10-Q 1 q3d10q.htm FORM 10-Q q3d10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
 

 
(Mark One)
   

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
       
   
For the quarterly period ended September 30, 2011
 
       
   
or
 
       
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
       
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  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]
 
Accelerated filer
[   ]
Non-accelerated filer
[   ]
(Do not check if a smaller reporting company)
Smaller reporting company
[   ]

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, 2011 there were 5,926 million common shares outstanding.
 
 
 
 

 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
 
                         
AT&T INC.
                       
CONSOLIDATED STATEMENTS OF INCOME
                       
Dollars in millions except per share amounts
                       
(Unaudited)    
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
   
2011
   
2010
   
2011
 
2010
Operating Revenues
                       
Wireless service
  $ 14,261     $ 13,675     $ 42,379     $ 39,711  
Data
    7,472       6,947       22,008       20,464  
Voice
    6,243       6,978       19,136       21,685  
Directory
    803       961       2,512       3,009  
Other
    2,699       3,020       8,185       8,050  
Total operating revenues
    31,478       31,581       94,220       92,919  
Operating Expenses
                               
Cost of services and sales (exclusive of depreciation and
   amortization shown separately below)
    13,165       13,605       39,900       38,440  
Selling, general and administrative
    7,460       7,672       22,308       22,522  
Depreciation and amortization
    4,618       4,873       13,804       14,472  
Total operating expenses
    25,243       26,150       76,012       75,434  
Operating Income
    6,235       5,431       18,208       17,485  
Other Income (Expense)                                
Interest expense
    (889     (729     (2,583     (2,248
Equity in net income of affiliates
    193       217       649       629  
Other income (expense) - net
    46       124       132       825  
Total other income (expense)     (650     (388     (1,802     (794
Income from Continuing Operations Before Income Taxes
    5,585       5,043       16,406       16,691  
Income tax (benefit) expense
    1,899       (6,573 )     5,594       (1,550 )
Income from Continuing Operations
    3,686       11,616       10,812       18,241  
Income from Discontinued Operations, net of tax
    -       780       -       777  
Net Income
    3,686       12,396       10,812       19,018  
Less: Net Income Attributable to Noncontrolling Interest
    (63 )     (77 )     (190 )     (243 )
Net Income Attributable to AT&T
  $ 3,623     $ 12,319     $ 10,622     $ 18,775  
Basic Earnings Per Share from Continuing Operations
 Attributable to AT&T
  $ 0.61     $ 1.95     $ 1.79     $ 3.05  
Basic Earnings Per Share from Discontinued Operations
 Attributable to AT&T
    -       0.13       -       0.13  
Basic Earnings Per Share Attributable to AT&T
  $ 0.61     $ 2.08     $ 1.79     $ 3.18  
Diluted Earnings Per Share from Continuing Operations
 Attributable to AT&T
  $ 0.61     $ 1.94     $ 1.79     $ 3.03  
Diluted Earnings Per Share from Discontinued Operations
 Attributable to AT&T
    -       0.13       -       0.13  
Diluted Earnings Per Share Attributable to AT&T
  $ 0.61     $ 2.07     $ 1.79     $ 3.16  
Weighted Average Number of Common Shares
    Outstanding - Basic (in millions)
      5,936       5,909       5,931       5,908  
Weighted Average Number of Common Shares
    Outstanding - with Dilution (in millions)
    5,954       5,938       5,950       5,937  
Dividends Declared Per Common Share   $
0.43
    $ 0.42     $ 1.29     $ 1.26  
See Notes to Consolidated Financial Statements.                                
 
 

 
 
AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
 
 
 
September 30,
   
December 31,
 
 
 
2011
   
2010
 
Assets
 
(Unaudited)
   
 
 
Current Assets
 
 
   
 
 
Cash and cash equivalents
  $ 10,762     $ 1,437  
Accounts receivable - net of allowances for doubtful accounts of $888 and $957
    13,377       13,610  
Prepaid expenses
    1,507       1,458  
Deferred income taxes
    1,101       1,170  
Other current assets
    1,858       2,276  
Total current assets
    28,605       19,951  
Property, plant and equipment
    256,626       243,833  
   Less: accumulated depreciation and amortization
    (150,840 )     (140,637 )
Property, Plant and Equipment – Net
    105,786       103,196  
Goodwill
    73,590       73,601  
Licenses
    50,406       50,372  
Customer Lists and Relationships – Net
    3,175       4,708  
Other Intangible Assets – Net
    5,394       5,440  
Investments in Equity Affiliates
    4,483       4,515  
Other Assets
    6,214       6,705  
Total Assets
  $ 277,653     $ 268,488  
 
