AT&T Wireless 2008 Annual Report Download - page 35

AT&T Annual Report 2008
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held at our captive insurance company and by decreased
operating expenses from our operator services and retail
payphone operations. The increase in 2007 was primarily
due to the addition of BellSouth’s other operations and
increased operating expenses at Sterling partially offset by
decreased expense from our retail payphone operations.
Prior to the December 29, 2006 close of the BellSouth
acquisition, our other segment included our 60% proportionate
share of AT&T Mobility results as equity in net income of
affiliates. As a result of the BellSouth acquisition, we own
100% of AT&T Mobility and its results for the final two days
of 2006 and for the year 2007 have been excluded from
equity in net income of affiliates in this segment and on
our consolidated statements of income.
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.
Our equity in net income of affiliates by major investment
is listed below:
2008 2007 2006
América Móvil $469 $381 $ 274
Telmex & Telmex Internacional 324 265 222
AT&T Mobility — — 1,508
Other 20 30 16
Other Segment Equity in
Net Income of Affiliates $813 $676 $2,020
Equity in net income of affiliates increased $137 in 2008.
Equity in net income in América Móvil increased $88 in 2008
primarily due to improved operating results. Equity in net
income in Telmex and Telmex Internacional increased $59
reflecting lower depreciation and tax expenses, and improved
operating results.
OPER ATING ENVIR ONMEN T AN D TR E N DS O F T H E B U S INESS
2009 Revenue Trends We expect a challenging operating
environment in 2009 due to the continuing economic
recession, increasing competition and changes at the
federal government level. Despite this environment, we
expect a modest expansion of our operating revenues in
2009 compared to 2008, reflecting continuing growth in
our wireless and broadband/data services. We expect our
primary driver of growth to be wireless, especially in sales
and increased use of advanced handsets including the
Apple iPhone 3G, and that all our major customer categories
will continue to increase their use of Internet-based
broadband/data services. We expect revenue growth will
also reflect the increased information and technology
services to be provided under our agreements with IBM.
We expect continuing declines in traditional access lines
but offsets in growth in broadband and video services.
We expect solid growth in broadband revenues as
customers continue to choose higher-speed services.
We expect to continue to expand our U-verse service
offerings in 2009.
2009 Expense Trends Our major merger integration
projects are now largely completed. However, given our
expected challenging operating environment for 2009,
we will continue to focus intensely on cost-control measures.
We expect our operating income margin to be stable
excluding pressure from our pension and retiree benefit
costs. We expect our pension and retiree benefit costs to
increase significantly due to our accounting policy for
handling substantial investment losses in 2008 on our
retirement plans’ assets (see “Significant Accounting
Policies and Estimates”). We do not expect significant
pension funding requirements in 2009. Expenses related
to growth initiatives (see “Expected Growth Areas”) will
apply some pressure to our operating income margin.
Market Conditions During 2008, the securities and
mortgage markets and the banking system in general
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, mortgage and banking systems. Although
we have issued short-term and long-term debt during this
economic decline, the U.S. government has provided capital
to financial institutions and has enabled access to short-term
borrowings for companies with high credit ratings. 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. We do not expect to
make significant funding contributions to our pension plans
in 2009. 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, our policy on recognizing losses on investments
in the pension and other postretirement plans will accelerate
the recognition of losses in 2009 earnings (see “Significant
Accounting Policies and Estimates”).
The ongoing weaknesses in the general economy and in
the securities, credit and mortgage markets are also affecting
portions of our customer and supplier bases although, at this
time, we are unable to quantify the effects. We are seeing
lower demand for our services from residential wireline
customers. Although business revenues remained relatively
stable this past year, we experienced some softening of
demand late in 2008 for usage-based services, such as
voice and transport. Our print directory revenues also
declined during 2008 as the economy continued to weaken.
Some of our suppliers also are experiencing increased
financial and operating costs and one large telecom
equipment supplier recently declared bankruptcy. As of
year-end, these negative trends had been offset by continued
growth in our wireless business. Our wireless growth
reflects both an increased demand for advanced services,
as evidenced by our successful launch of the iPhone 3G
and other advanced devices, and increased sales of other