate only in the case of market
failure.
ACCOUNTING POLICIES AND
STANDARDS
FSP 157-3 On
October 10, 2008, the FASB issued FASB Staff Position 157-3, “Determining the
Fair Value of a Financial Asset When the Market of that Asset is not Active”
(FSP 157-3). FSP 157-3 provides an example that clarifies and reiterates certain
provisions of the existing fair value standard, including basing fair value on
orderly transactions and usage of management and broker inputs. FSP 157-3 is
effective immediately but is not expected to have a material impact on our
financial position or results of operations.
LIQUIDITY AND CAPITAL
RESOURCES
We had
$1,594 in cash and cash equivalents available at September 30, 2008. Cash and
cash equivalents included cash of $915 and money market funds and other cash
equivalents of $679. In the first nine months, cash inflow was primarily
provided by cash receipts from operations, the issuance of long-term debt,
short-term borrowings and dispositions. These inflows were offset by cash used
to meet the needs of the business including, but not limited to, payment of
operating expenses, acquisition of wireless spectrum licenses and other assets,
funding capital expenditures, repurchase of common shares, dividends to
stockholders, tax payments, the repayment of debt and the payment of interest on
debt. We discuss many of these factors in detail below.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
Cash
Provided by or Used in Operating Activities
In the
first nine months of 2008, cash provided by operating activities was $22,773
compared to $24,345 in the first nine months of 2007. Our operating cash flow
reflects our increased operating income (including the effects of lower
amortization expense), more than offset by declines in our operational
liabilities and increased tax payments of approximately $3,200.
Within
the next 12 months, we expect the Internal Revenue Service (IRS) will complete
its examination of our 2003 through 2005 federal income tax returns and that we
will make a deposit in the range of $800 to $1,200 to reduce the accrual of
interest while we continue to work with the IRS to resolve any contested
issues.
Cash
Used in or Provided by Investing Activities
In the
first nine months of 2008, cash used in investing activities consisted primarily
of $10,086 for the acquisition of wireless spectrum and business acquisitions,
$14,388 for capital expenditures, $455 for interest during construction and $103
related to other investing activities. Cash provided by investing activities
included $436 from EchoStar for an investment made in 2003 and $1,477 primarily
related to the disposition of non-strategic assets.
Our
acquisitions activity included the following:
·
|
$9,325
for the purchase of spectrum licenses related to the 700 MHz Band wireless
spectrum auction and the acquisition of licenses from Aloha Partners,
L.P.
|
·
|
$350
related to a customer list
acquisition.
|
·
|
$342
related to wireless related
acquisitions.
|
·
|
$69
related to other acquisitions.
|
Our
capital expenditures are primarily for our wireless and wireline subsidiaries’
networks, our U-verse services, and support systems for our communications
services. Capital spending excluding interest during construction in our
wireless segment increased 66.2% in the first nine months, primarily for network
capacity expansion, integration and upgrades to our Universal Mobile
Telecommunications System/High-Speed Packet Access network, as well as for IT
and other support systems for our wireless service. Capital expenditures in the
wireline segment, which represented 73.3% of our capital expenditures, increased
7.9% in the first nine months, primarily due to the continued deployment of our
U-verse services.
We
continue to expect that our 2008 capital expenditures, which include wireless
network expansion and U-verse services, will be in the midteens as a percentage
of consolidated revenue. We continue to expect to fund 2008 capital expenditures
for our wireless and wireline segments, including international operations,
using cash from operations and incremental borrowings, depending on interest
rate levels and overall market conditions. The amount of capital investment is
influenced by demand for services and products, continued growth and regulatory
considerations.
In the
first nine months, proceeds from dispositions included $1,130 from the sale of
buildings and other equipment, $230 from the sale of a unit of one of our
publishing subsidiaries and $84 from the sale of other non-strategic
assets.
Cash
Used in or Provided by Financing Activities
We
continue to fund our 2008 financing activities through a combination of short-
and long-term borrowings and cash from operations. Our financing activities
include the repayment of debt and funding repurchases of our common
stock.
At
September 30, 2008, we had $17,419 of debt maturing within one year, which
included $7,196 of commercial paper borrowings, $10,189 of long-term debt
maturities, and $23 of other borrowings. The majority of our commercial paper
borrowings are due within 90 days. We continue to examine our mix of short- and
long-term debt in light of interest rate trends.
AT&T
INC.
SEPTEMBER
30, 2008
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Continued
Dollars
in millions except per share amounts
In the
first nine months of 2008, we received net proceeds of $10,924 from the issuance
of long-term debt and $5,188 from the issuance of commercial paper. Our
long-term debt issuances were as follows:
·
|
$2,500
of 5.5% global notes due in 2018.
|
·
|
$2,000
of floating rate notes due 2010 in a private offering, which can be
redeemed by the holder early (which is classified as debt maturing in one
year).
|
·
|
€1,250 of
6.125% global notes due 2015 (equivalent to approximately $1,975 when
issued).
|
·
|
$1,500
of 4.95% global notes due in 2013.
|
·
|
$1,250
of 6.40% global notes due 2038.
|
·
|
$1,000
of 5.60% global notes due 2018.
|
·
|
$750
of 6.3% global notes due in 2038.
|
In the
first nine months, we repaid $3,143 of debt, which primarily consisted of
repayments on long-term debt and scheduled principal payments on other debt and
borrowings.
