10-Q 1 att3q10.htm AT&T INC. 3RD QTR FORM 10-Q att3q10.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, 2010
 
       
   
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, 2010, there were 5,910 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
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Operating Revenues
                       
Wireless service
  $ 13,675     $ 12,372     $ 39,711     $ 35,978  
Voice
    6,973       7,943       21,671       24,701  
Data
    6,928       6,448       20,407       19,053  
Directory
    961       1,162       3,009       3,622  
Other
    3,044       2,809       8,121       8,451  
Total operating revenues
    31,581       30,734       92,919       91,805  
Operating Expenses
                               
Cost of services and sales (exclusive of depreciation and amortization shown separately below)
    13,519       12,907       38,235       37,665  
Selling, general and administrative
    7,707       7,574       22,570       22,914  
Depreciation and amortization
    4,891       4,881       14,529       14,614  
Total operating expenses
    26,117       25,362       75,334       75,193  
Operating Income
    5,464       5,372       17,585       16,612  
Other Income (Expense)
                               
Interest expense
    (729 )     (851 )     (2,248 )     (2,573 )
Equity in net income of affiliates
    217       181       629       549  
Other income (expense) – net
    125       29       825       44  
Total other income (expense)
    (387 )     (641 )     (794 )     (1,980 )
Income from Continuing Operations Before Income Taxes
    5,077       4,731       16,791       14,632  
Income tax (benefit) expense
    (6,560 )     1,463       (1,512 )     4,886  
Income from Continuing Operations
    11,637       3,268       18,303       9,746  
Income from Discontinued Operations, net of tax
    780       7       777       6  
Net Income
    12,417       3,275       19,080       9,752  
Less: Net Income Attributable to Noncontrolling Interest
    (78 )     (83 )     (243 )     (236 )
Net Income Attributable to AT&T
  $ 12,339     $ 3,192     $ 18,837     $ 9,516  
Basic Earnings Per Share from Continuing Operations Attributable to AT&T
  $ 1.96     $ 0.54     $ 3.06     $ 1.61  
Basic Earnings Per Share from Discontinued Operations Attributable to AT&T
    0.13       -       0.13       -  
Basic Earnings Per Share Attributable to AT&T
  $ 2.09     $ 0.54     $ 3.19     $ 1.61  
Diluted Earnings Per Share from Continuing Operations Attributable to AT&T
  $ 1.95     $ 0.54     $ 3.04     $ 1.61  
Diluted Earnings Per Share from Discontinued Operations Attributable to AT&T
    0.13       -       0.13       -  
Diluted Earnings Per Share Attributable to AT&T
  $ 2.08     $ 0.54     $ 3.17     $ 1.61  
Weighted Average Number of Common Shares Outstanding Basic (in millions)
    5,909       5,901       5,908       5,899  
Weighted Average Number of Common Shares Outstanding with Dilution (in millions)
    5,938       5,922       5,937       5,922  
Dividends Declared Per Common Share
  $ 0.42     $ 0.41     $ 1.26     $ 1.23  
See Notes to Consolidated Financial Statements.

 

 

AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
           
   
September 30,
   
December 31,
 
   
2010
   
2009
 
Assets
 
(Unaudited)
       
Current Assets
           
Cash and cash equivalents
  $ 3,246     $ 3,741  
Accounts receivable – net of allowances for doubtful accounts of $978 and $1,202
    13,606       14,845  
Prepaid expenses
    1,686       1,562  
Deferred income taxes
    1,059       1,247  
Other current assets
    2,380       3,792  
Total current assets
    21,977       25,187  
Property, plant and equipment
    240,466       230,295  
Less: accumulated depreciation and amortization
    (138,991 )     (130,242 )
Property, Plant and Equipment – Net
    101,475       100,053  
Goodwill
    73,447       72,782  
Licenses
    50,113       48,741  
Customer Lists and Relationships – Net
    5,369       7,393  
Other Intangible Assets – Net
    5,525       5,494  
Investments in Equity Affiliates
    4,544       2,921  
Other Assets
    6,802       6,275  
Total Assets
  $ 269,252     $ 268,846  
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Debt maturing within one year
  $ 6,426     $ 7,361  
Accounts payable and accrued liabilities
    18,417       21,260  
Advanced billing and customer deposits
    3,933       4,170  
Accrued taxes
    1,416       1,681  
Dividends payable
    2,482       2,479  
Total current liabilities
    32,674       36,951  
Long-Term Debt
    62,540       64,720  
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
    20,651       23,781  
Postemployment benefit obligation
    27,071       27,847  
Other noncurrent liabilities
    13,023       13,226  
Total deferred credits and other noncurrent liabilities
    60,745       64,854  
                 