               
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Debt maturing within one year
  $ 8,900     $ 7,196  
Accounts payable and accrued liabilities
    17,860       20,055  
Advanced billing and customer deposits
    3,794       4,086  
Accrued taxes
    929       72  
Dividends payable
    2,548       2,542  
Total current liabilities
    34,031       33,951  
Long-Term Debt
    62,326       58,971  
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
    26,446       22,070  
Postemployment benefit obligation
    28,190       28,803  
Other noncurrent liabilities
    12,778       12,743  
Total deferred credits and other noncurrent liabilities
    67,414       63,616  
 
               
Stockholders’ Equity
               
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2011 and
               
   December 31, 2010: issued 6,495,231,088 at September 30, 2011 and December 31, 2010
    6,495       6,495  
Additional paid-in capital
    91,455       91,731  
Retained earnings
    34,758       31,792  
Treasury stock (569,537,116 at September 30, 2011 and 584,144,220
               
   at December 31, 2010, at cost)
    (20,770 )     (21,083 )
Accumulated other comprehensive income
    1,677       2,712  
Noncontrolling interest
    267       303  
Total stockholders’ equity
    113,882       111,950  
Total Liabilities and Stockholders’ Equity
  $ 277,653     $ 268,488  
See Notes to Consolidated Financial Statements.
               

 

 

AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions
 
(Unaudited)
 
 
 
Nine months ended
 
 
 
September 30,
 
 
 
2011
   
2010
 
Operating Activities
 
 
   
 
 
Net income
  $ 10,812     $ 19,018  
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
    13,804       14,472  
   Undistributed earnings from investments in equity affiliates
    (539 )     (531 )
   Provision for uncollectible accounts
    805       973  
   Deferred income tax expense and noncurrent unrecognized tax benefits
    4,942       (4,184 )
   Net gain from impairment and sale of investments
    (57 )     (746 )
   Income from discontinued operations
    -       (777 )
   Changes in operating assets and liabilities:
               
      Accounts receivable
    (573 )     266  
      Other current assets
    439       495  
      Accounts payable and accrued liabilities
    (1,630 )     (2,861 )
Net income attributable to noncontrolling interest
    (190 )     (243 )
Other - net
    (663 )     (532 )
Total adjustments
    16,338       6,332  
Net Cash Provided by Operating Activities
    27,150       25,350  
 
               
Investing Activities
               
Construction and capital expenditures:
               
   Capital expenditures
    (14,625 )     (13,170 )
   Interest during construction
    (119 )     (577 )
Acquisitions, net of cash acquired
    (430 )     (2,615 )
Dispositions
    76       1,821  
(Purchases) and sales of securities, net
    45       (437 )
Other
    28       22  
Net Cash Used in Investing Activities
    (15,025 )     (14,956 )
 
               
Financing Activities
               
Net change in short-term borrowings with original maturities of three months or less
    (1,620 )     (33 )
Issuance of long-term debt
    7,935       2,235  
Repayment of long-term debt
    (1,298 )     (5,280 )
Issuance of treasury stock
    216       24  
Dividends paid
    (7,627 )     (7,436 )
Other
    (406 )     (399 )
Net Cash Used in Financing Activities
    (2,800 )     (10,889 )
Net increase (decrease) in cash and cash equivalents
    9,325       (495 )
Cash and cash equivalents beginning of year
    1,437       3,741  
Cash and Cash Equivalents End of Period
  $ 10,762     $ 3,246  
Cash paid during the nine months ended September 30 for:
               
   Interest
  $ 3,066     $ 3,322  
   Income taxes, net of refunds
  $ (121 )   $ 3,013  
See Notes to Consolidated Financial Statements.
 