On
December 10, 2007, our Board of Directors authorized the repurchase of up to 400
million shares of AT&T common stock; this authorization expires at the end
of 2009. In the first nine months of 2008, we repurchased 164.2 million shares
at a cost of $6,077. Although we will evaluate additional share repurchases
during the remainder of 2008 should the economic environment improve, we
currently intend to focus on reducing debt.
We paid
dividends of $7,150 in the first nine months of 2008 and $6,584 in the first
nine months of 2007, primarily reflecting an increase in the quarterly dividend
approved by our Board of Directors in December 2007, which was partially offset
by a decline in common shares outstanding of approximately 4% due to our share
repurchases over the past year. Dividends declared by our Board of Directors
totaled $0.40 per share in the third quarter of 2008 and $0.355 per share in the
third quarter of 2007. Our dividend policy considers the expectations and
requirements of stockholders, internal requirements of AT&T and long-term
growth opportunities. It is our intent to provide the financial flexibility to
allow our Board of Directors to consider dividend growth and to recommend an
increase in dividends to be paid in future periods. All dividends remain subject
to declaration by our Board of Directors.
At
September 30, 2008, our debt ratio was 40.6% compared to 35.3% at September 30,
2007 and 35.7% at December 31, 2007. The increased debt ratio at September 30,
2008 reflects an increase in debt of nearly $16,200 since September 30, 2007 and
nearly $12,700 since December 31, 2007. The increase was primarily due to the
issuance of new debt to pay for the acquisition of wireless spectrum licenses in
April 2008 (see “Cash Used in or Provided by Investing Activities”). The
increased debt ratio also reflects the impact of our share repurchases in 2007
and 2008. Equity in 2008 reflects our increased income and adjustments to other
comprehensive income required under Statement of Financial Standards No. 158
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans.”
We have a
five-year $10,000 credit agreement with a syndicate of investment and commercial
banks, which we have the right to increase up to an additional $2,000 provided
no event of default under the credit agreement has occurred. One of the
participating banks is Lehman Brothers Bank, Inc., which recently declared
bankruptcy. We are unable to determine the status of their stated commitment of
$595 at this time. The current agreement will expire in July 2011. We also have
the right to terminate, in whole or in part, amounts committed by the lenders
under this agreement in excess of any outstanding advances; however, any such
terminated commitments may not be reinstated. Advances under this agreement may
be used for general corporate purposes, including support of commercial paper
borrowings and other short-term borrowings. We must maintain a debt-to-EBITDA
(earnings before interest, income taxes, depreciation and amortization, and
other modifications described in the agreement) financial ratio covenant of not
more than three-to-one as of the last day of each fiscal quarter for the four
quarters then ended. We comply with all covenants under the agreement. At
September 30, 2008, we had no borrowings outstanding under this
agreement.
In April
2008, we entered into a $3,000 revolving credit agreement with certain banks
with a scheduled expiration date of December 2008. In August 2008, we exercised
our right to terminate this agreement.
AT&T
INC.
SEPTEMBER
30, 2008
Item 3. Quantitative and
Qualitative Disclosures About Market
Risk
At
September 30, 2008, we had interest rate swaps with a notional value of $5,750
and a fair value of $76. In the third quarter we terminated a swap with Lehman
Brothers Special Financing Inc. with a notional value of $250.
We have
fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt
instruments with a U.S. dollar notional value of $4,774 to hedge our exposure to
changes in foreign currency exchange rates. These derivatives have been
designated at inception and qualify as cash flow hedges with a net fair value of
$(363) at September 30, 2008.
Item 4. Controls and
Procedures
The
registrant maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the registrant is recorded,
processed, summarized, accumulated and communicated to its management, including
its principal executive and principal financial officers, to allow timely
decisions regarding required disclosure, and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms. The chief
executive officer and chief financial officer have performed an evaluation of
the effectiveness of the design and operation of the registrant’s disclosure
controls and procedures as of September 30, 2008. Based on that evaluation, the
chief executive officer and chief financial officer concluded that the
registrant’s disclosure controls and procedures were effective as of September
30, 2008.
AT&T
INC.
SEPTEMBER
30, 2008
CAUTIONARY LANGUAGE
CONCERNING FORWARD-LOOKING
STATEMENTS
Information
set forth in this report contains forward-looking statements that are subject to
risks and uncertainties, and actual results could differ materially. Many of
these factors are discussed in more detail in the “Risk Factors” section of
our Form 10-K.
We claim the protection of the safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995.