Stockholders’ Equity
               
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2010 and December 31, 2009: issued 6,495,231,088 at September 30, 2010 and December 31, 2009)
    6,495       6,495  
Additional paid-in capital
    91,748       91,707  
Retained earnings
    50,751       39,366  
Treasury stock (585,370,749 at September 30, 2010 and 593,300,187 at December 31, 2009, at cost)
    (21,112 )     (21,260 )
Accumulated other comprehensive loss
    (14,888 )     (14,412 )
Noncontrolling interest
    299       425  
Total stockholders’ equity
    113,293       102,321  
Total Liabilities and Stockholders’ Equity
  $ 269,252     $ 268,846  
See Notes to Consolidated Financial Statements.

 

 

AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions, increase (decrease) in cash and cash equivalents
 
(Unaudited)
 
   
Nine months ended
 
   
September 30,
 
   
2010
   
2009
 
Operating Activities
           
Net income
  $ 19,080     $ 9,752  
Adjustments to reconcile net income to
               
net cash provided by operating activities:
               
Depreciation and amortization
    14,529       14,614  
Undistributed earnings from investments in equity affiliates
    (531 )     (430 )
Bad debt expense
    973       1,383  
Deferred income tax expense and noncurrent unrecognized tax benefits
    (4,146 )     2,476  
Net (gain) loss from impairment and sale of investments
    (746 )     98  
Income from discontinued operations
    (777 )     (6 )
Changes in operating assets and liabilities:
               
Accounts receivable
    266       (270 )
Other current assets
    495       (269 )
Accounts payable and accrued liabilities
    (2,861 )     (1,551 )
Net income attributable to noncontrolling interest
    (243 )     (236 )
Other - net
    (689 )     (117 )
Total adjustments
    6,270       15,692  
Net Cash Provided by Operating Activities
    25,350       25,444  
                 
Investing Activities
               
Construction and capital expenditures
               
Capital expenditures
    (13,170 )     (11,034 )
Interest during construction
    (577 )     (553 )
Acquisitions, net of cash acquired
    (2,615 )     (184 )
Dispositions
    1,821       205  
(Purchases) and sales of securities, net
    (437 )     11  
Other
    22       19  
Net Cash Used in Investing Activities
    (14,956 )     (11,536 )
                 
Financing Activities
               
Net change in short-term borrowings with original maturities of three months or less
    (33 )     (3,918 )
Issuance of long-term debt
    2,235       8,161  
Repayment of long-term debt
    (5,280 )     (6,169 )
Issuance of treasury stock
    24       8  
Dividends paid
    (7,436 )     (7,252 )
Other
    (399 )     (367 )
Net Cash Used in Financing Activities
    (10,889 )     (9,537 )
Net increase (decrease) in cash and cash equivalents
    (495 )     4,371  
Cash and cash equivalents beginning of year
    3,741       1,727  
Cash and Cash Equivalents End of Period
  $ 3,246     $ 6,098  
                 
Cash paid during the nine months ended September 30 for:
               
Interest
  $ 3,322     $ 3,307  
Income taxes, net of refunds
  $ 3,013     $ 2,535  
See Notes to Consolidated Financial Statements.

 

 
 
AT&T INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
Dollars and shares in millions except per share amounts
(Unaudited)
 
 
September 30, 2010
 
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
        $ 91,707  
Issuance of treasury shares
          184  
Share-based payments
          (161 )
Change related to acquisition of interests held by noncontrolling owners
          18  
Balance at end of period
        $ 91,748  
               
Retained Earnings
             
Balance at beginning of year
        $ 39,366  
Net income attributable to AT&T ($3.17 per diluted share)
          18,837  
Dividends to stockholders ($1.26 per share)
          (7,444 )
Other
          (8 )
Balance at end of period
        $ 50,751  
               
Treasury Stock
             
Balance at beginning of year
  (593 )   $ (21,260 )
Issuance of shares
  8       148  
Balance at end of period
  (585 )   $ (21,112 )
               