 

 
 
AT&T INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
 
Dollars and shares in millions except per share amounts
 
(Unaudited)
 
 
 
September 30, 2011
 
 
Shares
 
Amount
Common Stock
 
 
   
 
 
Balance at beginning of year
    6,495     $ 6,495  
Balance at end of period
    6,495     $ 6,495  
 
               
Additional Paid-In Capital
               
Balance at beginning of year
          $ 91,731  
Issuance of treasury stock
            127  
Share-based payments
            (104 )
Change related to acquisition of interests held by noncontrolling owners
            (299 )
Balance at end of period
          $ 91,455  
 
               
Retained Earnings
               
Balance at beginning of year
          $ 31,792  
Net income attributable to AT&T ($1.79 per diluted share)
            10,622  
Dividends to stockholders ($1.29 per share)
            (7,638 )
Other
            (18 )
Balance at end of period
          $ 34,758  
 
               
Treasury Stock
               
Balance at beginning of year
    (584 )   $ (21,083 )
Issuance of treasury stock
    15       313  
Balance at end of period
    (569 )   $ (20,770 )
 
               
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax:
               
Balance at beginning of year
          $ 2,712  
Other comprehensive loss attributable to AT&T (see Note 2)
            (1,035 )
Balance at end of period
          $ 1,677  
 
               
Noncontrolling Interest:
               
Balance at beginning of year
          $ 303  
Net income attributable to noncontrolling interest
            190  
Distributions
            (167 )
Acquisition of interests held by noncontrolling owners
            (59 )
Balance at end of period
          $ 267  
 
               
Total Stockholders’ Equity at beginning of year
          $ 111,950  
Total Stockholders’ Equity at end of period
          $ 113,882  
See Notes to Consolidated Financial Statements.
               
 
 
 

 
AT&T INC.
SEPTEMBER 30, 2011

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.” We believe that these consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the presented interim periods. The results for the interim periods are not necessarily indicative of those 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, 2010.

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 advertising solutions.

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 period end.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. See Notes 4 and 5 for a discussion of our changes in accounting and reporting for our pension and other postretirement benefit costs.

Employee Separations  We established 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, 2011, we had severance accruals of $391 and at December 31, 2010, we had severance accruals of $848.

Income Taxes

Healthcare Legislation  In March 2010, the President of the United States signed into law comprehensive healthcare reform legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which included a change in the tax treatment related to Medicare Part D subsidies. As a result, during the first quarter of 2010, we recorded a $995 charge to income tax expense in our consolidated statement of income.

Internal Revenue Service Settlement  In September 2010, we reached a settlement with the Internal Revenue Service (IRS) on tax basis calculations related to a 2008 restructuring of our wireless operations. The IRS settlement resolved the uncertainty regarding the amount and timing of amortization deductions related to certain of our wireless assets. We recorded an $8,300 reduction to income tax expense in our consolidated statement of income during the third quarter of 2010 and corresponding decreases to our net noncurrent deferred income tax liabilities and other net tax liabilities to reflect the tax benefits of the settlement.

Our effective tax rates were 34.0% for the third quarter and 34.1% for the nine months ended September 30, 2011, compared to (130.3)% and (9.3)% for the same periods in 2010. The IRS settlement, partially offset by the effects of the healthcare legislation, caused the lower effective tax rates in 2010.
 
 
6
 

 
AT&T INC.
SEPTEMBER 30, 2011

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, 2011 and 2010 are included in the table below. Prior-year results have been adjusted to reflect our change in method of recognizing actuarial gains and losses for pension and other postretirement benefits (see Note 5).

 
 
Three months ended
   
Nine months ended
 
 
 
September 30,
   
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Net income
  $ 3,686     $ 12,396     $ 10,812     $ 19,018  
Other comprehensive income, net of tax:
                               
     Foreign currency translation adjustments (includes $0, $6, $0
         and $4 attributable to noncontrolling interest), net of
         taxes of $(280), $54, $(157) and $116
    (519 )     100       (291 )     215  
     Net unrealized gains (losses) on available-for-sale securities:
                               
        Unrealized gains (losses), net of taxes of $(88), $31, $(59)
           and $17
    (165 )     58       (110 )     33  
        Reclassification adjustment realized in net income, net of
           taxes of $(2), $(1), $(23) and $(30)
    (2 )     (1 )     (43 )     (56 )
     Net unrealized gains (losses) on cash flow hedges:
                               
