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AT&T Inc. Financial Review 2008

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AT&T Inc. Financial Review 2008 AT&T Inc. Financial Review 2008 Selected Financial and Operating Data 22 Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 Consolidated Financial Statements 49 Notes to Consolidated Financial Statements 53 Report of Management 76 Report of Independent Registered Public Accounting Firm 77 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 78 Board of Directors 79 Senior Officers 80 AT&T Annual Report 2008 | 21 Selected Financial and Operating Data Dollars in millions except per share amounts At December 31 or for the year ended: 2008 2007 20062 20053 2004 Financial Data1 Operating revenues $124,028 $118,928 $ 63,055 $ 43,764 $ 40,733 Operating expenses $100,965 $ 98,524 $ 52,767 $ 37,596 $ 34,832 Operating income $ 23,063 $ 20,404 $ 10,288 $ 6,168 $ 5,901 Interest expense $ 3,390 $ 3,507 $ 1,843 $ 1,456 $ 1,023 Equity in net income of affiliates $ 819 $ 692 $ 2,043 $ 609 $ 873 Other income (expense) – net $ (589) $ 615 $ 393 $ 397 $ 1,414 Income taxes $ 7,036 $ 6,253 $ 3,525 $ 932 $ 2,186 Income from continuing operations $ 12,867 $ 11,951 $ 7,356 $ 4,786 $ 4,979 Income from discontinued operations, net of tax4 $ — $ — $ — $ — $ 908 Net income $ 12,867 $ 11,951 $ 7,356 $ 4,786 $ 5,887 Earnings per common share: Income from continuing operations $ 2.17 $ 1.95 $ 1.89 $ 1.42 $ 1.50 Net income $ 2.17 $ 1.95 $ 1.89 $ 1.42 $ 1.78 Earnings per common share – assuming dilution: Income from continuing operations $ 2.16 $ 1.94 $ 1.89 $ 1.42 $ 1.50 Net income $ 2.16 $ 1.94 $ 1.89 $ 1.42 $ 1.77 Total assets $265,245 $275,644 $270,634 $145,632 $110,265 Long-term debt $ 60,872 $ 57,255 $ 50,063 $ 26,115 $ 21,231 Construction and capital expenditures $ 20,335 $ 17,888 $ 8,393 $ 5,612 $ 5,130 Dividends declared per common share $ 1.61 $ 1.47 $ 1.35 $ 1.30 $ 1.26 Book value per common share $ 16.35 $ 19.09 $ 18.52 $ 14.11 $ 12.27 Ratio of earnings to fixed charges 4.75 4.91 5.01 4.11 6.32 Debt ratio 43.8% 35.7% 34.1% 35.9% 40.0% Weighted-average common shares outstanding (000,000) 5,927 6,127 3,882 3,368 3,310 Weighted-average common shares outstanding with dilution (000,000) 5,958 6,170 3,902 3,379 3,322 End of period common shares outstanding (000,000) 5,893 6,044 6,239 3,877 3,301 Operating Data Wireless customers (000)5 77,009 70,052 60,962 54,144 49,132 In-region network access lines in service (000)6 55,610 61,582 66,469 49,413 52,356 Broadband connections (000)7 16,322 14,802 12,170 6,921 5,104 Number of employees 302,660 309,050 304,180 189,950 162,700 1 Amounts in the above table have been prepared in accordance with U.S. generally accepted accounting principles. 2 Our 2006 income statement amounts reflect results from BellSouth Corporation (BellSouth) and AT&T Mobility LLC (AT&T Mobility), formerly Cingular Wireless LLC, for the two days following the December 29, 2006 acquisition. Our 2006 balance sheet and end-of-year metrics include 100% of BellSouth and AT&T Mobility. Prior to the December 29, 2006 BellSouth acquisition, AT&T Mobility was a joint venture in which we owned 60% and was accounted for under the equity method. 3 Our 2005 income statement amounts reflect results from AT&T Corp. for the 43 days following the November 18, 2005 acquisition. Our 2005 balance sheet and end-of-year metrics include 100% of AT&T Corp. 4 Our financial statements reflect results from our sold directory advertising business in Illinois and northwest Indiana as discontinued operations. The operational results and the gain associated with the sale of that business are presented in “Income from discontinued operations, net of tax.” 5 The number presented represents 100% of AT&T Mobility cellular/PCS customers. The 2004 number includes customers from the acquisition of AT&T Wireless Services, Inc. 6 In-region represents access lines serviced by our incumbent local exchange companies (in 22 states since the BellSouth acquisition and in 13 states prior to that acquisition). Beginning in 2006, the number includes BellSouth lines in service. 7 Broadband connections include in-region DSL lines, in-region U-verse high-speed Internet access, satellite broadband and 3G LaptopConnect cards. 22 | AT&T Annual Report 2008 Management’s Discussion and Analysis of Financial Condition and Results of Operations Dollars in millions except per share amounts 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 both in the United States and internationally providing wireless and wireline telecommunications services and equipment as well as directory advertising and publishing services. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that equal or exceed 100% are not considered meaningful and are denoted with a dash. RESULTS OF OPERATIONS Consolidated Results Our financial results are summarized in the table below. We then discuss factors affecting our overall results for the past three years. These factors are discussed in more detail in our “Segment Results” section. We also discuss our expected revenue and expense trends for 2009 in the “Operating Environment and Trends of the Business” section. We completed our acquisition of BellSouth Corporation (BellSouth) on December 29, 2006. We thereby acquired BellSouth’s 40% economic interest in AT&T Mobility LLC (AT&T Mobility), formerly Cingular Wireless LLC (Cingular), resulting in 100% ownership of AT&T Mobility. Our consolidated results in 2006 include BellSouth’s and AT&T Mobility’s operational results for the final two days of the year. Prior to the acquisition, we reported the income from our 60% share of AT&T Mobility as equity in net income. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from BellSouth and AT&T Mobility prior to their respective acquisition dates are excluded. Percent Change 2008 vs. 2007 vs. 2008 2007 2006 2007 2006 Operating revenues $124,028 $118,928 $63,055 4.3% 88.6% Operating expenses 100,965 98,524 52,767 2.5 86.7 Operating income 23,063 20,404 10,288 13.0 98.3 Income before income taxes 19,903 18,204 10,881 9.3 67.3 Net income 12,867 11,951 7,356 7.7 62.5 Diluted earnings per share 2.16 1.94 1.89 11.3 2.6 Overview Our operating revenues also reflect the continued decline Operating income As noted above, 2007 revenues and of our retail access lines due to the dramatically declining expenses reflect the addition of BellSouth’s and AT&T Mobility’s overall economy and increased competition, as customers results while our 2006 results only include two days of their continued to disconnect both primary and additional lines and results. Accordingly, the following discussion of changes in our switched to wireless, Voice over Internet Protocol (VoIP) and revenues and expenses is affected by these acquisitions. cable offerings for voice and data. While we lose the wireline Our operating income increased $2,659, or 13.0%, in 2008 voice revenues, we have the opportunity to increase wireless and $10,116, or 98.3%, in 2007. Our operating income margin service revenue should customers choose AT&T Mobility as increased from 16.3% in 2006 to 17.2% in 2007 and to 18.6% their alternative provider. in 2008. Operating income in 2008 increased primarily due Operating expenses increased $2,441, or 2.5%, in 2008 to continued growth in wireless service and data revenues and $45,757, or 86.7%, in 2007. The increase in 2008 was along with a decrease in the amortization of merger-related primarily due to higher equipment costs related to the intangibles and increased in 2007 primarily due to the successful launch of the Apple iPhone 3G and increased acquisition of BellSouth. Reported results in 2008 include sales of PDA devices, while the increase in 2007 was primarily directory revenue and expenses from directories published by due to merger integration costs and amortization expense BellSouth subsidiaries. In accordance with GAAP, our reported on intangible assets identified at the time of acquisition. results in 2007 did not include deferred revenue of $964 and Also increasing 2008 expenses were higher commissions and expenses of $308 from BellSouth directories published during residuals from the growth in wireless, severance associated the 12-month period ending with the December 29, 2006 date with announced workforce reductions as well as hurricane- we acquired BellSouth. Had our 2007 directory results included related expenses affecting both the wireless and wireline this deferred revenue and expenses, operating income would segments. Partially offsetting these increases were merger have increased $2,003 for 2008, as compared to 2007. integration costs recognized in 2007 and not in 2008, and Operating revenues increased $5,100, or 4.3%, in 2008 lower amortization expense on intangible assets in 2008. and $55,873, or 88.6%, in 2007. Revenues in 2008 reflect an Interest expense decreased $117, or 3.3%, in 2008 and increase in wireless subscribers and data revenues, primarily increased $1,664, or 90.3%, in 2007.
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