Accumulated Other Comprehensive Income (Loss) Attributable to AT&T, net of tax:
             
Balance at beginning of year
        $ (14,412 )
Other comprehensive income attributable to AT&T (see Note 2)
          (476 )
Balance at end of period
        $ (14,888 )
               
Noncontrolling Interest:
             
Balance at beginning of year
        $ 425  
Net income attributable to noncontrolling interest
          243  
Distributions
          (217 )
Acquisition of interests held by noncontrolling owners
          (156 )
Translation adjustments applicable to noncontrolling interest, net of taxes
          4  
Balance at end of period
        $ 299  
               
Total Stockholders’ Equity at beginning of year
        $ 102,321  
Total Stockholders’ Equity at end of period
        $ 113,293  
See Notes to Consolidated Financial Statements.
             



 

 
AT&T INC.
SEPTEMBER 30, 2010

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.” The consolidated financial statements have been prepared pursuant to Regulation S-X and other applicable rules of the Securities and Exchange Commission that permit reduced disclosures for interim reporting. 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, 2009.

In preparing the accompanying unaudited consolidated financial statements, we have reviewed all known events that have occurred after September 30, 2010, and through the date that our Form 10-Q was available for issuance for possible inclusion in this Form 10-Q.

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 Note 4 for a discussion of our change in approach to intersegment activity, effective January 1, 2010, and see Note 7 for a discussion of changes in reporting related to discontinued operations.

Recent Accounting Standards

Fair Value Measurements and Disclosures  In January 2010, the Financial Accounting Standards Board issued “Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements” (Accounting Standards Update (ASU) 2010-06), which requires new disclosures and explanations for transfers of financial assets and liabilities between certain levels in the fair value hierarchy. ASU 2010-06 also clarifies that fair value measurement disclosures are required for each class of financial asset and liability, which may be a subset of a caption in the consolidated balance sheets, and those disclosures should include a discussion of inputs and valuation techniques. For financial assets and liabilities subject to lowest-level measurements, ASU 2010-06 further requires that we separately present purchases, sales, issuances and settlements instead of netting these changes. With respect to matters other than lowest-level measurements, we adopted ASU 2010-06 beginning with the quarter ended March 31, 2010, with the remaining disclosure requirements becoming effective for fiscal years and interim periods beginning on or after December 15, 2010 (i.e., the quarter ending March 31, 2011, for us). See Note 6 for fair value measurements and disclosures for our investment securities and derivatives.

 

 
AT&T INC.
SEPTEMBER 30, 2010

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


Valuation and Other Adjustments Included in the current liabilities reported on our consolidated balance sheets are acquisition-related accruals established prior to 2009. The liabilities include accruals for severance, lease terminations and equipment removal costs associated with our acquisitions of AT&T Corp., BellSouth Corporation (BellSouth) and Dobson Communications Corporation (Dobson). Following is a summary of the accruals recorded at December 31, 2009, cash payments made during 2010, and the adjustments thereto:

   
12/31/09
   
Cash
   
Adjustments
   
9/30/10
 
   
Balance
   
Payments
   
and Accruals
   
Balance
 
Severance accruals paid from:
                       
Company funds
  $ 6     $ (3 )   $ (2 )   $ 1  
Pension and postemployment benefit plans
    98       (3 )     -       95  
Lease terminations1
    212       (28 )     (66 )     118  
Equipment removal and other related costs1
    23       (1 )     (21 )     1  
Total
  $ 339     $ (35 )   $ (89 )   $ 215  
1The “Adjustments and Accruals” related to the BellSouth and Dobson acquisitions and resulted in goodwill reductions.

Employee Separations We establish 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. We had severance accruals of $195 at September 30, 2010 and $669 at December 31, 2009. The decrease in balance was due to payments during the period.

Income Taxes

Healthcare Legislation  In March 2010, the President of the United States signed into law comprehensive health care 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. We recorded a $995, or $0.17 per diluted share, charge to income tax expense in our consolidated statement of income during the first quarter of 2010 and increased our deferred income taxes liability balance to reflect the impact of this change.

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 resolves the uncertainty regarding the amount and timing of amortization deductions related to certain of our wireless assets. The allowed amortization deductions on these settlement-related assets and the related cash flow impacts are expected to be recognized over a 15-year period, which began in 2008. Pursuant to the settlement, we will pay approximately $300 to the IRS during the fourth quarter of 2010 as a result of the disallowance of a portion of the amortization deductions taken on our 2008 and 2009 income tax returns. We recorded an $8,300, or $1.40 per diluted share, reduction to income tax expense in our consolidated statement of income during the third quarter of 2010 and corresponding decreases of $6,760 to our net noncurrent deferred income tax liabilities and $1,540 to other net tax liabilities to reflect the tax benefits of the settlement. The IRS settlement resulted in a reduction to our unrecognized tax benefits for tax positions related to the current year of $348 and for tax positions related to prior years of $1,057, for a total of $1,405, which also reduces the total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate. Our effective tax rates were (129.2)% for the third quarter and (9.0)% for the first nine months of 2010, compared to 30.9% and 33.4% for the same periods in 2009. The decrease in our 2010 effective tax rates was primarily driven by the impacts of the IRS settlement, partially offset by the effects of the healthcare legislation.


 

 
AT&T INC.
SEPTEMBER 30, 2010

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, 2010 and 2009 include net income, foreign currency translation adjustments and net unrealized gains (losses) on available-for-sale securities, net unrealized gains (losses) on cash flow hedges and defined benefit postretirement plans.

Following is our comprehensive income with the respective tax impacts for the three months and nine months periods ended September 30, 2010 and 2009:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income
  $ 12,417     $ 3,275     $ 19,080     $ 9,752  
Other comprehensive income, net of tax:
                               
Foreign currency translation adjustments (includes $6, $6, $4 and $(2) attributable to noncontrolling interest), net of taxes of $54, $1, $116 and $45
    100       2       215       86  
Net unrealized gains (losses) on securities:
                               
Unrealized gains (losses), net of taxes of $31, $115, $17 and $130
    58       229       33       258  
Reclassification adjustment realized in net income, net of taxes of $(1), $(17), $(30) and $24
    (1 )     (34 )     (56 )     43  
Net unrealized gains (losses) on cash flow hedges:
                               
Unrealized gains (losses) net of taxes of $(108), $(56), $(380) and $168
    (205 )     (112 )     (706 )     306  
Reclassification adjustment for losses included in net income, net of taxes of $5, $2, $11 and $6
    4       4       9       11  
Defined benefit postretirement plans:
                               
Amortization of net actuarial gain and prior service cost included in net income, net of taxes of $9, $32, $20 and $99
    14       64       33       190  
Other comprehensive income (loss)
    (30 )     153       (472 )     894  
Total comprehensive income
    12,387       3,428       18,608       10,646  
Less: Total comprehensive income attributable to noncontrolling interest
    (84 )     (89 )     (247 )     (234 )
Total Comprehensive Income Attributable to AT&T
  $ 12,303     $ 3,339     $ 18,361     $ 10,412  


 




 

 
AT&T INC.
SEPTEMBER 30, 2010

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, 2010 and 2009, are shown in the table below:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Numerators
                       
Numerator for basic earnings per share:
                       
Income from continuing operations
  $ 11,637     $ 3,268     $ 18,303     $ 9,746  
Net income attributable to noncontrolling interest
    (78 )     (83 )     (243 )     (236 )
Income from continuing operations attributable to AT&T
    11,559       3,185       18,060       9,510  
Dilutive potential common shares:
                               
Other share-based payment
    3       2       8       7  
Numerator for diluted earnings per share
  $ 11,562     $ 3,187     $ 18,068     $ 9,517  
Denominators (000,000)
                               
Denominator for basic earnings per share:
                               
Weighted-average number of common shares outstanding
    5,909       5,901       5,908       5,899  
Dilutive potential common shares:
                               
Stock options
    3       3       3       3  
Other share-based payment
    26       18       26       20  
Denominator for diluted earnings per share
    5,938       5,922       5,937       5,922  
Basic earnings per share from continuing operations attributable to AT&T
  $ 1.96     $ 0.54     $ 3.06     $ 1.61  
Basic earnings per share from discontinued operations attributable to AT&T
    0.13       -       0.13       -  
Basic earnings per share attributable to AT&T
  $ 2.09     $ 0.54     $ 3.19     $ 1.61  
Diluted earnings per share from continuing operations attributable to AT&T
  $ 1.95     $ 0.54     $ 3.04     $ 1.61  
Diluted earnings per share from discontinued operations attributable to AT&T
    0.13       -       0.13       -  
Diluted earnings per share attributable to AT&T
  $ 2.08     $ 0.54     $ 3.17     $ 1.61  

At September 30, 2010, we had issued and outstanding options to purchase approximately 136 million shares of AT&T common stock. The exercise prices of 109 million shares were above the market price of AT&T stock at September 30, 2010. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the period. At September 30, 2010, the exercise prices of 22 million vested stock options were below market price.

At September 30, 2009, we had issued and outstanding options to purchase approximately 180 million shares of AT&T common stock. The exercise prices of 158 million shares were above the market price of AT&T stock at September 30, 2009. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the period. At September 30, 2009, the exercise prices of 19 million vested stock options were below market price.


9
 

 
AT&T INC.
SEPTEMBER 30, 2010

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. Interest expense and other income (expense) – net are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in the calculation of each segment’s percentage of our 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-verseSM TV, high-speed broadband and voice services (U-verse) 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 and all corporate and other operations. This segment also includes our portion of the results from our international equity investments. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated.

Historically, intersegment activity had been reported as revenue in the billing segment and offsetting operating expense in the purchasing segment. Upon consolidation, the intersegment revenue and expense were eliminated with the consolidated results reflecting the cash operating and depreciation expense of providing the intersegment service. As part of AT&T’s ongoing initiatives to manage its business from an external customer perspective, we no longer report intersegment revenue and instead report the cash operating and depreciation expense related to intersegment activity in the purchasing segment, which provided services to the external customer. While this change did not impact AT&T’s total consolidated results, the impact to each operating segment varied. In particular, the Wireless segment, as a purchaser of network, IT and other services from the Wireline segment, experienced a reduction in cash operating expense partially offset by increased depreciation expense with the net result being increased operating margins. This change was effective with the reporting of operating results for the quarter ended March 31, 2010. We have restated prior-period segment information to conform to the current period’s presentation.

In May 2010, we announced the sale of Sterling Commerce Inc. (Sterling) which we closed in August 2010. The Other segment results for all periods shown have been restated to exclude the results of Sterling, which are now reflected in discontinued operations (see Note 7).

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 consolidation column adds in those line items that we manage on a consolidated basis only: interest expense and other income (expense) – net.


10 
 

 
AT&T INC.
SEPTEMBER 30, 2010

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


For the three months ended September 30, 2010
                               
               
Advertising
               
Consolidated
 
   
Wireless
   
Wireline
   
Solutions
   
Other
   
Consolidations
   
Results
 
Total segment operating revenues
  $ 15,180     $ 15,275     $ 961     $ 165     $ -     $ 31,581  
Operations and support expenses
    10,040       10,318       640       228       -       21,226  
Depreciation and amortization expenses
    1,640       3,118       123       10       -       4,891  
Total segment operating expenses
    11,680       13,436       763       238       -       26,117  
Segment operating income (loss)
    3,500       1,839       198       (73 )     -       5,464  
Interest expense
    -       -       -       -       729       729  
Equity in net income (loss) of affiliates
    (6 )     2       -       221       -       217  
Other income (expense) - net
    -       -       -       -       125       125  
Segment income before income taxes
  $ 3,494     $ 1,841     $ 198     $ 148     $ (604 )   $ 5,077  

For the nine months ended September 30, 2010
                               
               
Advertising
               
Consolidated
 
   
Wireless
   
Wireline
   
Solutions
   
Other
   
Consolidations
   
Results
 
Total segment operating revenues
  $ 43,319     $ 46,092     $ 3,009     $ 499     $ -     $ 92,919  
Operations and support expenses
    26,785       31,324       1,988       708       -       60,805  
Depreciation and amortization expenses
    4,776       9,337       393       23       -       14,529  
Total segment operating expenses
    31,561       40,661       2,381       731       -       75,334  
Segment operating income (loss)
    11,758       5,431       628       (232 )     -       17,585  
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
  $ 11,772     $ 5,438     $ 628     $ 376     $ (1,423 )   $ 16,791  


For the three months ended September 30, 2009
                               
               
Advertising
               
Consolidated
 
   
Wireless
   
Wireline
   
Solutions
   
Other
   
Consolidations
   
Results
 
Total segment operating revenues
  $ 13,627     $ 15,749     $ 1,162     $ 196     $ -     $ 30,734  
Operations and support expenses
    8,645       10,762       686       388       -       20,481  
Depreciation and amortization expenses
    1,490       3,226       159       6       -       4,881  
Total segment operating expenses
    10,135       13,988       845       394       -       25,362  
Segment operating income (loss)
    3,492       1,761       317       (198 )     -       5,372  
Interest expense
    -       -       -       -       851       851  
Equity in net income of affiliates
    -       9       -       172       -       181  
Other income (expense) - net
    -       -       -       -       29       29  
Segment income before income taxes
  $ 3,492     $ 1,770     $ 317     $ (26 )   $ (822 )   $ 4,731  

For the nine months ended September 30, 2009
                               
               
Advertising
               
Consolidated
 
   
Wireless
   
Wireline
   
Solutions
   
Other
   
Consolidations
   
Results
 
Total segment operating revenues
  $ 39,687     $ 47,900     $ 3,622     $ 596     $ -     $ 91,805  
Operations and support expenses
    24,959       32,618       2,113       889       -       60,579  
Depreciation and amortization expenses
    4,493       9,594       501       26       -       14,614  
Total segment operating expenses
    29,452       42,212       2,614       915       -       75,193  
Segment operating income (loss)
    10,235       5,688       1,008       (319 )     -       16,612  
Interest expense
    -       -       -       -       2,573       2,573  
Equity in net income of affiliates
    -       16       -       532       1       549  
Other income (expense) - net
    -       -       -       -       44       44  
Segment income before income taxes
  $ 10,235     $ 5,704     $ 1,008     $ 213     $ (2,528 )   $ 14,632  



11 
 

 
AT&T INC.
SEPTEMBER 30, 2010

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 substantially all 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 2010.

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, historically averaging approximately 10%.

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Pension cost:
                       
Service cost – benefits earned during the period
  $ 269     $ 264     $ 807     $ 808  
Interest cost on projected benefit obligation
    787       835       2,362       2,525  
Expected return on assets
    (1,143 )     (1,140 )     (3,429 )     (3,421 )
Amortization of prior service (benefit) cost
    (4 )     7       (12 )     62  
Recognized actuarial loss
    171       163       513       495  
Net pension cost
  $ 80     $ 129     $ 241     $ 469  
                                 
Postretirement cost:
                               
Service cost – benefits earned during the period
  $ 87     $ 81     $ 261     $ 257  
Interest cost on accumulated postretirement benefit obligation
    564       595       1,693       1,856  
Expected return on assets
    (284 )     (238 )     (853 )     (716 )
Amortization of prior service benefit
    (156 )     (134 )     (469 )     (313 )
Recognized actuarial gain
    (2 )     (1 )     (5 )     (1 )
Net postretirement cost
  $ 209     $ 303     $ 627     $ 1,083  
                                 
Combined net pension and postretirement cost
  $ 289     $ 432     $ 868     $ 1,552  

Our combined net pension and postretirement cost decreased $143 in the third quarter and $684 for the first nine months of 2010. The decrease was primarily related to lower interest costs due to a lower net obligation, as a result of retiree medical and drug coverage changes, partially offset by a change in the discount rate from 7% to 6.5%. An increase in amortization of prior service benefit, driven by the utilization of market interest rates for lump sum pension distributions, under the Pension Protection Act and changes in future retiree benefits, also contributed to the decrease in combined net pension and postretirement cost. When calculating the expected return on plan assets, we use a method in which gains and losses are amortized only when the net gains or losses exceed 10% of the greater of the projected benefit obligation or the market-related value of assets (MRVA). Actual gains and losses on pension and postretirement plan assets are generally recognized in the MRVA equally over a period of up to five years. However, we use a methodology under which we hold the MRVA to within 20% of the actual fair value of plan assets, which can have the effect of accelerating the recognition of excess actual gains and losses in the MRVA in less than five years. Due to investment losses on plan assets experienced in 2008, this methodology contributed $1,577 to our combined net pension and postretirement costs in 2009. This methodology did not have a material impact on our combined net pension and postretirement cost in 2010.

We have varying types of pension programs providing benefits for substantially all of certain non-U.S. operations. In addition to the pension and postretirement costs above, we recorded net pension cost for non-U.S. plans of less than $1 in the third quarter and $1 for the first nine months of 2010 and $(1) in the third quarter and $(4) for the first nine months of 2009.

12
 

 
AT&T INC.
SEPTEMBER 30, 2010

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



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 $41 in the third quarter, of which $34 was interest cost and $125 for the first nine months of 2010, of which $101 was interest cost. In 2009, net supplemental retirement pension benefits cost was $42 in the third quarter, of which $35 was interest cost and $125 for the first nine months, of which $105 was interest cost.

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 AT&T has 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.
   
 
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
   
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
· Fair value is often based on internally 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. AT&T believes its 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 at September 30, 2010 and December 31, 2009.

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, 2010
 
December 31, 2009
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Notes and debentures
  $ 68,680     $ 76,366     $ 71,811     $ 75,212  
Bank borrowings
    32       32       33       33  
Investment securities
    2,233       2,233       1,885       1,885  
 

13 
 

 
AT&T INC.
SEPTEMBER 30, 2010

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



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. Fixed income investments have maturities of $85 in 2010, $302 in 2011 and 2012, $83 in 2013 and 2014, and $224 for years thereafter.

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, 2010 and December 31, 2009:

   
September 30, 2010
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-Sale Securities
                       
Domestic equities
  $ 955     $ -     $ -     $ 955  
International equities
    482       -       -       482  
Fixed income bonds
    -       694       -       694  
Asset Derivatives
                               
Interest rate swaps
    -       681       -       681  
Cross-currency swaps
    -       209       -       209  
Foreign exchange contracts
    -       8       -       8  
Liability Derivatives
                               
Cross-currency swaps
    -       (706 )     -       (706 )
Interest rate locks
    -       (506 )     -       (506 )
Foreign exchange contracts
    -       (5 )     -       (5 )


14 
 

 
AT&T INC.
SEPTEMBER 30, 2010

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



   
December 31, 2009
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-Sale Securities
                       
Domestic equities
  $ 1,047     $ -     $ -     $ 1,047  
International equities
    412       -       -       412  
Fixed income bonds
    -       341       -       341  
Asset Derivatives
                               
Interest rate swaps
    -       399       -       399  
Cross-currency swaps
    -       635       -       635  
Interest rate locks
    -       150       -       150  
Foreign exchange contracts
    -       2       -       2  
Liability Derivatives
                               
Cross-currency swaps
    -       (390 )     -       (390 )
Interest rate locks
    -       (6 )     -       (6 )
Foreign exchange contracts
    -       (7 )     -       (7 )

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, though they net to zero. Gains or losses realized upon early termination of our fair value hedges would be recognized in interest expense.
 
 
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 in other income - 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, 2010 and September 30, 2009, no ineffectiveness was measured.

15
 

 
AT&T INC.
SEPTEMBER 30, 2010

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



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. In the second quarter, we settled $200 of notional rate locks without utilizing them in a debt issuance. The total impact to interest expense was $(5). We are confident our remaining rate locks will be utilized given our probable refinancing needs over the next two years. No other ineffectiveness was measured in the nine months ended September 30, 2010. Over the next 12 months, we expect to reclassify $15 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.

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 over the next few months as the hedged funds are spent by our foreign subsidiaries, except where an amount is deemed to be ineffective, which would be immediately reclassified to income. In the nine months ended September 30, 2010, and September 30, 2009, no ineffectiveness was measured.

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, 2010, we had posted collateral of $53 (a deposit asset) and held collateral of $52 (a receipt liability). Under the agreements, if our credit rating had been simultaneously downgraded one rating level by Moody’s, S&P and Fitch, we would have been required to post additional collateral of $173. At December 31, 2009, we held $222 of counterparty collateral. 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,
 
   
2010
   
2009
 
Interest rate swaps
  $ 11,250     $ 9,000  
Cross-currency swaps
    7,502       7,502  
Interest rate locks
    3,400       3,600  
Foreign exchange contracts
    233       293  
Total
  $ 22,385     $ 20,395  


16 
 

 
AT&T INC.
SEPTEMBER 30, 2010

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


Following are our derivative instruments and their related hedged items affecting our financial position and performance:

Fair Value of Derivatives in the Consolidated Balance Sheets
Derivatives designated as hedging instruments are reflected as other assets, other liabilities and, for a portion of interest rate swaps, accounts receivable.

   
September 30,
   
December 31,
 
Asset Derivatives
 
2010
   
2009
 
Interest rate swaps
  $ 681     $ 399  
Cross-currency swaps
    209       635  
Interest rate locks
    -       150  
Foreign exchange contracts
    8       2  
Total
  $ 898     $ 1,186  

   
September 30,
   
December 31,
 
Liability Derivatives
 
2010
   
2009
 
Cross-currency swaps
  $ (706 )   $ (390 )
Interest rate locks
    (506 )     (6 )
Foreign exchange contracts
    (5 )     (7 )
Total
  $ (1,217 )   $ (403 )

Effect of Derivatives on the Consolidated Statements of Income
 
Three months ended
 
Nine months ended
 
Fair Value Hedging Relationships
September 30, 2010
 
September 30, 2009
 
September 30, 2010
 
September 30, 2009
 
Interest rate swaps (Interest expense):
                       
Gain (Loss) on interest rate swaps
  $ 100     $ 79     $ 294     $ (141 )
Gain (Loss) on long-term debt
    (100 )     (79 )     (294 )     141  

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, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
Cross-currency swaps:
                       
Gain (Loss) recognized in accumulated OCI
  $ (119 )   $ (78 )   $ (443 )   $ 485  
Other income (expense) reclassified from accumulated OCI into income
    1       -       -       -  
                                 
Interest rate locks:
                               
Gain (Loss) recognized in accumulated OCI
    (217 )     (90 )     (650 )     (11 )
Interest income (expense) reclassified from accumulated OCI into income
    (5 )     (6 )     (16 )     (17 )
                                 
Foreign exchange contracts:
                               
Gain (Loss) recognized in accumulated OCI
    23       -       7       -  
Other income (expense) reclassified from accumulated OCI into income
    (4 )     -       (4 )     -  

The balance of the unrealized derivative gain (loss) in accumulated OCI was $(555) at September 30, 2010 and $142 at December 31, 2009.

17
 

 
AT&T INC.
SEPTEMBER 30, 2010

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



NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

Wireless Properties Transaction  In June 2010, we acquired certain wireless properties, including Federal Communications Commission (FCC) licenses and network assets, from Verizon Wireless for $2,372 in cash and increased goodwill by $937. The assets primarily represent former Alltel Wireless assets and served approximately 1.6 million subscribers in 79 service areas across 18 states. The preliminary fair value of the acquired net assets of $1,435 included $361 of property plant and equipment, $765 of FCC licenses, and $224 of customer lists and other intangible assets.

Dispositions

Sale of Sterling Operations  In August 2010, we sold our Sterling subsidiary to International Business Machines Corporation (IBM) for approximately $1,400 in cash. Sterling provides business applications and integration solutions to approximately 18,000 customers worldwide. In conjunction with the sale, we divested of $649 of goodwill and other intangible assets. We also entered into a transition services agreement with IBM related to short-term support of Sterling’s operations after the sale, and an enterprise license agreement, under which we would purchase software from Sterling.

During the second quarter of 2010, we accounted for Sterling as a discontinued operation. We determined that the cash inflows under the transition services agreement and our cash outflows under the enterprise license agreement will not constitute significant continuing involvement with Sterling’s operations after the sale. We have reclassified Sterling’s operating results, for all historical periods, to net income from discontinued operations in the accompanying consolidated statements of income. We also applied held-for-sale treatment to Sterling’s assets and liabilities, and accordingly, included Sterling’s assets in other current assets and the related liabilities in accounts payable and accrued liabilities in our consolidated balance sheets as of December 31, 2009. Sterling’s assets and liabilities included the following as of December 31, 2009:

   
December 31, 2009
 
Assets held for sale:
     
Current assets
  $ 333  
Property, plant and equipment
    40  
Goodwill and other intangible assets
    672  
Other assets
    47  
Total assets
  $ 1,092  
         
Liabilities related to assets held for sale:
       
Current liabilities
  $ 365  
Other liabilities
    126  
Total liabilities
  $ 491  


18 
 

 
AT&T INC.
SEPTEMBER 30, 2010

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


The following table includes Sterling’s operating results, which we historically included in our Other segment, for the indicated periods:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
Operating revenues
  $ 81     $ 137     $ 349     $ 396  
Operating expenses
    72       121       327       377  
Operating income
    9       16       22       19  
Income before income taxes
    8       12       18