        Unrealized gains (losses), net of taxes of $(135), $(108),
           $(143) and $(380)
    (249 )     (205 )     (263 )     (706 )
        Reclassification adjustment for losses included in net income,
           net of taxes of $1, $5, $4 and $11
    2       4       7       9  
     Defined benefit postretirement plans:
                               
        Amortization of net prior service cost (benefit) included in
           net income, net of taxes of $(69), $(61), $(206) and $(183)
    (112 )     (99 )     (336 )     (297 )
     Other
    2       -       1       -  
Other comprehensive loss
    (1,043 )     (143 )     (1,035 )     (802 )
Total comprehensive income
    2,643       12,253       9,777       18,216  
Less: Total comprehensive income attributable to
                               
  noncontrolling interest
    (63 )     (83 )     (190 )     (247 )
Total Comprehensive Income Attributable to AT&T
  $ 2,580     $ 12,170     $ 9,587     $ 17,969  
 
 
7
 

 
AT&T INC.
SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 3. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for net income attributable to AT&T for the three and nine months ended September 30, 2011 and 2010, are shown in the table below:

 
 
Three months ended
   
Nine months ended
 
 
 
September 30,
   
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Numerators
 
 
   
 
   
 
   
 
 
Numerator for basic earnings per share:
 
 
   
 
   
 
   
 
 
   Income from continuing operations
  $ 3,686     $ 11,616     $ 10,812     $ 18,241  
   Net income attributable to noncontrolling interest
    (63 )     (77 )     (190 )     (243 )
   Income from continuing operations attributable to AT&T
    3,623       11,539       10,622       17,998  
Dilutive potential common shares:
                               
      Other share-based payment
    3       3       8       8  
Numerator for diluted earnings per share
  $ 3,626     $ 11,542     $ 10,630     $ 18,006  
Denominators (000,000)
                               
Denominator for basic earnings per share:
                               
   Weighted average number of common shares outstanding
    5,936       5,909       5,931       5,908  
Dilutive potential common shares:
                               
      Stock options
    3       3       4       3  
      Other share-based payment
    15       26       15       26  
Denominator for diluted earnings per share
    5,954       5,938       5,950       5,937  
Basic earnings per share from continuing operations
      attributable to AT&T
  $ 0.61     $ 1.95     $ 1.79     $ 3.05  
Basic earnings per share from discontinued operations
      attributable to AT&T
    -       0.13       -       0.13  
Basic earnings per share attributable to AT&T
  $ 0.61     $ 2.08     $ 1.79     $ 3.18  
Diluted earnings per share from continuing operations
      attributable to AT&T
  $ 0.61     $ 1.94     $ 1.79     $ 3.03  
Diluted earnings per share from discontinued operations
      attributable to AT&T
    -       0.13       -       0.13  
   Diluted earnings per share attributable to AT&T
  $ 0.61     $ 2.07     $ 1.79     $ 3.16  

At September 30, 2011 and 2010, we had issued and outstanding options to purchase approximately 85 million and 136 million shares of AT&T common stock. For quarter ended September 30, 2011 and 2010, the exercise prices of 58 million and 109 million shares were above the market price of AT&T stock for the respective periods. Accordingly, we did not include these amounts in determining the dilutive potential common shares. At September 30, 2011 and 2010, the exercise prices of 24 million and 22 million vested stock options were below market price.
 
 
8
 

 
AT&T INC.
SEPTEMBER 30, 2011

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. We make our capital allocations decisions primarily based on the network (wireless or wireline) providing services. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have four reportable segments: (1) Wireless, (2) Wireline, (3) Advertising Solutions and (4) Other.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, AT&T U-verse® TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements.

The Advertising Solutions segment includes our directory operations, which publish Yellow and White Pages directories and sell directory advertising and Internet-based advertising and local search.

The Other segment includes results from customer information services, our portion of the results from our international equity investments and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest cost and expected return on plan assets for our pension and postretirement benefit plans.
 
In January 2011, we announced a change in our method of recognizing actuarial gains and losses for pension and other postretirement benefits as well as the attribution of those benefit costs to our segments. Historically, the total benefit costs were attributed to our various segments. As part of the benefit accounting change, the service cost and the amortization of prior service costs, which represent the benefits earned by active employees during the period, will continue to be attributed to the segment in which the employee is employed, while interest cost and expected return on assets are recorded in the Other segment as those financing activities are managed on a corporate level. Actuarial gains and losses resulting from the remeasurement of our pension and postretirement benefit plans, which generally occurs in the fourth quarter, will be reflected in AT&T’s consolidated results only. We have adjusted prior-period segment information to conform to the current period’s presentation.

