3rd Quarter Results
Bellsouth Corp
25 October 2004
BellSouth Reports Third Quarter Earnings
• 5.7 million long distance customers
• 1.9 million DSL customers
• 25.7 million Cingular Wireless customers
ATLANTA - BellSouth Corporation (NYSE: BLS) announced third quarter 2004
earnings per share (EPS) from continuing operations of 46 cents compared to 48
cents in the third quarter of 2003. Normalized EPS was 49 cents in the third
quarter of 2004 compared to 50 cents in the same quarter a year ago. Normalizing
items included hurricane-related expenses in the wireline business, wireless
merger integration planning costs and a fair value adjustment for the pending
sale of Cingular Interactive assets. See below for further details.
For the quarter, consolidated revenue from continuing operations totaled $5.1
billion. Income from continuing operations was $852 million compared to $894
million in the same quarter a year ago.
In accordance with Generally Accepted Accounting Principles (GAAP), BellSouth's
reported consolidated revenues and consolidated operating expenses from
continuing operations do not include the Company's 40 percent share of Cingular
Wireless. Normalized results from continuing operations are adjusted for
BellSouth's 40 percent proportionate share of Cingular's revenues and expenses
and other normalizing items described below. Normalized revenue was $6.7
billion, reflecting some improvement compared to the third quarter of 2003.
Normalized net income was $893 million compared to $926 million in the same
quarter a year ago.
Operating free cash flow from continuing operations (defined as net cash
provided by operating activities less capital expenditures) totaled $923 million
for the third quarter of 2004. Capital expenditures for continuing operations in
the third quarter of 2004 were $768 million compared to $713 million in the same
period in 2003.
Communications Group
Communications Group revenue was $4.6 billion. Operating margin for the third
quarter of 2004 was 26.3 percent, level with the 2003 full year operating margin
and 40 basis points higher than the 25.9 percent operating margin in the second
quarter of 2004.
For the quarter ending Sept. 30, total access lines of 21.6 million declined 3.9
percent compared to a year earlier. UNE-P access lines resold by BellSouth
competitors decreased by 54,000 in the third quarter compared to an increase of
188,000 in the same quarter a year ago.
BellSouth added 532,000 mass-market long distance customers during the third
quarter of 2004 and now serves approximately 5.7 million mass-market long
distance customers. These customers represent a 44 percent penetration of
BellSouth's mass-market base and spend an average of approximately $17 per month
on long distance with BellSouth.
For the third quarter, network data revenue was $1.1 billion, an increase of 3.7
percent compared to the same quarter of 2003, driven by DSL. BellSouth added
134,000 net DSL customers during the third quarter of 2004, for a total of
approximately 1.9 million at quarter-end. In September, BellSouth launched
additional incentives and introduced new pricing for FastAccess(R)DSL designed
to increase long-term market penetration.
With the third-quarter launch of our DIRECTV(R) offer, the Company provides a
competitively priced triple-play package of voice, data and entertainment
services. Through Sept. 30, more than 90,000 customers have added DIRECTV(R) to
their communications services packages.
In the third quarter, the hurricanes that hit BellSouth's markets affected more
than 1.2 million residential and business customers. As a result, the Company
incurred approximately $38 million of incremental labor and material costs
during the third quarter. The Company expects to recognize incremental costs in
the $90 million range during the fourth quarter. Impacts to capital are not
expected to affect our guidance. BellSouth's emergency preparations and network
capabilities ensured high levels of service retention and restoration despite
the storm-related damages. To date, fewer than 20,000 lines remain affected, and
BellSouth continues to work around the clock restoring service to these
customers in the hardest-hit areas.
Domestic Wireless/Cingular
For the third quarter, Cingular Wireless added 657,000 net cellular/PCS
customers, bringing its nationwide customer base to 25.7 million. More than 80
percent of net additions were postpaid. Churn remained flat year-over-year at
2.8 percent. BellSouth's share of Cingular's revenue was $1.7 billion in the
third quarter of 2004, a gain of 4.8 percent compared to the same quarter a year
ago. Revenue growth was driven by a 4.3 percent increase in service revenue,
which included a 116 percent increase in cellular/PCS data revenue.
The third quarter operating margin of 12.5 percent was impacted by lower service
ARPU, costs associated with record gross customer additions and higher systems
costs from increased minutes of use.
During the third quarter, Cingular continued to make advances in deploying next-
generation network technologies that will give customers access to high-speed
wireless data services. The company has enabled substantially all of its markets
with EDGE (Enhanced Data for GSM Evolution) high-speed data technology. Cingular
is currently testing integrated voice and data wireless services in a 3G UMTS
(Universal Mobile Telecommunications System) trial.
Cingular's purchase of AT&T Wireless will create the nation's largest wireless
provider with more than 47 million subscribers. Cingular's plans for integration
will position the company as a leader in the wireless industry providing a high-
quality network, excellent customer care and innovative wireless services.
Cingular's management team has experience integrating wireless companies, and as
the two companies' operations are brought together, the number one focus will be
giving customers great service and a seamless transition.
The Cingular/AT&T Wireless transaction will be funded primarily by equity
contributions from Cingular's parent owners. BellSouth's portion of the funding
is approximately $14.5 billion, which will be funded with cash on hand, proceeds
from asset sales and incremental debt. Net incremental financing for this
transaction is expected to be approximately $6 billion.
Advertising & Publishing
Advertising & Publishing revenue was $498 million in the third quarter of 2004,
a decrease of 1.4 percent compared to the same quarter a year ago. Operating
margin for the third quarter of 2004 was 46.0 percent compared to 47.1 percent
in the third quarter of 2003. Segment net income was $141 million compared to
$147 million in the third quarter of 2003.
