AT&T Posts In-Line Third Quarter

AT&T (T Quote) posted third-quarter earnings Tuesday that were in line with Wall Street estimates, and the big phone company found a flaw in last year's books.

For the quarter ended Sept. 30, the New York telephone giant posted income from continuing operations of $458 million, or 58 cents a diluted share, down from the comparable year-ago totals of $525 million, or 67 cents a share. For the latest period, net income was $418 million, or 53 cents a share.

Revenue fell 8% from a year ago to $8.6 billion, as consumer long-distance revenue continued to tumble but was in part offset by gains in AT&T Consumer Services' bundled local and long-distance offering, as well as growth in several key markets of AT&T Business Services. All told, business services revenue fell 6% and consumer revenue 16% from a year ago.

For the third quarter, Wall Street analysts had expected AT&T to earn 53 cents a share on revenue of $8.64 billion.

"AT&T's third-quarter results demonstrate our ability to successfully execute in a difficult environment by maintaining our focus on controlling costs, streamlining processes and delighting our customers," CEO David Dorman said. "We continue to operate from a position of leadership and strength, and we remain among the best positioned in our industry for a recovery in employment growth and improved telecom sector spending and demand."

AT&T also said an audit last month found that two workers had "circumvented the internal controls process," resulting in a $125 million past understatement of a cost-related liability. As properly recorded the expense would have reduced 2001 and 2002 net income by a total of a dime a share. The company said it "made the appropriate personnel changes and enhanced its internal controls accordingly," and that the expense covering those costs was covered in the third quarter.

The company ended the quarter with net debt of $9.3 billion, including $500 million of debt associated with the adoption of FIN 46, a new accounting guideline covering the consolidation of variable interest entities.

Free cash flow was $2 billion for the third quarter, which included $600 million of tax refunds. Free cash flow is defined as cash flows provided by operating activities of $2.8 billion less cash used for capital expenditures and other additions of $800 million.

"AT&T is making solid progress in improving our cost structure and enhancing our overall financial flexibility and strength," financial chief Thomas Horton said. "This quarter's significant free cash flow allowed us to reduce net debt by $1.5 billion and reduce our year-end net debt target to less than $9 billion while continuing to invest in the future of our business."

Rumors of vast changes have been sweeping over AT&T in recent months, as the big telecom players continue to stagger in a weak economy beset by rising competition. Investors have seen the company as a natural merger partner with one of the Baby Bells it spawned nearly 20 years ago in a government-forced breakup; meanwhile, employees of Ma Bell continue to worry about the prospect of additional job cuts as the company seeks to adjust to less-flush times. Just a year ago AT&T was wrapping up the sale of its broadband operations to cable giant Comcast (CMCSA Quote).

On Monday, AT&T shares rose 95 cents to $21.07.