In the following tables, we show how our segment results are reconciled to our consolidated results reported. The Wireless, Wireline, Advertising Solutions and Other columns represent the segment results of each such operating segment. The Consolidations column adds in those line items that we manage on a consolidated basis only: actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net.
 
9
 

 
AT&T INC.
SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 

 
For the three months ended September 30, 2011
                               
   
Wireless
   
Wireline
   
Advertising
Solutions
   
Other
   
Consolidations
   
Consolidated Results
 
Total segment operating revenues
  $ 15,606     $ 14,961     $ 803     $ 108     $ -     $ 31,478  
Operations and support expenses
    9,367       10,259       553       446       -       20,625  
Depreciation and amortization expenses
    1,619       2,892       94       13       -       4,618  
Total segment operating expenses
    10,986       13,151       647       459       -       25,243  
Segment operating income (loss)
    4,620       1,810       156       (351 )     -       6,235  
Interest expense
    -       -       -       -       889       889  
Equity in net income (loss) of affiliates
    (7 )     -       -       200       -       193  
Other income (expense) – net
    -       -       -       -       46       46  
Segment income before income taxes
  $ 4,613     $ 1,810     $ 156     $ (151 )   $ (843 )   $ 5,585  
                                                 
At September 30, 2011 or for the nine months ended
                                         
   
Wireless
   
Wireline
   
Advertising Solutions
   
Other
   
Consolidations
   
Consolidated Results
 
Total segment operating revenues
  $ 46,517     $ 44,846     $ 2,512     $ 345     $ -     $ 94,220  
Operations and support expenses
    29,007       30,629       1,706       866       -       62,208  
Depreciation and amortization expenses
    4,737       8,726       301       40       -       13,804  
Total segment operating expenses
    33,744       39,355       2,007       906       -       76,012  
Segment operating income (loss)
    12,773       5,491       505       (561 )     -       18,208  
Interest expense
    -       -       -       -       2,583       2,583  
Equity in net income (loss) of affiliates
    (19 )     -       -       668       -       649  
Other income (expense) – net
    -       -       -       -       132       132  
Segment income before income taxes
  $ 12,754     $ 5,491     $ 505     $ 107     $ (2,451 )   $ 16,406  
Segment assets
  $ 124,785     $ 133,502     $ 7,711     $ 17,339     $ (5,684 )   $ 277,653  
Investments in equity method affiliates
    17       -       -       4,466       -       4,483  
Expenditures for additions
 to long-lived assets
  $ 6,901     $ 7,820     $ 21     $ 2     $ -     $ 14,744  

10 
 

 
AT&T INC.
SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

For the three months ended September 30, 2010
                               
   
Wireless
   
Wireline
   
Advertising Solutions
   
Other
   
Consolidations
   
Consolidated Results
 
Total segment operating revenues
  $ 15,180     $ 15,304     $ 961     $ 136     $ -     $ 31,581  
Operations and support expenses
    10,032       10,220       631       394       -       21,277  
Depreciation and amortization expenses
    1,640       3,099       123       11       -       4,873  
Total segment operating expenses
    11,672       13,319       754       405       -       26,150  
Segment operating income (loss)
    3,508       1,985       207       (269 )     -       5,431  
Interest expense
    -       -       -       -       729       729  
Equity in net income of affiliates
    (6 )     2       -       221       -       217  
Other income (expense) – net
    -       -       -       -       124       124  
Segment income before income taxes
  $ 3,502     $ 1,987     $ 207     $ (48 )   $ (605 )   $ 5,043  
                                                 