Discontinued Operations: Latin America Group
In March 2004, BellSouth signed a definitive agreement with Telefonica Moviles,
the wireless affiliate of Telefonica, S.A., to sell BellSouth's interests in its
10 Latin American operations. On Oct. 14, 2004, the company closed the sale of
wireless operations in Ecuador, Guatemala and Panama. Pending required
governmental approvals, the remaining seven properties are expected to close by
the end of 2004.
Following GAAP, the Company's financial statements, as of Sept. 30, 2004,
reflect results for the Latin American segment in the line item titled
Discontinued Operations. For the third quarter, BellSouth reported a loss from
discontinued operations of 3 cents per share compared to income of 2 cents per
share in the third quarter of 2003. Results for the third quarter of 2004
include an after-tax charge of approximately $190 million, or 10 cents per
share, related to an agreement in principle with the other major shareholder of
Telcel, our Venezuelan operation, where we would purchase its 21.8 percent
interest in Telcel and settle all outstanding claims for an aggregate payment of
$617 million. In accordance with our agreement with Telefonica Moviles, we will
sell this interest for approximately $300 million.
The BellSouth consolidated Latin American operations added 583,000 customers in
the third quarter of 2004, for a total of 12.1 million customers served at
quarter-end. Consolidated Latin American operations produced $724 million in
revenue for the third quarter of 2004.
Normalizing Items
In the third quarter of 2004, the difference between reported (GAAP) EPS from
continuing operations and normalized EPS is shown in the following table:
3Q04 3Q03
GAAP Diluted EPS - Income from continuing operations $0.46 $0.48
Hurricane-related expenses $0.01
Wireless merger integration planning costs and fair value
adjustment $0.01
Asset impairment $0.02
Normalized Diluted EPS (1) $0.49 $0.50
(1) Normalized Diluted EPS for 3Q04 does not sum due to rounding
Hurricane-related expenses - Represents the incremental labor and material costs
incurred during the third quarter related to service restoration and network
repairs in the wireline business due to Hurricanes Charley, Frances, Ivan and
Jeanne.
Wireless merger integration planning costs and fair value adjustment -
Represents BellSouth's 40 percent share of tax-effected wireless merger
integration planning costs of $43 million incurred during the third quarter in
preparation for the Cingular/AWE merger. Also includes a $31 million fair value
adjustment for the announced sale of Cingular Interactive.
Asset impairment - The third quarter 2003 charge for asset impairment represents
the write-off of capitalized software related to an abandoned systems project.
About BellSouth Corporation
BellSouth Corporation is a Fortune 100 communications company headquartered in
Atlanta, GA, and a parent company of Cingular Wireless, the nation's second
largest wireless voice and data provider.
Backed by award-winning customer service, BellSouth offers the most
comprehensive and innovative package of voice and data services available in the
market. Through BellSouth Answers(R), residential and small business customers
can bundle their local and long distance service with dial up and high speed DSL
Internet access, satellite television and Cingular(R) Wireless service. For
businesses, BellSouth provides secure, reliable local and long distance voice
and data networking solutions. BellSouth also offers online and directory
advertising through BellSouth(R) Realpages.com(R) and The Real Yellow Pages(R).
More information about BellSouth can be found at www. bellsouth.com.
Further information about BellSouth and Cingular's third quarter earnings can be
accessed at www.BellSouth.com/investor. The press release, financial statements
and BLS Investor News summarizing highlights of the quarter are available on the
BellSouth Investor Relations website starting today at 8 a.m. Eastern Time (ET).
BellSouth will host a conference call with investors today at 10 a.m. (ET).
Participating will be BellSouth CFO Ron Dykes and Investor Relations Vice
President Nancy Davis. Dial-in information for the conference call is as
follows:
Domestic: 888-370-1863
International: 706-634-1735
The conference call will also be webcast live beginning at 10 a.m. (ET) on our
website at www.bellsouth.com/investor. The webcast will be archived on our
website beginning at approximately 1 p.m. (ET) today.
A replay of the call will be available beginning at approximately 1 p.m. (ET)
today, through Nov. 1, 2004, and can be accessed by dialing:
Domestic: 800-642-1687 - Reservation number: 9280326
International: 706-645-9291 - Reservation number: 9280326
In addition to historical information, this document may contain forward-looking
statements regarding events and financial trends. Factors that could affect
future results and could cause actual results to differ materially from those
expressed or implied in the forward-looking statements include: (i) a change in
economic conditions in domestic or international markets where we operate or
have material investments which would affect demand for our services; (ii) the
intensity of competitive activity and its resulting impact on pricing strategies
and new product offerings; (iii) higher than anticipated cash requirements for
investments, new business initiatives and acquisitions; (iv) unfavorable
regulatory actions; (v) currency devaluations and continued economic weakness in
certain international markets in which we operate or have material investments;
and (vi) those factors contained in the Company's periodic reports filed with
the SEC. The forward-looking information in this document is given as of this
date only, and BellSouth assumes no duty to update this information.
This document may also contain certain non-GAAP financial measures. The most
directly comparable GAAP financial measures, and a full reconciliation of non-
GAAP to GAAP financial information, are attached hereto and provided on the
Company's investor relations website, www.BellSouth.com/investor.
For More Information Contact:
LeAnn Hansen Boucher, Media Relations at 404-249-2839
BellSouth Investor Relations at 800-241-3419
BellSouth Corporation
Consolidated Statements of Income - Reported Basis (unaudited)
(amounts in millions, except per share data)
Note to Readers: See Normalization Earnings Summary and Reconciliation to GAAP
results on pages 3 and 4 for a summary of unusual items included in Reported
Basis results.