The
following factors could cause our future results to differ materially from those
expressed in the forward-looking statements:
·
|
Adverse
economic changes in the markets served by us or in countries in which we
have significant investments including the impact on customer demand and
our ability to access financial
markets.
|
·
|
Changes
in available technology and the effects of such changes including product
substitutions and deployment costs.
|
·
|
Increases
in our benefit plans’ costs including increases due to adverse changes in
the U.S. and foreign securities markets, resulting in worse-than-assumed
investment returns and discount rates, and adverse medical cost
trends.
|
·
|
The
final outcome of Federal Communications Commission proceedings and
reopenings of such proceedings and judicial review, if any, of such
proceedings, including issues relating to access charges, broadband
deployment, unbundled loop and transport elements and wireless
services.
|
·
|
The
final outcome of regulatory proceedings in the states in which we operate
and reopenings of such proceedings, and judicial review, if any, of such
proceedings, including proceedings relating to interconnection terms,
access charges, universal service, unbundled network elements and resale
and wholesale rates, broadband deployment including our U-verse services,
performance measurement plans, service standards and traffic
compensation.
|
·
|
Enactment
of additional state, federal and/or foreign regulatory and tax laws and
regulations pertaining to our subsidiaries and foreign
investments.
|
·
|
Our
ability to absorb revenue losses caused by increasing competition,
including offerings using alternative technologies (e.g., cable, wireless
and VoIP), and our ability to maintain capital
expenditures.
|
·
|
The
impact of competition on customer totals and customer acquisition and
retention costs and the resulting pressures on wireline and wireless
operating margins.
|
·
|
Our
ability to develop attractive and profitable product/service offerings to
offset increasing competition in our wireless and wireline
markets.
|
·
|
The
ability of our competitors to offer product/service offerings at lower
prices due to lower cost structures and regulatory and legislative actions
adverse to us, including state regulatory proceedings relating to
unbundled network elements and nonregulation of comparable alternative
technologies (e.g., VoIP).
|
·
|
The
timing, extent and cost of deployment of our U-verse services; the
development of attractive and profitable service offerings; the extent to
which regulatory, franchise fees and build-out requirements apply to these
services; and the availability, cost and/or reliability of the various
technologies and/or content required to provide such
services.
|
·
|
The
outcome of pending or threatened litigation including patent infringement
claims by or against third parties.
|
·
|
The
impact on our networks and business of major equipment failures, severe
weather conditions, natural disasters or terrorist
attacks.
|
·
|
The
issuance by the Financial Accounting Standards Board or other accounting
oversight bodies of new accounting standards or changes to existing
standards.
|
·
|
The
issuance by the Internal Revenue Service and/or other tax authorities of
new tax regulations or changes to existing standards; actions by tax
agencies and judicial authorities with respect to applying applicable tax
laws and regulations; and the resolution of disputes with any taxing
jurisdictions.
|
·
|
Our
ability to adequately fund our wireless operations, including access to
additional spectrum, network upgrades and technological
advancements.
|
·
|
Changes
in our corporate strategies, such as changing network requirements or
acquisitions and dispositions, to respond to competition and regulatory,
legislative and technological
developments.
|
Readers
are cautioned that other factors discussed in this report, although not
enumerated here, also could materially affect our future earnings.
AT&T
INC.
SEPTEMBER
30, 2008
PART II - OTHER
INFORMATION
Dollars
in millions except per share
amounts
Item 1A. Risk
Factors
We
discuss in our Annual Report on Form 10-K various risks that may materially
affect our business. We use this section to update this discussion to reflect
material developments since our Form 10-K was filed. For the third quarter 2008,
there were no such material developments.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
(a)
|
During
the third quarter of 2008, non-employee directors acquired shares of
common stock pursuant to the Non-Employee Director Stock and Deferral
Plan. Under the plan, a director may make an annual election to receive
all or part of his or her annual retainer or fees in the form of shares or
deferred stock units (DSUs) that are convertible into cash or shares. Each
director also receives an annual grant of DSUs. The plan provides that
DSUs (and dividends earned thereon) acquired during 2007 and thereafter
would be convertible in the form of cash only. During the third quarter of
2008, an aggregate of 7,301 shares and DSUs (from pre-2007 accruals) were
acquired by non-employee directors at $30.81, the fair market value of the
shares on the date of acquisition. The issuances of shares and DSUs were
exempt from registration pursuant to Section 4(2) of the Securities
Act.
|
AT&T
INC.
SEPTEMBER
30, 2008
Item 6.
Exhibits
Exhibits
identified in parentheses below, on file with the Securities and Exchange
Commission, are incorporated by reference as exhibits hereto. Unless otherwise
indicated, all exhibits so incorporated are from File No. 1-8610.
10-a
|
AT&T
Inc. 2005 Supplemental Employee Retirement Plan amended and restated
effective as of June 26, 2008
|
10-b
|
BellSouth
Corporation Supplemental Executive Retirement Plan, amended and restated
effective as of January 1, 2008
|
12
|
Computation
of Ratios of Earnings to Fixed Charges
|
31
|
Rule
13a-14(a)/15d-14(a) Certifications
31.1 Certification
of Principal Executive Officer
31.2 Certification
of Principal Financial Officer
|
32
|
Section
1350 Certifications
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AT&T Inc.
November 5,
2008
/s/ Richard G.
Lindner.
Richard G. Lindner
Senior Executive Vice
President
and Chief Financial
Office
33