For the nine months ended September 30, 2010
                                         
   
Wireless
   
Wireline
   
Advertising Solutions
   
Other
   
Consolidations
   
Consolidated Results
 
Total segment operating revenues
  $ 43,319     $ 46,172     $ 3,009     $ 419     $ -     $ 92,919  
Operations and support expenses
    26,758       31,021       1,957       1,226       -       60,962  
Depreciation and amortization expenses
    4,776       9,280       393       23       -       14,472  
Total segment operating expenses
    31,534       40,301       2,350       1,249       -       75,434  
Segment operating income (loss)
    11,785       5,871       659       (830 )     -       17,485  
Interest expense
    -       -       -       -       2,248       2,248  
Equity in net income of affiliates
    14       7       -       608       -       629  
Other income (expense) – net
    -       -       -       -       825       825  
Segment income before income taxes
  $ 11,799     $ 5,878     $ 659     $ (222 )   $ (1,423 )   $ 16,691  

 
11
 

 
AT&T INC.
SEPTEMBER 30, 2011

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 certain retired employees under various plans and accrue actuarially determined postretirement benefit costs as active 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 2011.

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. In the following table, gains are denoted with parentheses. A portion of these expenses is capitalized as part of the benefit load on internal construction and capital expenditures, providing a small reduction in the net expense recorded.

 
 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2011
 
2010
 
2011
 
2010
Pension cost:
 
 
   
 
   
 
   
 
 
   Service cost – benefits earned during the period
  $ 297     $ 269     $ 890     $ 807  
   Interest cost on projected benefit obligation
    740       787       2,219       2,362  
   Expected return on assets
    (923 )     (943 )     (2,767 )     (2,830 )
   Amortization of prior service benefit
    (4 )     (4 )     (12 )     (12 )
   Net pension cost
  $ 110     $ 109     $ 330     $ 327  
 
                               
Postretirement cost:
                               
   Service cost – benefits earned during the period
  $ 90     $ 87     $ 271     $ 261  
   Interest cost on accumulated postretirement benefit obligation
    513       564       1,538       1,693  
   Expected return on assets
    (260 )     (236 )     (780 )     (709 )
   Amortization of prior service benefit
    (173 )     (156 )     (520 )     (468 )
   Net postretirement cost
  $ 170     $ 259     $ 509     $ 777  
 
                               
   Combined net pension and postretirement cost
  $ 280     $ 368     $ 839     $ 1,104  

Our combined net pension and postretirement cost decreased $88 in the third quarter and $265 for the first nine months of 2011. The decrease was primarily related to lower interest costs due to our reduction in the discount rate from 6.50% in 2010 to 5.80% in 2011.
 
In January 2011, we announced a change in our method of recognizing actuarial gains and losses for pension and other postretirement benefits for all benefit plans. Historically, we recognized the actuarial gains and losses as a component of “Stockholders’ Equity” on our consolidated balance sheets on an annual basis and amortized them into our operating results over the average future service period of the active employees of these plans, to the extent such gains and losses were outside of a corridor. We have elected to immediately recognize actuarial gains and losses in our operating results, noting that it is generally preferable to accelerate the recognition of deferred gains and losses into income rather than to delay such recognition. Generally, these gains and losses are measured annually as of December 31 and accordingly will be recorded during the fourth quarter.
 
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 $35 in the third quarter of 2011, of which $31 was interest cost and $106 for the first nine months, of which $94 was interest cost. In 2010, net supplemental retirement pension benefits cost was $37 in the third quarter, of which $34 was interest cost and $113 for the first nine months, of which $102 was interest cost.
 
 
12
 

 
AT&T INC.
SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.

Level 2
Inputs to the valuation methodology include:
·  
Quoted prices for similar assets and liabilities in active markets.
·  
Quoted prices for identical or similar assets or liabilities in inactive markets.
·  
Inputs other than quoted market prices that are observable for the asset or liability.
·  
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
·  
Fair value is often based on developed models in which there are few, if any, external observations.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2010.

Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:

 
September 30, 2011
 
December 31, 2010
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Notes and debentures
  $ 70,993     $ 78,414     $ 64,256     $ 69,313  
Commercial paper
    -       -       1,625       1,625  
Bank borrowings
    5       5       27       27  
Investment securities
    2,007       2,007       2,185       2,185  

The fair values of our notes and debentures were estimated based on quoted market prices, where available. The carrying value of debt with an original maturity of less than one year approximates market value.
 