Year-to-Date
3Q04 3Q03 Growth 2Q04 Growth 2004 2003 Growth
Operating Revenues
Communications group $4,585 $4,626 -0.9% $4,562 0.5% $13,632 $13,679 -0.3%
Advertising and publishing 495 501 -1.2% 507 -2.4% 1,481 1,515 -2.2%
All other 15 14 7.1% 14 7.1% 41 40 2.5%
Total Operating Revenues 5,095 5,141 -0.9% 5,083 0.2% 15,154 15,234 -0.5%
Operating Expenses
Cost of services and products 1,881 1,789 5.1% 1,789 5.1% 5,468 5,229 4.6%
Selling, general & *
administrative expenses 905 889 1.8% 930 -2.7% 2,744 2,797 -1.9%
Depreciation and amortization 908 959 -5.3% 914 -0.7% 2,720 2,861 -4.9%
Provision for restructuring and
asset impairments - 51 -100.0% 8 -100.0% 21 189 -88.9%
Total Operating Expenses 3,694 3,688 0.2% 3,641 1.5% 10,953 11,076 -1.1%
Operating Income 1,401 1,453 -3.6% 1,442 -2.8% 4,201 4,158 1.0%
Interest Expense 220 234 -6.0% 211 4.3% 646 725 -10.9%
Other Income (Expense), net 136 161 -15.5% 224 -39.3% 990 706 40.2%
Income from Continuing Operations before
Income Taxes, Discontinued
Operations and Cumulative Effect
of Changes in Accounting Principles 1,317 1,380 -4.6% 1,455 -9.5% 4,545 4,139 9.8%
Provision for Income Taxes 465 486 -4.3% 516 -9.9% 1,604 1,487 7.9%
Income from Continuing Operations
before Discontinued Operations and
Cumulative Effect of Changes in
Accounting Principles 852 894 -4.7% 939 -9.3% 2,941 2,652 10.9%
Income (Loss) from Discontinued
Operations, net of tax (53) 42 -226.2% 57 -193.0% 453 150 202.0%
Income Before Cumulative Effect of
Changes in Accounting Principles 799 936 -14.6% 996 -19.8% 3,394 2,802 21.1%
Cumulative Effect of Changes in
Accounting Principle - - N/M* - N/M - 315 -100.0%
Net Income 799 936 -14.6% 996 -19.8% 3,394 3,117 8.9%
Diluted:
Weighted Average Common Shares
Outstanding 1,835 1,851 -0.9% 1,836 -0.1% 1,836 1,854 -1.0%
Earnings Per Share:
Income from Continuing
Operations $0.46 $0.48 -4.2% $0.51 -9.8% $1.60 $1.43 11.9%
Income from Discontinued
Operations ($0.03) $0.02 -250.0% $0.03 -200.0% $0.25 $0.08 212.5%
Cumulative Effect of Changes in
Accounting Principles $0.00 $0.00 N/M $0.00 N/M $0.00 $0.17 -100.0%
Net Income $0.44 $0.51 -13.7% $0.54 -18.5% $1.85 $1.68 10.1%
* - Not meaningful.
Selected Financial and Operating Data
Operating income $1,401 $1,453 -3.6% $1,442 -2.8% $4,201 $4,158 1.0%
Operating margin 27.5% 28.3% -80 bps 28.4% -90 bps 27.7% 27.3% 40 bps
Declared dividends per share $0.27 $0.23 17.4% $0.27 0.0% $0.79 $0.67 17.9%
Capital expenditures $768 $713 7.7% $731 5.1% $2,134 $1,978 7.9%
Common shares outstanding 1,831 1,848 -0.9% 1,831 0.0%
Book value per share $11.94 $10.65 12.1% $11.75 1.6%
-1-
See Accompanying Notes at Page 12
BellSouth Corporation
Consolidated Statements of Income - Normalized Basis (unaudited)
(amounts in millions, except per share data)
Note to Readers: Our reported results, as shown on page 1, are prepared in
accordance with generally accepted accounting principles (GAAP). The normalized
results presented below exclude the impact of certain non-recurring or
non-operating items, the details of which are provided on pages 3 and 4 of this
release. In addition, the normalized results reflect our 40% proportionate
share of Cingular's results, the presentation of which is not allowed under
GAAP. Normalized results exclude discontinued operations from all periods.
Certain reclassifications have been made to prior periods to conform to the
current presentation.