Investment Securities
Our investment securities consist of primarily available-for-sale instruments, which include equities, fixed income bonds and other securities. Substantially all the fair values of our available-for-sale securities were estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in “Other income (expense) – net” in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated other comprehensive income (accumulated OCI). Unrealized losses that are considered other than temporary are recorded in “Other income (expense) – net” with the corresponding reduction to the carrying basis of the investment. Fixed income investments have maturities of $257 less than one year, $68 within one to three years, $55 within three to five years, and $257 for five or more years.

13
 

 
AT&T INC.
SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Our short-term investments, other short- and long-term held-to-maturity investments (including money market securities) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values.
 
Our investment securities maturing within one year are recorded in “Other current assets,” and instruments with maturities of more than one year are recorded in “Other Assets” on the consolidated balance sheets.
 
Following is the fair value leveling for available-for-sale securities and derivatives as of September 30, 2011 and December 31, 2010:

   
 
   
 
   
 
   
 
 
 
September 30, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Available-for-Sale Securities
 
 
   
 
   
 
   
 
 
   Domestic equities
  $ 830     $ -     $ -     $ 830  
   International equities
    441       -       -       441  
   Fixed income bonds
    -       637       -       637  
Asset Derivatives1
                               
   Interest rate swaps
    -       595       -       595  
   Cross-currency swaps
    -       88       -       88  
   Foreign exchange contracts
    -       1       -       1  
Liability Derivatives1
                               
   Cross-currency swaps
    -       (836 )     -       (836 )
   Interest rate locks
    -       (159 )     -       (159 )
   Foreign exchange contracts
    -       (5 )     -       (5 )
                                 
 
December 31, 2010
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Available-for-Sale Securities
                               
   Domestic equities
  $ 976     $ -     $ -     $ 976  
   International equities
    513       -       -       513  
   Fixed income bonds
    -       639       -       639  
Asset Derivatives1
                               
   Interest rate swaps
    -       537       -       537  
   Cross-currency swaps
    -       327       -       327  
   Interest rate locks
    -       11       -       11  
   Foreign exchange contracts
    -       6       -       6  
Liability Derivatives1
                               
   Cross-currency swaps
    -       (675 )     -       (675 )
   Interest rate locks
    -       (187 )     -       (187 )
   Foreign exchange contracts
    -       (2 )     -       (2 )
 1  Derivatives designated as hedging instruments are reflected as other assets, other liabilities and, for a portion of interest rate swaps, accounts receivable.
 
 
14
 

 
AT&T INC.
SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Derivative Financial Instruments
We employ derivatives to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

The majority of our derivatives are designated either as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).
 
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense on the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed-rate notes payable they hedge due to changes in the designated benchmark interest rate and are recognized in interest expense. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the nine months ended September 30, 2011 and September 30, 2010, no ineffectiveness was measured.
 
Cash Flow Hedging Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities, both for the period they are outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as other income or expense in each period.

We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro and British pound sterling denominated debt. These agreements include initial and final exchanges of principal from fixed foreign denominations to fixed U.S. denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed foreign-denominated rate to a fixed U.S. denominated interest rate. We evaluate the effectiveness of our cross-currency swaps each quarter. In the nine months ended September 30, 2011 and September 30, 2010, no ineffectiveness was measured.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to income. No ineffectiveness was measured in the nine months ended September 30, 2011. Over the next 12 months, we expect to reclassify $33 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks. Our unutilized interest rate locks carry mandatory early terminations, the latest occurring in April 2012. In April 2011, we utilized $2,600 notional value of interest rate locks related to our April 2011 debt issuance.

We hedge a large portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Some of these instruments are designated as cash flow hedges while others remain non-designated, largely based on size and duration. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to income. In the nine months ended September 30, 2011 and September 30, 2010, no ineffectiveness was measured.
 
 
15
 

 
AT&T INC.
SEPTEMBER 30, 2011
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2011, we had posted collateral of $112 (a deposit asset) and had no held collateral (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Moody’s Investors Service and Fitch, Inc. before the final collateral exchange in September, we would have been required to post additional collateral of $147. At December 31, 2010, we had posted collateral of $82 and held collateral of $26. We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), against the fair value of the derivative instruments.