Year-to-Date
3Q04 3Q03 Growth 2Q04 Growth 2004 2003 Growth
Operating Revenues
Communications group $4,533 $4,583 -1.1% $4,510 0.5% $13,531 $13,556 -0.2%
Domestic wireless 1,702 1,624 4.8% 1,662 2.4% 4,941 4,628 6.8%
Advertising and publishing 495 501 -1.2% 507 -2.4% 1,481 1,515 -2.2%
All other 16 14 14.3% 14 14.3% 42 40 5.0%
Total Operating Revenues 6,746 6,722 0.4% 6,693 0.8% 19,995 19,739 1.3%
Operating Expenses
Cost of services and products 2,445 2,392 2.2% 2,320 5.4% 7,104 6,781 4.8%
Selling, general, & administrative
expenses 1,510 1,462 3.3% 1,519 -0.6% 4,493 4,356 3.1%
Depreciation and amortization 1,137 1,168 -2.7% 1,140 -0.3% 3,396 3,468 -2.1%
Total Operating Expenses 5,092 5,022 1.4% 4,979 2.3% 14,993 14,605 2.7%
Operating Income 1,654 1,700 -2.7% 1,714 -3.5% 5,002 5,134 -2.6%
Interest Expense 276 290 -4.8% 268 3.0% 816 913 -10.6%
Other Income (Expense), net 7 25 -72.0% 8 -12.5% 19 118 -83.9%
Income Before Income Taxes 1,385 1,435 -3.5% 1,454 -4.7% 4,205 4,339 -3.1%
Provision for Income Taxes 492 509 -3.3% 516 -4.7% 1,486 1,569 -5.3%
Net Income $893 $926 -3.6% $938 -4.8% $2,719 $2,770 -1.8%
Diluted:
Weighted Average Common Shares Outstanding 1,835 1,851 -0.9% 1,836 -0.1% 1,836 1,854
-1.0%
Earnings Per Share $0.49 $0.50 -2.0% $0.51 -3.9% $1.48 $1.49 -0.7%
Selected Financial and Operating Data
Operating income $1,654 $1,700 -2.7% $1,714 -3.5% $5,002 $5,134 -2.6%
Operating margin 24.5% 25.3% -80 bps 25.6% -110 bps 25.0% 26.0% -100 bps
Declared dividends per share $0.27 $0.23 17.4% $0.27 0.0% $0.79 $0.67 17.9%
Capital expenditures $768 $713 7.7% $731 5.1% $2,134 $1,978 7.9%
Common shares outstanding 1,831 1,848 -0.9% 1,831 0.0%
Book value per share $11.94 $10.65 12.1% $11.75 1.6%
Total employees 63,132 66,182 -4.6% 64,113 -1.5%
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See Accompanying Notes at Page 12
BellSouth Corporation
Normalized Earnings Summary and Reconciliation to Reported Results
(amounts in millions, except per share data)
Third Quarter 2004 Normalizing Items
Hurricane- Merger
Discontinued related Integration/
Cingular Operations Expenses FV Adj
GAAP A F H I Rounding Normalized
Operating Revenues $5,095 $1,651 $- $- $- $- $6,746
Operating Expenses 3,694 1,466 - (38) (29) (1) 5,092
Operating Income 1,401 185 - 38 29 1 1,654
Interest Expense 220 56 - - - - 276
Other Income (Expense), net 136 (129) - - - - 7
Income from Continuing Operations before Income
Taxes 1,317 - - 38 29 1 1,385
Provision for Income Taxes 465 - - 15 12 - 492
Income from Continuing Operations 852 - - 23 17 1 893
Income (Loss) from Discontinued Operations,
net of tax (53) - 53 - - - -
Net Income $799 $0 $53 $23 $17 $1 $893
Diluted Earnings Per Share $0.44 $0.00 $0.03 $0.01 $0.01 $0.00 $0.49
Year-to-Date 2004 Normalizing Items
Hurricane- Merger
Sale of Discontinued SC related Integration/
Cingular Sonofon Operations Settlement Expenses FV Adj
GAAP A E F G H I Normalized
Operating Revenues $15,154 $4,791 $- $- $50 $- $- $19,995
Operating Expenses 10,953 4,110 - - (3) (38) (29) 14,993
Operating Income 4,201 681 - - 53 38 29 5,002
Interest Expense 646 170 - - - - - 816
Other Income (Expense), net 990 (509) (462) - - - - 19
Income from Continuing Operations
before Income Taxes 4,545 2 (462) - 53 38 29 4,205
Provision for Income Taxes 1,604 2 (167) - 20 15 12 1,486
Income from Continuing Operations 2,941 - (295) - 33 23 17 2,719
Income (Loss) from Discontinued
Operations, net of tax 453 - - (453) - - - -
Net Income $3,394 $0 ($295) ($453) $33 $23 $17 $2,719
Diluted Earnings Per Share $1.85 $0.00 ($0.16) ($0.25) $0.02 $0.01 $0.01 $1.48
-3-
See Accompanying Notes at Page 5
BellSouth Corporation
Normalized Earnings Summary and Reconciliation to Reported Results
(amounts in millions, except per share data)
Third Quarter 2003 Normalizing Items
Asset Discontinued
Cingular Impairment Operations
GAAP A J F Normalized
Operating Revenues $5,141 $1,581 $- $- $6,722
Operating Expenses 3,688 1,386 (52) - 5,022
Operating Income 1,453 195 52 - 1,700
Interest Expense 234 56 - - 290
Other Income (Expense), net 161 (136) - - 25
Income from Continuing Operations before Income
Taxes 1,380 3 52 - 1,435
Provision for Income Taxes 486 3 20 - 509
Income from Continuing Operations 894 - 32 - 926
Income (Loss) from Discontinued Operations,
net of tax 42 - - (42) -
Income Before Cumulative Effect of Changes in
Accounting Principles 936 - 32 (42) 926
Cumulative Effect of Changes in Accounting
Principles - - - - -
Net Income $936 $0 $32 ($42) $926
Diluted Earnings Per Share * $0.51 $0.00 $0.02 ($0.02) $0.50
* Normalized earnings per share for third quarter 2003 does not sum due to
rounding.
Year-to-Date 2003 Normalizing Items
A&P Pension/ Discontinued Asset
Cingular Acctg.Change FAS143 Severance Operations Impairment
GAAP A B C D F J Normalized
Operating Revenues $15,234 $4,505 $- $- $- $- $- $19,739
Operating Expenses 11,076 3,722 - - (141) - (52) 14,605
Operating Income 4,158 783 - - 141 - 52 5,134
Interest Expense 725 188 - - - - - 913
Other Income (Expense), net 706 (588) - - - - - 118
Income from Continuing
Operations before Income Taxes 4,139 7 - - 141 - 52 4,339
Provision for Income Taxes 1,487 7 - - 55 - 20 1,569
Income from Continuing
Operations 2,652 - - - 86 - 32 2,770
Income (Loss) from
Discontinued Operations,
net of tax 150 - - - - (150) - -
Income Before Cumulative
Effect of Changes in
Accounting Principles 2,802 - - - 86 (150) 32 2,770
Cumulative Effect of Changes
in Accounting Principles 315 - 501 (816) - - - -
Net Income $3,117 $0 $501 ($816) $86 ($150) $32 $2,770
Diluted Earnings Per Share * $1.68 $0.00 $0.27 ($0.44) $0.05 ($0.08) $0.02 $1.49
* Normalized earnings per share for year-to-date 2003 does not sum due to
rounding.
-4-
See Accompanying Notes at Page 5
BellSouth Corporation
Notes to Normalized Financial and Operating Data (pages 3 and 4)
(amounts in millions, except per share data)
Our normalized earnings have been adjusted for the following:
(a) The periods presented have been adjusted to include our 40% proportional
share of Cingular Wireless' operating results, net of eliminations for
amounts charged by other BellSouth companies to Cingular.
(b) Change in method of accounting related to our directory publishing business
from the issue basis method to the deferral method - The 2003 amount is a
one-time charge to net income of $501.
(c) Adoption of Financial Accounting Standard No. 143 (FAS 143) - Represents a
one-time charge related to the adoption of new accounting rules associated
with obligations related to the retirement of long-lived assets. The
adjustment resulted in a one-time increase to net income of $816.
(d) Pension/Severance Costs - During 2003, the number of employees who
voluntarily separated and elected to receive lump-sum retirement benefits
exceeded thresholds that require current recognition of deferred losses
related to these employees. These costs include $33 after-tax of severance
related costs.
(e) Gain related to the sale of our operations in Denmark.
(f) Discontinued Operations - In March 2004, we announced our intention to sell
our Latin American properties. Accordingly, the prior period results have
been recast to reflect the Latin American operations as Discontinued
Operations and excluded from normalized results. The year-to-date period
in 2004 includes $357 in net income tax benefit representing the
recognition of book over tax basis differential in connection with the
announced sale of these properties. The third quarter 2004 results include
an after-tax charge of $190 related to the buyout of the other major
shareholder in Telcel, our Venezuelan operation and the settlement of all
outstanding claims with this shareholder.
(g) SC Regulatory Settlement - In April 2004, BellSouth entered into a
settlement agreement with the South Carolina Consumer Advocate with respect
to previously disclosed litigation (See 2003 10K for further discussion).
The settlement required among other things, that BellSouth refund $50 to
its South Carolina customers. The refund was recognized in the first
quarter 2004 as a reduction to revenue.
(h) Hurricane-related Expenses - Represents the incremental labor and material
costs incurred during the 3rd quarter related to service restoration and
network repairs in the wireline business due to Hurricanes Charley,
Frances, Ivan and Jeanne.
(i) Wireless merger intergration planning costs and fair value adjustment-
Represents BellSouth's 40% share of tax-effected wireless merger
integration planning costs of $43 incurred during the 3rd quarter in
preparation for the Cingular/AWE merger. Also includes a $31 fair value
adjustment for the announced sale of Cingular Interactive.
(j) Asset Impairment - The third quarter 2003 charge for asset impairment
represents the write-off of capitalized software related to an abandoned
systems project.
-5-
BellSouth Corporation
Consolidated Balance Sheets (unaudited)
(amounts in millions, except per share data)
September 30, December 31, Change vs. June 30, Change vs.
2004 2003 Prior Year 2004 Prior Quarter
Assets
Current Assets:
Cash and cash equivalents $9,200 $4,556 $4,644 $6,216 $2,984
Accounts receivable, net of allowance for 2,546 2,870 (324) 2,436 110
uncollectibles of $331, $496, and $338
Material and supplies 316 375 (59) 319 (3)
Other current assets 842 1,048 (206) 870 (28)
Assets of discontinued operations 3,977 0 3,977 3,928 49
Total Current Assets 16,881 8,849 8,032 13,769 3,112
Investments and Advances 8,768 8,552 216 8,638 130
Property, Plant and Equipment, net 21,971 23,807 (1,836) 22,104 (133)
Deferred Charges and Other Assets 6,113 5,855 258 6,033 80
Goodwill 249 342 (93) 249 0
Intangible Assets, net 1,507 2,297 (790) 1,501 6
Total Assets $55,489 $49,702 $5,787 $52,294 $3,195
Liabilities and Shareholders' Equity
Current Liabilities:
Debt maturing within one year $3,048 $3,491 ($443) $3,262 ($214)
Accounts payable 970 1,339 (369) 883 87
Other current liabilities 3,150 3,628 (478) 3,301 (151)
Liabilities of discontinued operations 2,674 0 2,674 2,469 205
Total Current Liabilities 9,842 8,458 1,384 9,915 (73)
Long-Term Debt 13,142 11,489 1,653 10,341 2,801
Noncurrent Liabilities:
Deferred income taxes 6,314 5,349 965 6,180 134
Other noncurrent liabilities 4,327 4,694 (367) 4,342 (15)
Total Noncurrent Liabilities 10,641 10,043 598 10,522 119
Shareholders' Equity:
Common stock, $1 par value 2,020 2,020 0 2,020 0
Paid-in capital 7,790 7,729 61 7,748 42
Retained earnings 18,421 16,540 1,881 18,126 295
Accumulated other comprehensive income (470) (585) 115 (460) (10)
Shares held in trust and treasury (5,897) (5,992) 95 (5,918) 21
Total Shareholders' Equity 21,864 19,712 2,152 21,516 348
Total Liabilities and Shareholders' Equity $55,489 $49,702 $5,787 $52,294 $3,195
See Accompanying Notes at Page 12
-6-
BellSouth Corporation
Consolidated Statements of Cash Flows (unaudited)
(amounts in millions, except per share data)
Year-To-Date
3Q04 3Q03 2Q04 2004 2003
Cash Flows from Operating Activities:
Income from Continuing Operations $ 852 $ 894 $ 939 $ 2,941 $ 2,652
Adjustments to income from continuing operations:
Depreciation and amortization 908 959 914 2,720 2,861
Provision for uncollectibles 90 111 80 285 398
Net losses (earnings) of equity affiliates (73) (79) (151) (328) (427)
Deferred income taxes 137 294 434 740 800
Net (gains) losses on sale or impairment of equity securities 6 (1) - 9 7
Pension income (121) (134) (121) (363) (401)
Pension settlement (gains) losses - - - - 87
Stock-based compensation expense 29 32 30 87 92
Asset impairments - 52 - - 52
(Gain) loss on sale/disposal of operations - - - (462) -
Net change in:
Accounts receivable and other current assets (147) (55) (110) (271) 8
Accounts payable and other current liabilities (88) 164 43 (4) 288
Deferred charges and other assets 19 122 (52) (58) 253
Other liabilities and deferred credits 28 (97) 17 48 (133)
Other reconciling items, net 51 6 46 144 18
Net cash provided by operating activities 1,691 2,268 2,069 5,488 6,555
Cash Flows from Investing Activities:
Capital expenditures (768) (713) (731) (2,134) (1,978)
Investments in debt and equity securities (87) (6) (276) (503) (27)
Proceeds from sale of securities and operations 6 1 - 565 27
Proceeds from repayments of loans and advances 20 - - 129 1,899
Settlement of derivatives on advances - - - (17) (352)
Other investing activities, net (8) (10) 10 (3) (11)
Net cash provided by (used for) investing activities (837) (728) (997) (1,963) (442)
Cash Flows from Financing Activities:
Net borrowing (repayments) of short-term debt 73 (25) 23 (266) (423)
Proceeds from long-term debt 2,993 - 696 3,689 -
Repayments of long-term debt (524) (280) (214) (745) (1,836)
Dividends paid (493) (424) (457) (1,407) (1,183)
Purchase of treasury shares - - (99) (99) (322)
Other financing activities, net (3) 7 3 48 29
Net cash used for financing activities 2,046 (722) (48) 1,220 (3,735)
Net Increase/(Decrease) in Cash from Continuing Operations 2,900 818 1,024 4,745 2,378
Net Increase/(Decrease) in Cash from Discontinued Operations 84 85 (176) (101) 165
Net Increase (Decrease) in Cash and Cash Equivalents 2,984 903 848 4,644 2,543
Cash and Cash Equivalents at Beginning of Period 6,216 4,122 5,368 4,556 2,482
Cash and Cash Equivalents at End of Period $ 9,200 $ 5,025 $ 6,216 $ 9,200 $ 5,025
See Accompanying Notes at Page 12
-7-
BellSouth Corporation
Results by Segment (amounts in millions)(unaudited)
Communications Group (1)
Year-To-Date
3Q04 3Q03 Growth 2Q04 Growth 2004 2003 Growth
Operating Revenues
Voice $3,121 $3,204 -2.6% $3,153 -1.0% $9,443 $9,538 -1.0%
Data 1,145 1,104 3.7% 1,116 2.6% 3,353 3,259 2.9%
Other 361 360 0.3% 334 8.1% 1,009 1,033 -2.3%
Total Operating Revenues 4,627 4,668 -0.9% 4,603 0.5% 13,805 13,830 -0.2%
Operating Expenses
Cost of services and products 1,783 1,720 3.7% 1,730 3.1% 5,258 5,057 4.0%
Selling, general, & administrative 729 755 -3.4% 778 -6.3% 2,279 2,287 -0.3%
expenses
Depreciation and amortization 898 949 -5.4% 903 -0.6% 2,689 2,830 -5.0%
Total Operating Expenses 3,410 3,424 -0.4% 3,411 0.0% 10,226 10,174 0.5%
Segment Operating Income 1,217 1,244 -2.2% 1,192 2.1% 3,579 3,656 -2.1%
Interest Expense 94 98 -4.1% 89 5.6% 274 317 -13.6%
Other Income (Expense), net 7 7 0.0% 7 0.0% 20 28 -28.6%
Income Before Income Taxes 1,130 1,153 -2.0% 1,110 1.8% 3,325 3,367 -1.2%
Provision for Income Taxes 416 426 -2.3% 408 2.0% 1,222 1,252 -2.4%
Segment Net Income (1) $714 $727 -1.8% $702 1.7% $2,103 $2,115 -0.6%
Selected Financial and Operating Data
(amounts In millions)
Segment operating income $1,217 $1,244 -2.2% $1,192 2.1% $3,579 $3,656 -2.1%
Segment operating margin 26.3% 26.6% -30 bps 25.9% 40 bps 25.9% 26.4% -50 bps
Long distance revenues $524 $381 37.5% $479 9.4% $1,443 $943 53.0%
Access minutes of use 22,801 23,390 -2.5% 22,753 0.2% 68,847 69,238 -0.6%
Capital expenditures $724 $692 4.6% $713 1.5% $2,049 $1,923 6.6%
(amounts in thousands)
Wholesale lines 3,070 2,507 22.5% 3,139 -2.2%
DSL customers 1,872 1,336 40.1% 1,738 7.7%
LD customers 5,663 3,440 64.6% 5,131 10.4%
Consumer ARPU (4) $56.80 $53.35 6.5% $55.47 2.4%
See Accompanying Notes at Page 12
-8-
BellSouth Corporation
Results by segment (unaudited)
Supplemental Operating Data (in thousands)
Communications Group - Network Access Lines In Service Reported (a)
3Q04 3Q03 Growth 2Q04 Growth
Access lines
Residence
Retail
Primary 11,816 12,670 -6.7% 11,876 -0.5%
Additional 1,388 1,671 -16.9% 1,447 -4.1%
Total Retail Residence 13,204 14,341 -7.9% 13,323 -0.9%
Wholesale
Resale 114 198 -42.4% 127 -10.2%
UNE-P 2,082 1,534 35.7% 2,149 -3.1%
Total Wholesale Residence 2,196 1,732 26.8% 2,276 -3.5%
Total Residence 15,400 16,073 -4.2% 15,599 -1.3%
Business
Retail
Total Retail Business 5,264 5,484 -4.0% 5,282 -0.3%
Wholesale
Resale 61 75 -18.7% 63 -3.2%
UNE-P 752 654 15.0% 740 1.6%
Total Wholesale Business 813 729 11.5% 803 1.2%
Total Business 6,077 6,213 -2.2% 6,085 -0.1%
Other Retail/Wholesale Lines
Retail 38 113 -66.4% 42 -9.5%
Wholesale 61 46 32.6% 60 1.7%
Total Other Retail/Wholesale Lines 99 159 -37.7% 102 -2.9%
Total Access Lines in Service 21,576 22,445 -3.9% 21,786 -1.0%
ISDN line equivalents
Residence 10 14 -28.6% 11 -9.1%
Business 1,462 1,445 1.2% 1,477 -1.0%
Total ISDN Adjusted ALIS 23,048 23,904 -3.6% 23,274 -1.0%
Access Line Equivalents (b)
Selected digital data services:
Unbundled Loops 326 353 -7.6% 343 -5.0%
DSO & ADSL 11,493 8,301 38.5% 10,695 7.5%
DS1 7,594 7,089 7.1% 7,475 1.6%
DS3 & higher 32,643 31,342 4.2% 32,547 0.3%
Total digital data lines in service 52,056 47,085 10.6% 51,060 2.0%
Total equivalent access lines in service 75,104 70,989 5.8% 74,334 1.0%
(a) Prior period operating data are often revised at later dates to reflect
updated information. The above information reflects the latest data
available for the periods indicated.
(b) Access line equivalents represent a conversion of non-switched data circuits
to a switched access line basis and is presented for comparability purposes.
Equivalents are calculated by converting high-speed/high-capacity circuits
to the equivalent of a switched access line based on transport capacity.
While the revenues generated by access line equivalents have a directional
relationship with these counts, revenue growth rates cannot be compared to
line growth rates on an equivalent basis.
See Accompanying Notes at Page 12
-9-
BellSouth Corporation
Results by Segment (amounts in millions) (unaudited)
Domestic Wireless Segment (1)(a)
Year-To-Date
3Q04 3Q03 Growth 2Q04 Growth 2004 2003 Growth
Operating Revenues
Service revenues (2) $1,534 $1,471 4.3% $1,521 0.9% $4,478 $4,275 4.7%
Equipment and other revenues 168 153 9.8% 141 19.1% 463 353 31.2%
Total Operating Revenues 1,702 1,624 4.8% 1,662 2.4% 4,941 4,628 6.8%
Operating Expenses
Cost of services and products 651 643 1.2% 579 12.4% 1,814 1,666 8.9%
Selling, general, &
administrative expenses 609 577 5.5% 585 4.1% 1,742 1,571 10.9%
Depreciation and amortization 229 209 9.6% 226 1.3% 676 607 11.4%
Total Operating Expenses 1,489 1,429 4.2% 1,390 7.1% 4,232 3,844 10.1%
Segment Operating Income 213 195 9.2% 272 -21.7% 709 784 -9.6%
Interest Expense 80 79 1.3% 80 0.0% 239 261 -8.4%
Other Income (Expense), net (46) (44) -4.5% (52) 11.5% (145) (114) -27.2%
Income Before Income Taxes 87 72 20.8% 140 -37.9% 325 409 -20.5%
Provision for Income Taxes 33 28 17.9% 51 -35.3% 123 160 -23.1%
Segment Net Income (1) $54 $44 22.7% $89 -39.3% $202 $249 -18.9%
Selected Financial and Operating Data
(amounts in millions, except customer data in thousands)
Segment operating income $213 $195 9.2% $272 -21.7% $709 $784 -9.6%
Segment operating margin 12.5% 12.0% 50 bps 16.4% -390 bps 14.3% 16.9% -260 bps
Cellular/PCS Operating Metrics
(100% Cingular):
Total Customers 25,672 23,385 9.8% 25,044 2.5% 25,672 23,385 9.8%
Net Customer Additions 657 745 -11.8% 428 53.5% 1,639 1,474 11.2%
Partitioned Customers and/or
Adjustments (29) 0 N/M (2) -1350.0% 6 (14) 142.9%
Churn 2.8% 2.8% 0 bps 2.7% 10 bps 2.7% 2.6% 10 bps
Wireless Service ARPU (3) $49.78 $52.43 -5.1% $50.32 -1.1% $49.36 $52.12 -5.3%
Minutes Of Use Per Subscriber 537 456 17.8% 523 2.7% 516 436 18.3%
Licensed POPs (4) 243 236 3.0% 243 0.0% 243 236 3.0%
Penetration (4) 11.4% 10.6% 80 bps 11.1% 30 bps 11.4% 10.6% 80 bps
Cingular Interactive Operating
Metrics:
Total Customers 653 788 -17.1% 735 -11.2% 653 788 -17.1%
Net Customer Additions (82) - N/M (33) -148.5% (136) (29) N/M
(a) The domestic wireless segment is comprised of BellSouth's 40% share of the reported results of Cingular Wireless.
- 10 -
BellSouth Corporation
Results by Segment (amounts in millions) (unaudited)
Advertising & Publishing (1)
Year-To-Date
3Q04 3Q03 Growth 2Q04 Growth 2004 2003 Growth
Operating Revenues
Advertising and publishing
revenues 471 475 -0.8% 466 1.1% 1,403 1,436 -2.3%
Commission revenues 27 30 -10.0% 45 -40.0% 88 92 -4.3%
Total Operating Revenues 498 505 -1.4% 511 -2.5% 1,491 1,528 -2.4%
Operating Expenses
Cost of services 89 94 -5.3% 90 -1.1% 259 254 2.0%
Selling, general, &
administrative expenses 173 168 3.0% 167 3.6% 496 522 -5.0%
Depreciation and amortization 7 5 40.0% 7 0.0% 21 19 10.5%
Total Operating Expenses 269 267 0.7% 264 1.9% 776 795 -2.4%
Segment Operating Income 229 238 -3.8% 247 -7.3% 715 733 -2.5%
Interest Expense 2 1 100.0% 2 0.0% 6 5 20.0%
Other Income (Expense), net - - N/M* 1 -100.0% 1 1 0.0%
Income Before Income Taxes 227 237 -4.2% 246 -7.7% 710 729 -2.6%
Provision for Income Taxes 86 90 -4.4% 96 -10.4% 272 276 -1.4%
Segment Net Income(1) $141 $147 -4.1% $150 -6.0% $438 $453 -3.3%
Segment operating income $229 $238 -3.8% $247 -7.3% $715 $733 -2.5%
Segment operating margin 46.0% 47.1% -110 bps 48.3% -230 bps 48.0% 48.0% 0 bps
* - Not meaningful.
- 11 -
BellSouth Corporation
Notes
(1) Segment net income (loss) is based on normalized results which exclude
certain one-time transactions and certain corporate intercompany billings.
Intersegment revenues are not eliminated for purposes of management
reporting.
(2) Wireless service revenues includes activation fees, access, airtime,
roaming, long distance and value added services. Roaming revenues are
included on a gross basis for the Domestic Wireless segment. Average
monthly revenue per customer is calculated by dividing average monthly
service revenue by average customers.
(3) Management uses average revenue per unit (ARPU) as an indicator of operating
performance of the business. Consumer ARPU - is defined as consumer revenues
during the period divided by average primary access lines during the period.
Wireless Service ARPU - Cellular/PCS is defined as Cellular/PCS service
revenues during the period divided by average Cellular/PCS subscribers
during the period. This metric is used to compare the recurring revenue
amounts being generated on our network to prior periods and internal
targets. We believe that each of these metrics provides useful information
concerning the performance of our initiatives to attract and retain high
value customers and the use of our network.
(4) Licensed POPs refers to the number of people residing in areas where
Cingular and its partners, Salmon and T-Mobile USA, Inc., have licenses to
provide cellular or PCS service, including the New York City metropolitan
area, and in areas where Cingular has not yet commenced service, such as the
Salt Lake City area. Penetration calculation is based upon licensed
operational POPs of 226 million. The New York City metropolitan area is
included in the penetration calculation, beginning in the third quarter of
2002
- 12 -
BellSouth Corporation
Non-GAAP Measures - Reconciliation
(amounts in millions) (unaudited)
Segment Net Income Reconciliation to GAAP Net Income
Year-to-Date
3Q04 3Q03 2Q04 2004 2003
Communications group segment net income $714 $727 $702 $2,103 $2,115
Domestic wireless group segment net income 54 44 89 202 249
Advertising and publishing group segment net income 141 147 150 438 453
Corporate, eliminations and other (16) 8 (3) (24) (47)
Normalized net income 893 926 938 2,719 2,770
Add back Excluded non-recurring or
non-operational items (a) (94) 10 58 675 347
Consolidated GAAP net income $799 $936 $996 $3,394 $3,117
Free Cash Flow Year-to-Date
3Q04 3Q03 2Q04 2004 2003
Net cash provided by operating activities $1,691 $2,268 $2,069 $5,488 $6,555
Less Capital Expenditures (768) (713) (731) (2,134) (1,978)
Operating Free Cash Flow $923 $1,555 $1,338 $3,354 $4,577
Net Debt
September 30, December 31, June 30,
2004 2003 2004
Total Debt $16,190 $14,980 $13,603
Less Cash (9,200) (4,556) (6,216)
Net Debt $6,990 $10,424 $7,387
Communications Group Operating Income before Depreciation and Amortization Year-to-Date
3Q04 3Q03 2Q04 2004 2003
Operating Revenues $4,627 $4,668 $4,603 $13,805 $13,830
Operating Income 1,217 1,244 1,192 3,579 3,656
Add back Depreciation and amortization 898 949 903 2,689 2,830
Operating Income before Depreciation and Amortization $2,115 $2,193 $2,095 $6,268 $6,486
Margin 45.7% 47.0% 45.5% 45.4% 46.9%
(a) See pages 3 and 4 for detail of excluded items.
- 13 -
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