Following is the notional amount of our outstanding derivative positions:

 
 
September 30,
   
December 31,
 
 
 
2011
   
2010
 
Interest rate swaps
  $ 11,800     $ 11,050  
Cross-currency swaps
    7,502       7,502  
Interest rate locks
    800       3,400  
Foreign exchange contracts
    210       221  
Total
  $ 20,312     $ 22,173  

Following is the related hedged items affecting our financial position and performance:
 
 
 
 
   
 
   
 
   
 
 
Effect of Derivatives on the Consolidated Statements of Income
 
 
   
 
   
 
 
Fair Value Hedging Relationships
Three months ended
 
Nine months ended
 
September 30,
2011
 
September 30,
2010
 
September 30,
2011
 
September 30,
2010
 
Interest rate swaps (Interest expense):
 
 
   
 
   
 
   
 
 
Gain (Loss) on interest rate swaps
  $ 92     $ 100     $ 81     $ 294  
Gain (Loss) on long-term debt
    (92 )     (100 )     (81 )     (294 )

 
 

 
16
 

 
AT&T INC.
SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
In addition, the net swap settlements that accrued and settled in the quarter ended September 30 were also reported as reductions of interest expense.

   
Three months ended
   
Nine months ended
 
Cash Flow Hedging Relationships
 
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
Cross-currency swaps:
 
 
   
 
   
 
   
 
 
Gain (Loss) recognized in accumulated OCI
  $ (266 )   $ (119 )   $ (415 )   $ (443 )
 
                               
Interest rate locks:
                               
Gain (Loss) recognized in accumulated OCI
    (105 )     (217 )     17       (650 )
Interest income (expense) reclassified from
                               
   accumulated OCI into income
    (3 )     (5 )     (11 )     (16 )
 
                               
Foreign exchange contracts:
                               
Gain (Loss) recognized in accumulated OCI
    (13 )     23       (8 )     7  
Other income (expense) reclassified from accumulated
    OCI into income
    -       (4 )     -       (4 )

The balance of the unrealized derivative gain (loss) in accumulated OCI was $(436) at September 30, 2011 and $(180) at December 31, 2010.
 
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
 
Acquisitions
Purchase of Wireless Partnership Minority Interest  In July 2011, we completed the acquisition of Convergys’ minority interests in the Cincinnati SMSA Limited Partnership and an associated cell tower holding company for approximately $320 in cash.
 
Pending Acquisitions
T-Mobile  In March 2011, we agreed to acquire from Deutsche Telekom AG (Deutsche Telekom) all of the issued and outstanding shares of T-Mobile USA, Inc. (T-Mobile) in exchange for approximately $39,000, consisting of $25,000 cash and approximately $14,000 of our common stock, subject to certain adjustments. T-Mobile serves approximately 34 million wireless subscribers, and we anticipate this transaction will strengthen and expand our U.S. mobile broadband infrastructure and make Long Term Evolution network technology available to more wireless broadband users in the United States, including those in rural areas. The transaction is subject to regulatory approvals and other customary closing conditions. In March 2011, we filed with the U.S. Department of Justice (DOJ) notice of the transaction as required under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act). In April 2011, we filed our application for approval of the merger with the Federal Communications Commission (FCC). We also filed applications or notices in five states (Arizona, California, Hawaii, Louisiana and West Virginia), and have received approvals from Arizona, Louisiana and West Virginia. On August 31, 2011, the DOJ filed a lawsuit against us alleging that the proposed acquisition would impact pricing and competition. We dispute the allegations and intend to vigorously contest the matter. A trial date has been set for February 13, 2012. We anticipate closing the transaction in the first half of 2012. In the event this transaction does not close, we could be required to pay a breakup fee of $3,000, enter into a broadband roaming agreement and transfer to Deutsche Telekom certain wireless spectrum.
 
In March 2011, we entered into a credit agreement with certain banks to provide unsecured bridge financing of up to $20,000 in connection with the T-Mobile acquisition. The lenders’ obligations to provide advances will terminate on September 20, 2012, unless prior to that date: (i) we reduce to $0 the commitments of the lenders to provide advances, (ii) the T-Mobile purchase agreement is terminated prior to the date the advances are made, or (iii) certain events of default occur. The agreement contains certain representations and warranties and covenants, including covenants related to liens, mergers and accounting changes, and a debt-to-EBITDA (earnings before interest, income taxes, depreciation and amortization, and other modifications described in the agreement) financial ratio covenant that upon closing of the acquisition, AT&T will maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.0 to 1.0.
 
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AT&T INC.
SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts