10-Q 1 d10q.htm FORM 10-Q Form 10-Q

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 June 30, 2011

or

 

        ¨   

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 July 29, 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     Six months ended  
    June 30,     June 30,  
            2011                     2010                     2011                         2010          

 

 

 Operating Revenues

       

 Wireless service

  $ 14,157      $ 13,186      $ 28,118      $ 26,036       

 Data

    7,356        6,866        14,536        13,517       

 Voice

    6,342        7,224        12,893        14,707       

 Directory

    841        1,007        1,709        2,048       

 Other

    2,799        2,525        5,486        5,030       

 

 

 Total operating revenues

    31,495        30,808        62,742        61,338       

 

 

 Operating Expenses

       

 Cost of services and sales (exclusive of depreciation and amortization shown separately below)

    13,332        12,452        26,735        24,835       

 Selling, general and administrative

    7,396        7,454        14,848        14,850       

 Depreciation and amortization

    4,602        4,819        9,186        9,599       

 

 

 Total operating expenses

    25,330        24,725        50,769        49,284       

 

 

 Operating Income

    6,165        6,083        11,973        12,054       

 

 

 Other Income (Expense)

       

 Interest expense

    (848     (754     (1,694     (1,519)      

 Equity in net income of affiliates

    207        195        456        412       

 Other income (expense) – net

    27        723        86        701       

 

 

 Total other income (expense)

    (614     164        (1,152     (406)      

 

 

 Income from Continuing Operations Before Income Taxes

    5,551        6,247        10,821        11,648       

 Income tax expense

    1,893        2,160        3,695        5,023       

 

 

 Income from Continuing Operations

    3,658        4,087        7,126        6,625       

 

 

 Loss from Discontinued Operations, net of tax

    -          (5     -          (3)      

 

 

 Net Income

    3,658        4,082        7,126        6,622       

 

 

 Less: Net Income Attributable to Noncontrolling Interest

    (67     (79     (127     (166)      

 

 

 Net Income Attributable to AT&T

  $ 3,591      $ 4,003      $ 6,999      $ 6,456       

 

 

 Basic Earnings Per Share from Continuing Operations Attributable to AT&T

  $ 0.60      $ 0.68      $ 1.18      $ 1.09       

 Basic Earnings Per Share from Discontinued Operations Attributable to AT&T

    -          -          -          -         

 

 

 Basic Earnings Per Share Attributable to AT&T

  $ 0.60      $ 0.68      $ 1.18      $ 1.09       

 

 

 Diluted Earnings Per Share from Continuing Operations Attributable to AT&T

  $ 0.60      $ 0.67      $ 1.18      $ 1.09       

 Diluted Earnings Per Share from Discontinued Operations Attributable to AT&T

    -          -          -          -         

 

 

 Diluted Earnings Per Share Attributable to AT&T

  $ 0.60      $ 0.67      $ 1.18      $ 1.09       

 

 

 Weighted Average Number of Common Shares Outstanding Basic (in millions)

    5,932        5,909        5,929        5,907       

 Weighted Average Number of Common Shares Outstanding with Dilution (in millions)

    5,953        5,937        5,948        5,936       

 Dividends Declared Per Common Share

  $ 0.43      $ 0.42      $ 0.86      $ 0.84       

 

 

  See Notes to Consolidated Financial Statements.

 

2


 AT&T INC.        

 

 
 CONSOLIDATED BALANCE SHEETS        
 Dollars in millions except per share amounts        

 

 
           June 30,          December 31,        
       2011      2010        

 

 
 Assets      (Unaudited)         

 Current Assets

       

 Cash and cash equivalents

     $ 3,831       $ 1,437         

 Accounts receivable – net of allowances for doubtful accounts of $908 and $957

       13,608         13,610         

 Prepaid expenses

       1,563         1,458         

 Deferred income taxes

       1,180         1,170         

 Other current assets

       2,057         2,276         

 

 

 Total current assets

       22,239         19,951         

 

 

 Property, plant and equipment

       252,050         243,833         

Less: accumulated depreciation and amortization

       (147,444      (140,637)        

 

 

 Property, Plant and Equipment – Net

       104,606         103,196         

 

 

 Goodwill

       73,591         73,601         

 Licenses

       50,403         50,372         

 Customer Lists and Relationships – Net

       3,643         4,708         

 Other Intangible Assets – Net

       5,407         5,440         

 Investments in Equity Affiliates

       5,207         4,515         

 Other Assets

       6,918         6,705         

 

 

 Total Assets

     $ 272,014       $ 268,488         

 

 

 Liabilities and Stockholders’ Equity

       

 Current Liabilities

       

 Debt maturing within one year

     $ 7,910       $ 7,196         

 Accounts payable and accrued liabilities

       18,145         20,055         

 Advanced billing and customer deposits

       3,804         4,086         

 Accrued taxes

       1,130         72         

 Dividends payable

       2,548         2,542         

 

 

 Total current liabilities

       33,537         33,951         

 

 

 Long-Term Debt

       58,663         58,971         

 

 

 Deferred Credits and Other Noncurrent Liabilities

       

 Deferred income taxes

       25,065         22,070         

 Postemployment benefit obligation

       28,350         28,803         

 Other noncurrent liabilities

       12,290         12,743         

 

 

 Total deferred credits and other noncurrent liabilities

       65,705         63,616         

 

 

 Stockholders’ Equity

       

 Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2011 and December 31, 2010: issued 6,495,231,088 at June 30, 2011 and December 31, 2010)

       6,495         6,495         

 Additional paid-in capital

       91,687         91,731         

 Retained earnings

       33,687         31,792         

 Treasury stock (570,191,742 at June 30, 2011 and 584,144,220 at December 31, 2010, at cost)

       (20,786      (21,083)        

 Accumulated other comprehensive income

       2,720         2,712         

 Noncontrolling interest

       306         303         

 

 

 Total stockholders’ equity

       114,109         111,950         

 

 

 Total Liabilities and Stockholders’ Equity

     $               272,014       $             268,488         

 

 

  See Notes to Consolidated Financial Statements.

 

3


 AT&T INC.     

 

 
 CONSOLIDATED STATEMENTS OF CASH FLOWS     
 Dollars in millions     
 (Unaudited)     

 

 
     Six months ended          
     June 30,          
     2011     2010      

 

 

 Operating Activities

    

 Net income

   $ 7,126      $ 6,622       

 Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     9,186        9,599       

Undistributed earnings from investments in equity affiliates

     (417     (378)       

Provision for uncollectible accounts

     523        671       

Deferred income tax expense and noncurrent unrecognized tax benefits

     2,818        2,249       

Net gain from impairment and sale of investments

     (44     (629)      

Loss from discontinued operations

     -          3       

Changes in operating assets and liabilities:

    

Accounts receivable

     (521     394       

Other current assets

     104        389       

Accounts payable and accrued liabilities

     (1,133     (3,063)      

Net income attributable to noncontrolling interest

     (127     (166)       

Other – net

     (758 )      120       

 

 

 Total adjustments

     9,631        9,189       

 

 

 Net Cash Provided by Operating Activities

     16,757        15,811       

 

 

 Investing Activities

    

 Construction and capital expenditures:

    

Capital expenditures

     (9,405     (7,856)      

Interest during construction

     (77     (379)      

 Acquisitions, net of cash acquired

     (62     (2,554)      

 Dispositions

     30        14       

 (Purchases) and sales of securities, net

     45        (545)      

 Other

     19        15       

 

 

 Net Cash Used in Investing Activities

     (9,450     (11,305)      

 

 

 Financing Activities

    

 Net change in short-term borrowings with original maturities of three months or less

     (1,603     3,280       

 Issuance of long-term debt

     2,985        -       

 Repayment of long-term debt

     (1,290     (4,661)      

 Issuance of treasury stock

     199        5       

 Dividends paid

     (5,082     (4,960)      

 Other

     (122     (534)      

 

 

 Net Cash Used in Financing Activities

     (4,913     (6,870)      

 

 

 Net increase (decrease) in cash and cash equivalents

     2,394        (2,364)      

 Cash and cash equivalents beginning of year

     1,437        3,741       

 

 

 Cash and Cash Equivalents End of Period

   $         3,831      $ 1,377       

 

 

 Cash paid during the six months ended June 30 for:

    

Interest

   $ 2,200      $ 2,390       

Income taxes, net of refunds

   $ (196   $         2,449       

  See Notes to Consolidated Financial Statements.

 

4


AT&T INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Dollars and shares in millions except per share amounts

(Unaudited)

 
     June 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 shares

       122           

Share-based payments

       (140)          

Change related to acquisition of interests held by noncontrolling owners

       (26)          

 

 

Balance at end of period

     $ 91,687           

 

 

Retained Earnings

    

Balance at beginning of year

     $ 31,792           

Net income attributable to AT&T ($1.18 per diluted share)

       6,999           

Dividends to stockholders ($0.86 per share)

       (5,091)          

Other

       (13)          

 

 

Balance at end of period

     $ 33,687           

 

 

Treasury Stock

    

Balance at beginning of year

     (584)          $             (21,083)          

Issuance of treasury shares

     14             297           

 

 

Balance at end of period

     (570)          $ (20,786)          

 

 

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax:

    

Balance at beginning of year

     $ 2,712           

Other comprehensive income attributable to AT&T (see Note 2)

       8           

 

 

Balance at end of period

     $ 2,720           

 

 

Noncontrolling Interest:

    

Balance at beginning of year

     $ 303           

Net income attributable to noncontrolling interest

       127           

Distributions

       (120)          

Acquisition of interests held by noncontrolling owners

       (4)          

 

 

Balance at end of period

     $ 306           

 

 

Total Stockholders’ Equity at beginning of year

     $ 111,950           

 

 

Total Stockholders’ Equity at end of period

     $ 114,109           

 

 

See Notes to Consolidated Financial Statements.

 

5


AT&T INC.

JUNE 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 June 30, 2011, we had severance accruals of $501 and at December 31, 2010, we had severance accruals of $848.

Income Taxes 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. The charge also contributed to a higher effective tax rate of 43.1% for the six months ended June 30, 2010, compared to 34.1% for the six months ended June 30, 2011.

 

6


AT&T INC.

JUNE 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 six months ended June 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
June 30,
    

Six months ended

June 30,

 
      2011      2010      2011      2010  

Net income

   $ 3,658        $ 4,082        $ 7,126       $ 6,622    

Other comprehensive income, net of tax:

           

Foreign currency translation adjustments (includes $0, $(1), $0 and $(2) attributable to noncontrolling interest), net of taxes of $73, $11, $123 and $62

     135          21          228         115    

Net unrealized gains (losses) on available-for-sale securities:

           

Unrealized gains (losses), net of taxes of $2, $(62), $29 and $(14)

             (115)         55         (25)   

Reclassification adjustment realized in net income, net of taxes of $(2), $(16), $(21) and $(29)

     (6)         (30)         (41)         (55)   

Net unrealized gains (losses) on cash flow hedges:

           

Unrealized gains (losses) net of taxes of $(12), $(257), $(8) and $(273)

     (21)         (472)         (14)         (502)   

Reclassification adjustment for losses included in net income, net of taxes of $2, $2, $3 and $4

                     5           

Defined benefit postretirement plans:

           

Amortization of net prior service cost (benefit) included in net income, net of taxes of $(66), $(61), $(137) and $(122)

     (109)         (99)         (224)         (198)   

Other

     (1)                 (1)           

 

 

Other comprehensive income (loss)

             (692)         8         (659)   

 

 

Total comprehensive income

     3,665          3,390          7,134         5,963    

Less: Total comprehensive income attributable to noncontrolling interest

     (67)         (78)         (127)         (164)   

 

 

Total Comprehensive Income Attributable to AT&T

   $ 3,598        $ 3,312        $ 7,007       $ 5,799    

 

 

 

7


AT&T INC.

JUNE 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 six months ended June 30, 2011 and 2010, are shown in the table below:

 

     

Three months ended

June 30,

    

Six months ended

June 30,

 
              2011            2010                    2011      2010      

Numerators

           

Numerator for basic earnings per share:

           

Income from continuing operations

   $         3,658        $         4,087                $         7,126                $         6,625            

Net income attributable to noncontrolling interest

     (67)         (79)                 (127)                 (166)           

 

 

Income from continuing operations attributable to AT&T

     3,591          4,008                  6,999                  6,459            

Dilutive potential common shares:

           

Other share-based payment

             2                  6                  4            

 

 

Numerator for diluted earnings per share

   $ 3,594        $ 4,010                $ 7,005                $ 6,463            

 

 

Denominators (000,000)

           

Denominator for basic earnings per share:

           

Weighted average number of common shares outstanding

     5,932          5,909                  5,929                  5,907            

Dilutive potential common shares:

           

Stock options

             3                  4                  3            

Other share-based payment

     16          25                  15                  26            

 

 

Denominator for diluted earnings per share

     5,953          5,937                  5,948                  5,936            

 

 

Basic earnings per share from continuing operations attributable to AT&T

   $ 0.60        $ 0.68                $ 1.18                $ 1.09            

Basic earnings per share from discontinued operations attributable to AT&T

             -                  -                  -             

 

 

Basic earnings per share attributable to AT&T

   $ 0.60        $ 0.68                $ 1.18                $ 1.09            

 

 

Diluted earnings per share from continuing operations attributable to AT&T

   $ 0.60        $ 0.67                $ 1.18                $ 1.09            

Diluted earnings per share from discontinued operations attributable to AT&T

             -                   -                   -             

 

 

Diluted earnings per share attributable to AT&T

   $ 0.60        $ 0.67                $ 1.18                $ 1.09            

 

 

At June 30, 2011 and 2010, we had issued and outstanding options to purchase approximately 90 million and 143 million shares of AT&T common stock. At June 30, 2011 and 2010, the exercise prices of 57 million and 127 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 June 30, 2011 and 2010, the exercise prices of 30 million and 12 million vested stock options were below market price.

 

8


AT&T INC.

JUNE 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.

JUNE 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended June 30, 2011

  

                                       
     Wireless     Wireline     Advertising
Solutions  
    Other       Consolidations     Consolidated
Results    
 

Total segment operating revenues

  $       15,602      $       14,935      $             841          $             117      $ -           $         31,495   

Operations and support expenses

    9,782        10,104        580            262        -             20,728   

Depreciation and amortization expenses

    1,613        2,876        102            11        -             4,602   

Total segment operating expenses

    11,395        12,980        682            273        -             25,330   

Segment operating income (loss)

    4,207        1,955        159            (156     -             6,165   

Interest expense

    -        -        -            -        848             848   

Equity in net income (loss) of affiliates

    (8     -        -            215        -             207   

Other income (expense) – net

    -        -        -            -        27             27   

Segment income before income taxes

  $ 4,199      $ 1,955      $ 159          $ 59      $           (821)          $ 5,551   

    

                                               
At June 30, 2011 or for the six months ended                                           
     Wireless     Wireline     Advertising
Solutions  
    Other       Consolidations     Consolidated
Results    
 

Total segment operating revenues

  $ 30,911      $ 29,885      $ 1,709          $ 237      $ -           $ 62,742   

Operations and support expenses

    19,640        20,370        1,153            420        -             41,583   

Depreciation and amortization expenses

    3,118        5,834        207            27        -             9,186   

Total segment operating expenses

    22,758        26,204        1,360            447        -             50,769   

Segment operating income (loss)

    8,153        3,681        349            (210     -             11,973   

Interest expense

    -        -        -            -        1,694             1,694   

Equity in net income (loss) of affiliates

    (12     -        -            468        -             456   

Other income (expense) – net

    -        -        -            -        86             86   

Segment income before income taxes

  $ 8,141      $ 3,681      $ 349          $ 258      $ (1,608)          $ 10,821   

Segment assets

  $ 124,054      $ 133,882      $ 7,867          $ 11,622      $ (5,411)          $ 272,014   

Investments in equity method affiliates

    13        -        -            5,194        -             5,207   

Expenditures for additions to long-lived assets

    4,381        5,088        12            1        -             9,482   

    

                                               
For the three months ended June 30, 2010                                           
     Wireless     Wireline     Advertising
Solutions  
    Other       Consolidations     Consolidated
Result    
 

Total segment operating revenues

  $ 14,242      $ 15,422      $ 1,007          $ 137      $ -           $ 30,808   

Operations and support expenses

    8,553        10,289        662            402        -             19,906   

Depreciation and amortization expenses

    1,578        3,105        132            4        -             4,819   

Total segment operating expenses

    10,131        13,394        794            406        -             24,725   

Segment operating income (loss)

    4,111        2,028        213            (269     -             6,083   

Interest expense

    -        -        -            -        754             754   

Equity in net income of affiliates

    8        -        -            187        -             195   

Other income (expense) – net

    -        -        -            -        723             723   

Segment income before income taxes

  $ 4,119      $ 2,028      $ 213          $ (82   $ (31)          $ 6,247   

    

                                               
For the six months ended June 30, 2010                                           
     Wireless     Wireline     Advertising
Solutions  
    Other       Consolidations     Consolidated
Results    
 

Total segment operating revenues

  $ 28,139      $ 30,868      $ 2,048          $ 283      $ -           $ 61,338   

Operations and support expenses

    16,726        20,801        1,326            832        -             39,685   

Depreciation and amortization expenses

    3,136        6,181        270            12        -             9,599   

Total segment operating expenses

    19,862        26,982        1,596            844        -             49,284   

Segment operating income (loss)

    8,277        3,886        452            (561     -             12,054   

Interest expense

    -        -        -            -        1,519             1,519   

Equity in net income of affiliates

    20        5        -            387        -             412   

Other income (expense) – net

    -        -        -            -        701             701   

Segment income before income taxes

  $ 8,297      $ 3,891      $ 452          $ (174   $ (818)          $ 11,648   

    

                                               

 

10


AT&T INC.

JUNE 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.

 

$0000296 $0000296 $0000296 $0000296

 

 
    

Three months ended

June 30,

    Six months ended
June 30,
 
     2011     2010     2011     2010  

 

 

Pension cost:

        

Service cost – benefits earned during the period

   $             296      $         269      $ 593      $ 538   

Interest cost on projected benefit obligation

     739        788        1,479        1,575   

Expected return on assets

     (922     (944     (1,844     (1,887

Amortization of prior service benefit

     (4     (4     (8     (8

 

 

Net pension cost

   $ 109      $ 109      $ 220      $ 218   

 

 

Postretirement cost:

        

Service cost – benefits earned during the period

   $ 91      $ 87      $ 181      $ 174   

Interest cost on accumulated postretirement benefit obligation

     512        566        1,025        1,129   

Expected return on assets

     (260     (238     (520     (473

Amortization of prior service benefit

     (173     (156     (347     (312

 

 

Net postretirement cost

   $ 170      $ 259      $ 339      $ 518   

 

 

Combined net pension and postretirement cost

   $ 279      $ 368      $ 559      $ 736   

 

 

Our combined net pension and postretirement cost decreased $89 in the second quarter and $177 for the first six 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 “Stockholder’s 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 $36 in the second quarter of 2011, of which $32 was interest cost and $71 for the first six months, of which $63 was interest cost. In 2010, net supplemental retirement pension benefits cost was $38 in the second quarter, of which $34 was interest cost and $76 for the first six months, of which $68 was interest cost.

 

11


AT&T INC.

JUNE 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.

   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 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:

 

          June 30, 2011            December 31, 2010    
          Carrying    
    Amount    
  

    Fair    

    Value    

       Carrying    
    Amount    
  

    Fair    

    Value    

Notes and debentures

   $        66,328    $        70,969    $        64,256    $        69,313    

Commercial paper

   5    5    1,625    1,625    

Bank borrowings

   17    17    27    27    

Investment securities

   2,229    2,229    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

 

12


AT&T INC.

JUNE 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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 $225 less than one year, $103 between one to two years, $41 between three to four years, and $264 for five or more years.

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 June 30, 2011 and December 31, 2010:

 

     June 30, 2011
             Level 1           Level 2           Level 3           Total

  Available-for-Sale Securities

       

      Domestic equities

  $                982   $                    -    $                -   $                982    

      International equities

  558     -   558    

      Fixed income bonds

  -   633    -   633    

  Asset Derivatives1

       

      Interest rate swaps

  -   525    -   525    

      Cross-currency swaps

  -   449    -   449    

      Interest rate locks

  -     -   -    

      Foreign exchange contracts

  -   13    -   13    

  Liability Derivatives1

       

      Cross-currency swaps

  -   (534)   -   (534)   

      Interest rate locks

  -   (55)   -   (55)   

      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     

  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.

 

13


AT&T INC.

JUNE 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 six months ended June 30, 2011 and June 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 six months ended June 30, 2011 and June 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 six months ended June 30, 2011. Over the next 12 months, we expect to reclassify $28 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

 

14


AT&T INC.

JUNE 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to income. In the six months ended June 30, 2011 and June 30, 2010, 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 June 30, 2011, we had no posted collateral (a deposit asset) and held collateral of $126 (a receipt liability). Under the agreements, if our credit rating had been simultaneously downgraded two rating levels by Moody’s Investors Service and Fitch, Inc., and one rating level by Standard & Poor’s Ratings Service, before the final collateral exchange in June, we would have been required to post collateral of $28. 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:

 

     

June 30,

2011

    

December 31,

2010

      

Interest rate swaps

   $             11,800                 $             11,050              

Cross-currency swaps

     7,502                   7,502              

Interest rate locks

     800                   3,400              

Foreign exchange contracts

     219                   221              

 

    

Total

   $ 20,321                 $ 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     Six months ended  
   June 30, 2011      June 30, 2010     June 30, 2011     June 30, 2010        

Interest rate swaps (Interest expense):

         

Gain (Loss) on interest rate swaps

   $ 75        $ 142       $ (11)      $ 194         

Gain (Loss) on long-term debt

     (75)         (142)        11         (194)        

 

 

In addition, the net swap settlements that accrued and settled in the quarter ended June 30 were also reported as reductions of interest expense.

 

Cash Flow Hedging Relationships    Three months ended     Six months ended  
   June 30, 2011      June 30, 2010     June 30, 2011      June 30, 2010  

Cross-currency swaps:

          

Gain (Loss) recognized in accumulated OCI

   $ (117)         $ (345)        $ (149)         $ (324)     

Interest rate locks:

          

Gain (Loss) recognized in accumulated OCI

     87            (379)          122            (433)     

Interest income (expense) reclassified from accumulated OCI into income

     (5)           (6)          (8)            (11)     

Foreign exchange contracts:

          

Gain (Loss) recognized in accumulated OCI

     (3)           (3)          5            (16)     

 

 

The balance of the unrealized derivative gain (loss) in accumulated OCI was $(190) at June 30, 2011 and $(180) at December 31, 2010.

 

15


AT&T INC.

JUNE 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

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. We anticipate closing the transaction by the end of the first quarter 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.

We must repay all advances no later than the first anniversary of the date on which advances are made. The agreement also provides that in the event of certain asset sales or certain debt or stock offerings, we must use the net proceeds to prepay any outstanding advances or to reduce the amount of the lenders’ commitments.

Qualcomm Spectrum Purchase  In December 2010, we agreed to purchase spectrum licenses in the Lower 700 MHz frequency band from Qualcomm Incorporated (Qualcomm) for approximately $1,925 in cash. The transaction is subject to regulatory approvals and other customary closing conditions. In February 2011, the waiting period under the HSR Act expired without the DOJ requesting additional information. We are awaiting approval from the FCC to complete the transaction. AT&T and Qualcomm anticipate closing the purchase in the second half of 2011.

Purchase of Wireless Partnership Minority Interest  On July 1, 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.

Dispositions

Sale of Sterling Operations  In May 2010, we entered into an agreement to sell our Sterling Commerce Inc. (Sterling) subsidiary and changed our reporting for Sterling to discontinued operations. In August 2010, we completed the sale and received net proceeds of approximately $1,400, recording a gain of $769.

 

16


AT&T INC.

JUNE 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The following table includes Sterling’s operating results, which are presented in the “Income From Discontinued Operations, net of tax” line item on the consolidated statements of income. Prior to the reclassification, these results were reported in our Other segment:

 

      Three Months Ended
June 30, 2010
               Six Months Ended
June 30, 2010
 

  Operating revenues

     $ 136                    $ 268          

  Operating expenses

     127                      255          

 

 

  Operating income

     9                      13          

 

 

  Income before income taxes

     7                      10          

  Income tax expense

     12                      13          

 

 

  Loss from discontinued operations, net of tax

     $ (5)                   $ (3)         

 

 

NOTE 8. SUBSEQUENT EVENTS

Tender of Telmex Shares On August 1, 2011, the Board of Directors of América Móvil, S.A. de C.V. (América Móvil) approved a tender offer for the remaining outstanding shares of Télefonos de México, S.A. de C.V. (Telmex) that were not already owned by América Móvil. The offer was for $10.50 Mexican pesos per share (payable in cash). We have announced our intent to tender all of our shares of Telmex for an estimated $1,370 of cash (using August 1, 2011 exchange rate). Assuming the tender offer is launched and it is completed, we expect to record a gain of approximately $0.01 to $0.03 per diluted share after tax as a result of this sale.

 

17


AT&T INC.

JUNE 30, 2011

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry in both the United States and internationally, providing wireless and wireline telecommunications services and equipment as well as advertising services. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.

Consolidated Results  Our financial results in the second quarter and for the first six months of 2011 and 2010 are summarized as follows:

 

              Second Quarter                          Six-Month Period  
      2011      2010      Percent
Change
     2011      2010      Percent
Change
 

 Operating Revenues

   $         31,495               $       30,808                  2.2%          $         62,742         $             61,338             2.3%    

 

       

 

 

    

 Operating expenses

                 

Cost of services and sales

     13,332           12,452                  7.1             26,735           24,835             7.7       

Selling, general and administrative

     7,396           7,454                  (0.8)            14,848           14,850             -         

Depreciation and amortization

     4,602           4,819                  (4.5)            9,186           9,599             (4.3)      

 

       

 

 

    

 Total Operating Expenses

     25,330           24,725                  2.4             50,769           49,284             3.0       

 

       

 

 

    

 Operating Income

     6,165           6,083                  1.3             11,973           12,054             (0.7)      

 Income from Continuing Operations Before Income Taxes

     5,551           6,247                  (11.1)            10,821           11,648             (7.1)      

 Income from Continuing Operations

     3,658           4,087                  (10.5)            7,126           6,625             7.6       

 Net Income Attributable to AT&T

   $ 3,591               $ 4,003                  (10.3)%         $ 6,999         $ 6,456             8.4%    

 

 

Overview

Operating income increased $82, or 1.3%, in the second quarter and decreased $81, or 0.7%, for the first six months of 2011. Operating income in the second quarter and for the first six months reflects continued growth in wireless service revenue, driven mostly by our subscriber and data revenue growth, along with an increase in AT&T U-verse® (U-verse) services and strategic business services. Also contributing to the positive operating income in the second quarter were decreased employee-related charges and lower amortization expenses associated with the accelerated amortization of customer lists acquired in acquisitions. Partially offsetting this increase in the second quarter and more than offsetting the increase for the first six months were continued declines in voice revenue and higher costs from increased sales of smartphones. Our operating income margin in the second quarter decreased from 19.7% in 2010 to 19.6% in 2011 and for the first six months decreased from 19.7% in 2010 to 19.1% in 2011.

Operating revenues increased $687, or 2.2%, in the second quarter and $1,404, or 2.3%, for the first six months. This increase was primarily due to the continued growth in wireless service revenue, driven mostly by our increase in subscribers along with a significant increase in wireless data revenue, stemming from higher smartphone sales. Also contributing to the increase was higher wireline data revenue largely due to Internet Protocol (IP) data growth, driven by U-verse subscriber growth and strategic business services.

Partially offsetting our revenue growth was the continued decline in our voice revenues due to a decrease in total switched access lines of 12.2% during the first six months of 2011. Customers disconnecting access lines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data or terminated service permanently as businesses closed or consumers left residences. While we lose wireline voice revenues, we have the opportunity to increase wireless service or wireline data revenues should the customer choose us as their wireless or VoIP provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.

 

18


AT&T INC.

JUNE 30, 2011

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

Cost of services and sales expenses increased $880, or 7.1%, in the second quarter and $1,900, or 7.7%, for the first six months. Increased cost of services and sales were primarily due to strong sales of wireless smartphones, a high number of customers upgrading their wireless handset and costs associated with transferring primarily former Alltel Wireless (Alltel) and Centennial Communications Corp. (Centennial) wireless customers to our network. Lower employee-related charges in the second quarter partially offset these increases.

Selling, general and administrative expenses decreased $58, or 0.8%, in the second quarter and $2 for the first six months. These decreases were primarily due to lower financing-related costs associated with our pension and postretirement benefits (referred to as Pension/OPEB expenses) and decreases in other employee-related expenses partially offset by expenses related to our pending acquisition of T-Mobile USA, Inc. (T-Mobile). The decrease for the first six months was mostly offset by higher wireless commission and sales.

Depreciation and amortization expense decreased $217, or 4.5%, in the second quarter and $413, or 4.3%, for the first six months. The decrease was due to lower amortization of intangibles related to customer lists associated with acquisitions, partially offset by increased depreciation associated with ongoing capital spending for network upgrades and expansion.

Interest expense increased $94, or 12.5%, in the second quarter and $175, or 11.5%, for the first six months of 2011. These increases in interest expense were primarily due to no longer capitalizing interest on spectrum that will be used to support our Long Term Evolution (LTE) technology, partially offset by a decrease in our average debt balances. Effective January 1, 2011, we ceased capitalization of interest on spectrum for LTE as this spectrum was determined to be ready for its intended use.

Equity in net income of affiliates increased $12, or 6.2%, in the second quarter and $44, or 10.7%, for the first six months of 2011. Increased equity in net income of affiliates was primarily due to improved operating results at América Móvil, S.A. de C.V. (América Móvil).

Other income (expense) – net  We had other income of $27 in the second quarter and $86 for the first six months of 2011, compared to other income of $723 in the second quarter and $701 for the first six months of 2010. Results for 2011 included interest, dividend and leveraged lease income of $34 in the second quarter and $54 for the first six months and a net gain of $48 from the sale of investments, partially offset by a loss of $20 on the sale of nonstrategic assets during the first six months.

Results in the second quarter and for the first six months of 2010 included a $647 gain on the exchange of Telmex Internacional, S.A.B. de C.V. (Telmex Internacional) shares for América Móvil shares, a gain from appreciation and sale of other investments, leveraged lease income, dividends and interest.

Income taxes decreased $267, or 12.4%, in the second quarter and $1,328, or 26.4%, for the first six months of 2011. The decrease in income taxes for the first six months of 2011 was primarily due to a $995 charge recorded during the first quarter of 2010 to reflect the deferred tax impact of enacted U.S. healthcare legislation. Our effective tax rate was 34.1% for both the second quarter and the first six months of 2011, as compared to 34.6% for second quarter and 43.1% for the first six months of 2010.

 

19


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

Selected Financial and Operating Data

0000272,450 0000272,450
      June 30,  
     

 

2011

    

 

2010

 

  Wireless customers (000)

     98,615              90,130         

  Postpaid wireless customers (000)

     68,353              66,970         

  Prepaid wireless customers (000)

     6,750              5,881         

  Reseller wireless customers (000)

     12,522              10,597         

  Connected device customers (000)

     10,990              6,682         

  Wireline consumer revenue connections (000)1,2

     42,505              44,262         

  Network access lines in service (000)2,7,8

     39,275              44,730         

  Broadband connections (000)2,3,7

     16,473              15,952         

  Video connections (000)4

     5,259              4,558         

  Debt ratio5,7

     36.8%              40.4%         

  Ratio of earnings to fixed charges6,7

     5.40              5.56         

  Number of AT&T employees

     258,870              272,450         
1

Wireline consumer revenue connections includes retail access lines, U-verse VoIP connections, broadband and video.

 
2

Represents services provided by AT&T’s Incumbent Local Exchange Carriers (ILECs) and affiliates.

 
3

Broadband connections include DSL, U-verse High Speed Internet and satellite broadband.

 
4

Video connections include customers that have satellite service under our agency arrangements and U-verse video connections (of 3,407 in 2011 and 2,505 in 2010).

 
5

Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and does not consider cash on hand available to pay down debt. See our “Liquidity and Capital Resources” section for discussion.

 
6

See Exhibit 12.

 
7

Prior-year amounts restated to conform to current-period reporting methodology.

 
8 

At June 30, 2011, total switched access lines were 39,275, retail business switched access lines totaled 16,293 and wholesale and coin switched access lines totaled 2,270.

 

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. 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. 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, 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 pension and postretirement benefits assets.

 

20


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

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.

The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”

 

21


AT&T INC.

JUNE 30, 2011

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

Wireless

Segment Results

      Second Quarter      Six-Month Period  
      2011      2010      Percent
Change
     2011      2010      Percent
Change
 

Segment operating revenues

                 

Service

       $     14,157        $     13,186             7.4%           $     28,118            $     26,036             8.0%    

Equipment

     1,445          1,056             36.8             2,793          2,103             32.8       

 

       

 

 

    

Total Segment Operating Revenues

     15,602          14,242             9.5             30,911          28,139             9.9       

 

       

 

 

    

Segment operating expenses

                 

Operations and support

     9,782          8,553             14.4             19,640          16,726             17.4       

Depreciation and amortization

     1,613          1,578             2.2             3,118          3,136             (0.6)      

 

       

 

 

    

Total Segment Operating Expenses

     11,395          10,131             12.5             22,758          19,862             14.6       

 

       

 

 

    

Segment Operating Income

     4,207          4,111             2.3             8,153          8,277             (1.5)      

Equity in Net Income (Loss) of Affiliates

     (8)         8             -                 (12)         20             -           

 

       

 

 

    

Segment Income

       $ 4,199        $ 4,119             1.9%           $ 8,141            $ 8,297             (1.9)%   

 

 

The following table highlights other key measures of performance for the Wireless segment:

 

        Second Quarter        Six-Month Period  
        2011        2010        Percent
Change
       2011        2010        Percent
Change
 

Wireless Subscribers (000)

                      98,615              90,130             9.4%     

Gross Subscriber Additions (000)1

       5,301              4,942             7.3%             11,208              10,136             10.6        

Net Subscriber Additions (000)1

       1,095              1,562             (29.9)               3,079              3,419             (9.9)       

Total Churn

       1.43%           1.29%           14 BP               1.40%           1.29%           11 BP       

Postpaid Subscribers (000)

                      68,353              66,970             2.1%     

Net Postpaid Subscriber Additions (000)1

       331              496             (33.3)%           393              1,008             (61.0)       

Postpaid Churn

       1.15%           1.01%           14 BP               1.17%           1.04%           13 BP       

Prepaid Subscribers (000)

                      6,750              5,881             14.8%     

Net Prepaid Subscriber Additions (000)1

       137              300             (54.3)%           222              324             (31.5)       

Reseller Subscribers (000)

                      12,522              10,597             18.2        

Net Reseller Subscriber Additions (000)1

       248              (130)           -                 809              139             -         

Connected Device Subscribers (000)2

                      10,990              6,682             64.5        

Net Connected Device Subscriber Additions (000)

       379              896             (57.7)%           1,655              1,948             (15.0)%   

 

 
1

Excludes merger and acquisition-related additions during the period.

2 

Includes data-centric devices such as eReaders, home security monitoring, fleet management, and smart grid devices. Tablets are primarily reflected in our prepaid subscriber category.

Wireless Metrics

Subscriber Additions As of June 30, 2011, we served 98.6 million wireless subscribers. Lower net subscriber additions (net additions) in the first six months of 2011 were primarily attributable to lower net postpaid additions and lower net connected devices additions. The declines in net postpaid additions in the second quarter and first six months of 2011 reflect slowing growth in the industry’s subscriber base, higher postpaid churn attributable in part to the integration of Alltel and Centennial customers into our network, and the expiration of Apple iPhone exclusivity in the first quarter of 2011. The 7.3% increase in gross additions in the second quarter was primarily related to higher activations of postpaid smartphones (a

 

22


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

handset with voice and data capabilities using an advanced operating system to better manage data and Internet access), Alltel subscriber additions, and an increase in our reseller subscriber base. The 10.6% increase in gross additions for the first six months of 2011 primarily related to the postpaid smartphone sales trend, sales of connected devices and tablets, Alltel subscriber additions, and growth in our reseller subscriber base. We expect revenue growth to continue to shift from voice toward data revenues with increasing penetration rates for smartphones and additional sales of data-centric devices.

Average service revenue per user (ARPU) from postpaid subscribers increased 2.0% in the second quarter and 2.2% for the first six months of 2011, driven by an increase in postpaid data services ARPU of 16.6% in the second quarter and an increase of 16.3% for the first six months of 2011. Of our total postpaid subscriber base, 67% now use more advanced handsets (with 50% using smartphones), up from 53% a year earlier (with 36% using smartphones). Approximately 68% of our postpaid subscribers were on data plans as of June 30, 2011, up from 58% as of June 30, 2010. The growth in postpaid data services ARPU in the second quarter and for the first six months of 2011 was partially offset by a 5.4% decrease in the second quarter and a 4.8% decrease for the first six months of 2011 in postpaid voice and other service ARPU. Postpaid voice and other service ARPU declined due to lower access and airtime charges and roaming revenues. Continued growth in our FamilyTalk® Plans (family plans) subscriber base, which has lower ARPU than traditional postpaid subscribers, has also contributed to these declines. The postpaid ARPU increases also reflected the inclusion of subscribers from the Alltel merger.

Total ARPU declined 3.7% in the second quarter and 3.5% for the first six months of 2011, reflecting strong growth in connected devices, tablet subscribers, and reseller subscribers. Connected devices and other data-centric devices, such as tablets, have lower-priced data-only plans compared with our postpaid plans, so those subscribers typically have a lower ARPU compared to ARPU generated from our other subscribers. Data services ARPU increased 10.7% in the second quarter and 10.5% for the first six months of 2011, reflecting these trends. We expect continued revenue growth from data services, as more subscribers purchase smartphones and data-centric devices, and as we continue to expand our network. Voice and other service ARPU declined 10.8% in the second quarter and 10.3% for the first six months of 2011. We expect continued pressure on voice and other service ARPU.

Churn The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Churn rate is calculated by dividing the aggregate number of wireless subscribers who cancel service during a period by the total number of wireless subscribers at the beginning of that period. The churn rate for an annual period is equal to the average of the churn rate for each month of that period. Higher total, postpaid, and connected device churn rates contributed to the decline in net additions in the second quarter and first six months of 2011. Churn also increased slightly as we transitioned former Alltel and Centennial subscribers to our network. Reseller subscribers, who generally have the lowest churn rate among our wireless subscribers, partially offset the churn rate increases due to their increasing share of net additions. A lower prepaid churn rate, due to the introduction of additional tablets to the market after the first quarter of 2010, also partially offset a higher postpaid churn rate.

Wireless Subscriber Relationships

The wireless industry continues to mature. Accordingly, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices. To attract and retain subscribers, we offer a wide variety of service plans in addition to offering a broad handset line. Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. We also offer data plans at different price levels to attract a wide variety of subscribers and to differentiate us from our competitors. Many of our subscribers are on family plans or business plans, which provide for service on multiple handsets at discounted rates, and such subscribers tend to have higher retention and lower churn rates. As of June 30, 2011, more than 85% of our postpaid subscribers are on family plans or business discount plans. Moreover, the vast majority of postpaid subscribers (including family plan users) are allowed to accumulate unused minutes (known as Rollover Minutes®), a feature that is currently not offered by other major postpaid carriers in the United States, and users would lose these minutes if they switched carriers. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn. In the first six months of 2011, we continued to see a significant portion of our existing subscriber base upgrade from their current devices to smartphones. We also introduced our Mobile to Any Mobile feature, which enables our new and existing subscribers on these and other qualifying plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions.

 

23


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

We offer a large variety of handsets, including at least 16 smartphones with advanced operating systems from eight manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry, with the continual introduction of new models (e.g., various Windows, Android, and other smartphones) or significant revisions of existing models. We believe a broad offering of a wide variety of handsets reduces dependence on any single product as these products continue to evolve in terms of technology and subscriber appeal. From time to time, we offer and have offered attractive handsets on an exclusive basis. As these exclusivity arrangements expire, we expect to continue to offer such handsets (based on historical industry practice), and we believe our service plan offerings will help to retain our subscribers by providing incentives not to move to a new carrier. As is common in the industry, most of our phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. While the expiration of our iPhone exclusivity arrangement in the first quarter of 2011 contributed to a very small increase in postpaid churn for the first six months of 2011, this increase was largely due to customers that were not currently using an iPhone. While the expiration of our iPhone exclusivity arrangement may continue to affect our net postpaid subscriber additions, we do not expect exclusivity terminations to have a material impact on our Wireless segment income, consolidated operating margin or our cash flows from operations.

We also believe future wireless growth will depend upon a wireless network that has sufficient spectrum and capacity to support innovative services and devices, and makes these innovations available to more wireless subscribers. Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. Unless a solution is obtained, these constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services. To address these constraints, in March 2011, we announced an agreement to acquire T-Mobile (see “T-Mobile” discussed in “Other Business Matters”), which is currently under ongoing regulatory review. While AT&T has and will continue to attempt to address spectrum and capacity constraints on a market-by-market basis, this acquisition provides the surest, fastest, and most efficient solution to these spectrum and capacity constraints. We also anticipate that the acquisition will enhance our ability to provide LTE network technology to over 97% of the U.S. population, including those in various rural areas.

Wireless Operating Results

Our Wireless segment operating income margin in the second quarter decreased from 28.9% in 2010 to 27.0% in 2011, and for the first six months decreased from 29.4% in 2010 to 26.4% in 2011. The margin declines in 2011 were primarily due to higher selling costs associated with smartphone activations and costs associated with the transition of former Alltel and Centennial subscribers to our network, partially offset by higher data revenues generated by our subscribers during the period. While we subsidize the sales prices of various smartphones, we expect to recover that cost over time from increased usage of the devices (especially data usage by the subscriber).

Service revenues are comprised of local voice and data services, roaming, long-distance and other revenue. Service revenues increased $971, or 7.4%, in the second quarter and $2,082, or 8.0%, for the first six months of 2011. The increases for these periods consisted of the following:

   

Data service revenues increased $1,024, or 23.4%, in the second quarter and $2,011, or 23.7%, for the first six months of 2011. The increases were primarily due to the increased number of subscribers and heavier text and multimedia messaging and Internet access by subscribers using integrated devices and data-centric devices, such as eReaders, tablets, and mobile navigation devices. Data service revenues accounted for approximately 37% of our wireless service revenues for the first six months of 2011, compared to 33% for the first six months of 2010.

   

Voice and other service revenues decreased $53, or 0.6%, in the second quarter, and increased $71, or 0.4%, for the first six months of 2011. While the number of wireless subscribers increased 9.4% over the last 12 months, ARPU continues to decline for voice and other non-data wireless services.

Equipment revenues increased $389, or 36.8%, in the second quarter and $690, or 32.8%, for the first six months of 2011, primarily due to higher sales of smartphones. As previously noted, an increasing share of our postpaid subscriber base now uses a smartphone. Our mix of smartphone sales as a percentage of total sales and upgrades to postpaid subscribers has continued to increase, with the introduction of additional smartphones to the market.

 

24


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

Operations and support expenses increased $1,229, or 14.4%, in the second quarter, and $2,914, or 17.4%, for the first six months of 2011, primarily due to the following:

   

Higher levels of smartphone sales and upgrades, as well as handsets provided to former Alltel subscribers, increased equipment costs $930 in the second quarter and $1,857 for the first six months and increased commission expenses $159 in the second quarter and $382 for the first six months.

   

Interconnect, network system, and long-distance costs increased $265 in the second quarter and $590 for the first six months due to higher network traffic, our ongoing network enhancement efforts, and higher leasing costs.

   

Selling expenses (other than commissions) increased $138 in the second quarter and $265 for the first six months due to increased employee-related costs and advertising.

Partially offsetting these increases were the following:

   

Administrative expenses decreased $174 in the second quarter and decreased $74 for the first six months of 2011 due in part to lower legal, tax, and payroll costs in both periods and a reclassification of shared information technology costs.

Depreciation and amortization expenses increased $35, or 2.2%, in the second quarter and decreased $18, or 0.6%, for the first six months of 2011. Depreciation expense increased $159, or 12.7%, in the second quarter and $229, or 9.3%, in the first six months primarily due to ongoing capital spending for network upgrades and expansion and the reclassification of shared information technology costs partially offset by certain network assets becoming fully depreciated.

Amortization expense decreased $124, or 37.6%, in the second quarter and $247, or 36.2%, for the first six months primarily due to lower amortization of intangibles for customer lists related to acquisitions.

Wireline

Segment Results

      Second Quarter      Six-Month Period  
      2011      2010      Percent
Change
     2011      2010      Percent
Change
 

Segment operating revenues

                 

Data

   $         7,356       $         6,866         7.1%         $         14,536       $         13,517         7.5%     

Voice

     6,342         7,224         (12.2)             12,893         14,707         (12.3)       

Other

     1,237         1,332         (7.1)             2,456         2,644         (7.1)       

 

       

 

 

    

Total Segment Operating Revenues

     14,935         15,422         (3.2)             29,885         30,868         (3.2)       

 

       

 

 

    

Segment operating expenses

                 

Operations and support

     10,104         10,289         (1.8)             20,370         20,801         (2.1)       

Depreciation and amortization

     2,876         3,105         (7.4)             5,834         6,181         (5.6)       

 

       

 

 

    

Total Segment Operating Expenses

     12,980         13,394         (3.1)             26,204         26,982         (2.9)       

 

       

 

 

    

Segment Operating Income

     1,955         2,028         (3.6)             3,681         3,886         (5.3)       

Equity in Net Income of Affiliates

     -         -         -                -         5         -          

 

       

 

 

    

Segment Income

   $         1,955       $ 2,028         (3.6)%       $ 3,681       $ 3,891         (5.4)%   

Operating Income and Margin Trends

Our Wireline segment operating income decreased $73, or 3.6%, in the second quarter and $205, or 5.3%, for the first six months of 2011. Segment operating income margin in the second quarter decreased from 13.2% in 2010 to 13.1% in 2011, and for the first six months decreased from 12.6% in 2010 to 12.3% in 2011. Our operating income and margins continued to be pressured by access line declines as our wireline consumer and business customers either reduced usage or disconnected traditional landline services and switched to alternative technologies, such as wireless and VoIP. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video, and U-verse voice. Additionally, we have the opportunity to increase Wireless segment revenues if customers choose AT&T Mobility as an alternative provider. The Wireline operating margins also reflect increases in data revenue growth and decreases in employee-related costs, driven by continuing cost initiatives and workforce reductions.

 

25


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

Operating Results

Data revenues increased $490, or 7.1%, in the second quarter and $1,019, or 7.5%, for the first six months of 2011. Data revenues accounted for approximately 49% of wireline operating revenues for the first six months of 2011 and 44% for the first six months of 2010. Data revenues include transport, IP and packet-switched data services.

   

IP data revenues increased $622, or 16.2%, in the second quarter and $1,277, or 17.1%, for the first six months of 2011 primarily driven by U-verse expansion, broadband additions and growth in IP-based strategic business services, which include Ethernet and application services. In the second quarter and for the first six months U-verse video revenues increased $303 and $623, strategic business service revenues increased $224 and $431 and broadband high-speed Internet access increased $89 and $187, respectively. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based services.

   

Traditional packet switched data services revenue, which include frame relay and asynchronous transfer mode services, decreased $94, or 22.8%, in the second quarter and $191, or 22.6%, for the first six months of 2011. This decrease is primarily due to lower demand as customers continue to shift to IP-based technology such as Virtual Private Networks, DSL and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.

Voice revenues decreased $882, or 12.2%, in the second quarter and $1,814, or 12.3%, for the first six months of 2011 primarily due to declining demand for traditional voice services by our consumer and business customers. Included in voice revenues are revenues from local voice, long-distance (including international) and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.

   

Local voice revenues decreased $553, or 12.4%, in the second quarter and $1,114, or 12.3%, for the first six months of 2011. The decrease was driven primarily by a 12.2% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by increased competition from alternative technologies and the disconnection of additional lines.

   

Long-distance revenues decreased $306, or 12.4%, in the second quarter and $653, or 12.9%, for the first six months of 2011. Lower demand for long-distance service from global businesses and consumer customers decreased revenues $244 in the second quarter and $523 for the first six months of 2011. Additionally, expected declines in the number of our national mass-market customers decreased revenues $64 in the second quarter and $133 for the first six months of 2011.

Other operating revenues decreased $95, or 7.1%, in the second quarter and $188, or 7.1%, for the first six months of 2011. Major items included in other operating revenues are integration services and customer premises equipment, government-related services and outsourcing, which account for more than 60% of total other revenue for both periods.

Operations and support expenses decreased $185, or 1.8%, in the second quarter and decreased $431, or 2.1%, for the first six months of 2011. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as salary, wage and bonus accruals. Costs in this category include certain network planning and engineering expenses, information technology, our repair technicians and repair services and property taxes. Operations and support expenses also include bad debt expense; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees.

The decreases in the second quarter and for the first six months were primarily due to lower employee-related expenses $108 and $487, reflecting ongoing workforce reduction initiatives, and reduced traffic compensation charges of $103 and $276, respectively. These decreases were partially offset by an increase in U-verse related spending of $93 in the second quarter and $219 for the first six months. Also contributing to a net decrease in the second quarter were refunds of transaction taxes and regulatory fees, and other one-time adjustments.

Depreciation and amortization expenses decreased $229, or 7.4%, in the second quarter and $347, or 5.6%, for the first six months. The second quarter and year-to-date decrease is primarily related to lower amortization of intangibles for the customer lists associated with acquisitions, partially offset by increased depreciation related to capital spending for network upgrades and expansion.

 

26


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

Supplemental Information

Telephone, Wireline Broadband and Video Connections Summary

Our switched access lines and other services provided by our local exchange telephone subsidiaries at June 30, 2011 and 2010 are shown below, and trends are addressed throughout this segment discussion.

 

(in 000s)   

June 30,

2011

  

June 30,

2010

  

Percent

Change

Switched Access Lines1

        

Retail Consumer

       20,712        24,452          (15.3)%

Retail Business2

       16,293        17,728         (8.1)

Retail Subtotal2

       37,005        42,180        (12.3)

Wholesale Subtotal2

         2,216          2,480        (10.6)

Total Switched Access Lines2,3

       39,275        44,730          (12.2)%

 

Total Retail Consumer Voice Connections6

       22,735        25,780          (11.8)%

 

Total Wireline Broadband Connections4

       16,473        15,952            3.3%

 

Satellite service5

         1,852          2,053            (9.8)%

U-verse video

         3,407          2,505        36.0

Video Connections

         5,259          4,558            15.4%

 

1 Represents access lines served by AT&T’s ILECs and affiliates.

2 Prior-period amounts restated to conform to current-period reporting methodology.

3 Total switched access lines includes payphone access lines of 54 at June 30, 2011 and 70 at June 30, 2010.

4 Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband.

5 Satellite service includes connections under our agency and resale agreements.

6 Includes consumer U-verse VoIP connections of 2,023 at June 30, 2011 and 1,328 at June 30, 2010.

Advertising Solutions

Segment Results

      Second Quarter    Six-Month Period
          2011        2010     Percent
  Change
       2011        2010    Percent
Change

Total Segment Operating Revenues

   $            841        $        1,007       (16.5)%        $        1,709    $        2,048    (16.6)%    

Segment operating expenses

                

    Operations and support

   580        662       (12.4)            1,153    1,326    (13.0)        

    Depreciation and amortization

   102        132       (22.7)            207    270    (23.3)        

Total Segment Operating Expenses

   682        794       (14.1)            1,360    1,596    (14.8)        

Segment Income

   $            159        $           213       (25.4)%        $            349    $           452    (22.8)%    

 

Operating Results

Our advertising solutions operating income margin was 18.9% in the second quarter of 2011, compared to 21.2% in the second quarter of 2010 and 20.4% for the first six months of 2011 compared to 22.1% for the first six months of 2010. The declines are primarily attributable to decreased print advertising revenue.

Operating revenues decreased $166, or 16.5%, in the second quarter and $339, or 16.6%, for the first six months of 2011, reflecting migration from print to online search, partially offset by an increase in interactive advertising.

Operating expenses decreased $112, or 14.1%, in the second quarter and $236, or 14.8%, for the first six months of 2011, largely driven by decreased product related expense of $58 in the second quarter and $105 for the first six months and lower

 

27


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

bad debt expense of $32 in the second quarter and $68 for the first six months. Also contributing to the decreases was lower amortization expense of $32 in the second quarter and $68 for the first six months, due to a declining basis method of customer list amortization.

Other

Segment Results

      Second Quarter      Six-Month Period    
      2011      2010      Percent
Change
     2011      2010      Percent
Change

Total Segment Operating Revenues

   $       117       $       137              (14.6)%       $       237           $           283               (16.3)% 

 

       

 

 

    

Total Segment Operating Expenses

     273         406             (32.8)           447             844               (47.0)     

 

       

 

 

    

Segment Operating Loss

     (156)         (269)             42.0               (210)            (561)              62.6     

 

       

 

 

    

Equity in Net Income of Affiliates

     215         187             15.0           468             387               20.9     

 

       

 

 

    

Segment Income (Loss)

   $ 59       $ (82)             -            $ 258           $ (174)              -         

 

The Other segment includes results from customer information services and all corporate and other operations. This segment 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, including the interest cost and expected return on pension and postretirement benefits assets.

Segment operating revenues decreased $20, or 14.6%, in the second quarter and $46, or 16.3%, for the first six months of 2011 primarily due to reduced revenues from our operator services.

Segment operating expenses decreased $133, or 32.8%, in the second quarter and $397, or 47.0%, for the first six months of 2011 primarily due to reduced financing-related costs associated with our pension and postretirement benefits and lower other employee-related charges, partially offset by costs associated with our pending acquisition of T-Mobile.

Our Other segment also includes our equity investments in international companies, the income from which we report as equity in net income of affiliates. Our earnings from foreign affiliates are sensitive to exchange-rate changes in the value of the respective local currencies.

Equity in net income of affiliates increased $28, or 15.0%, in the second quarter and $81, or 20.9%, for the first six months of 2011 primarily due to improved operating results at América Móvil, partially offset by decreased results at Télefonos de México, S.A. de C.V. (Telmex). In June 2010, América Móvil acquired control of Telmex and Telmex Internacional, which contributed to the improved operating results at América Móvil in 2011.

Our equity in net income of affiliates by major investment is listed below:

 

      Second Quarter      Six-Month Period
      2011      2010      2011      2010

  América Móvil

   $             191       $         138       $           418       $        283    

  Telmex

     24         31         49       71    

  Telmex Internacional

     -         19         -       35    

  Other

     -         (1)         1       (2)   

  Other Segment Equity in Net Income of Affiliates

   $ 215       $ 187       $ 468       $387    

 

 

28


AT&T INC.

JUNE 30, 2011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

OTHER BUSINESS MATTERS

U-verse Services We continue to expand our deployment of U-verse High Speed Internet and TV services. As of June 30, 2011, we have passed 29 million living units (constructed housing units as well as platted housing lots) and are marketing the services to 76% of those units. We are now nearing completion of our deployment goal of 30 million living units by year-end 2011.

We believe that our U-verse TV service is subject to federal oversight as a “video service” under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation. Certain municipalities have delayed our request or have refused us permission to use our existing right-of-ways to deploy or activate our U-verse-related services and products, resulting in litigation. Pending negotiations and current or threatened litigation involving municipalities could delay our deployment plans in those areas. Petitions have been filed at the Federal Communications Commission (FCC) alleging that the manner in which we provision “public, educational and governmental” (PEG) programming over our U-verse TV service conflicts with federal law, and a lawsuit has been filed in a California state superior court raising similar allegations under California law. If courts having jurisdiction where we have significant deployments of our U-verse services were to decide that federal, state and/or local cable regulation were applicable to our U-verse services, or if the FCC, state agencies or the courts were to rule that we must deliver PEG programming in a manner substantially different from the way we do today or in ways that are inconsistent with our current network architecture, it could have a material adverse effect on the cost, timing and extent of our deployment plans.

Retiree Phone Concession Litigation In May 2005, we were served with a purported class action in U.S. District Court, Western District of Texas (Stoffels v. SBC Communications Inc.), in which the plaintiffs, who are retirees of Pacific Bell Telephone Company, Southwestern Bell and Ameritech, contend that the cash reimbursement formerly paid to retirees living outside their company’s local service area, for telephone service they purchased from another provider, is a “defined benefit plan” within the meaning of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In October 2006, the Court certified two classes. The issue of whether the concession is an ERISA pension plan was tried before the judge in November 2007. In May 2008, the court ruled that the concession was an ERISA pension plan. We asked the court to certify this ruling for interlocutory appeal, and in August 2008, the court denied our request. In May 2009, we filed a motion for reconsideration with the trial court. That motion was granted in January 2011, and a final judgment was entered in our favor. Plaintiffs have appealed the judgment to the Fifth Circuit Court of Appeals. On June 3, 2011, the Fifth Circuit Court of Appeals held that a similar cash reimbursement program currently offered to out-of-region retirees of BellSouth is not a defined benefit plan. The Court’s decision lends significant support to our belief that an adverse outcome having a material effect on our financial statements in this case is unlikely, but we will continue to evaluate the potential impact of this suit on our financial results as it progresses.

NSA Litigation Twenty-four lawsuits were filed alleging that we and other telecommunications carriers unlawfully provided assistance to the National Security Agency in connection with intelligence activities that were initiated following the events of September 11, 2001. In the first filed case, Hepting et al v. AT&T Corp., AT&T Inc. and Does 1-20, a purported class action filed in U.S. District Court in the Northern District of California, plaintiffs alleged that the defendants disclosed and are currently disclosing to the U.S. Government content and call records concerning communications to which Plaintiffs were a party. Plaintiffs sought damages, a declaratory judgment and injunctive relief for violations of the First and Fourth Amendments to the U.S. Constitution, the Foreign Intelligence Surveillance Act (FISA), the Electronic Communications Privacy Act and other federal and California statutes. We filed a motion to dismiss the complaint. The United States asserted the “state secrets privilege” and related statutory privileges and also filed a motion asking the court to dismiss the complaint. The Court denied the motions, and we and the United States appealed. In August 2008, the U.S. Court of Appeals for the Ninth Circuit remanded the case to the district court without deciding the issue in light of the passage of the FISA Amendments Act, a provision of which addresses the allegations in these pending lawsuits (immunity provision). The immunity provision requires the pending lawsuits to be dismissed if the Attorney General certifies to the court either that the alleged assistance was undertaken by court order, certification, directive or written request or that the telecom entity did not provide the alleged assistance. In September 2008, the Attorney General filed his certification and asked the district court to dismiss all of the lawsuits pending against the AT&T Inc. telecommunications companies. The court granted the Government's motion to dismiss and entered final judgments in July 2009. In addition, a lawsuit seeking to enjoin the immunity provision’s application on grounds that it is unconstitutional was filed. In March 2009, we and the Government filed motions to dismiss this lawsuit. The court granted the motion to dismiss and entered final judgment in

 

29


AT&T INC.

JUNE 30, 2011

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

July 2009. All cases brought against the AT&T entities have been dismissed. In August 2009, plaintiffs in all cases filed an appeal with the Ninth Circuit Court of Appeals, and this appeal remains pending. Management believes this appeal is without merit and intends to continue to defend these matters vigorously.

Universal Service Fees Litigation  In October 2010, our wireless subsidiary was served with a purported class action in Circuit Court, Cole County, Missouri (MBA Surety Agency, Inc. v. AT&T Mobility, LLC), in which the plaintiffs contend that we violated the FCC’s rules by collecting Universal Service Fees on certain services not subject to such fees, including Internet access service provided over wireless handsets commonly called “smartphones” and wireless data cards, as well as collecting certain other state and local fees. Plaintiffs define the class as all persons who from April 1, 2003, until the present had a contractual relationship with us for Internet access through a smartphone or a wireless data card. Plaintiffs seek an unspecified amount of damages as well as injunctive relief. We believe that an adverse outcome having a material effect on our financial statements in this case is unlikely.

Wireless Transactions

Qualcomm Spectrum Purchase  In December 2010, we agreed to purchase spectrum licenses in the Lower 700 MHz frequency band from Qualcomm Incorporated for approximately $1,925 in cash. The spectrum covers more than 300 million people total nationwide, including 12 MHz of Lower 700 MHz D and E block spectrum covering more than 70 million people in five of the top 15 metropolitan areas and 6 MHz of Lower 700 MHz D block spectrum covering more than 230 million people across the rest of the United States. We plan to deploy this spectrum as supplemental downlink capacity, using carrier aggregation technology once compatible handsets and network equipment are developed. The transaction is subject to regulatory approvals and other customary closing conditions. In February 2011, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) expired without the Department of Justice (DOJ) requesting additional information. We are awaiting approval by the FCC to complete this transaction. We anticipate closing the purchase in the second half of 2011.

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 in exchange for approximately $39,000, consisting of $25,000 cash and approximately $14,000 of our common stock, subject to certain adjustments, and the right to nominate a person to a seat on our Board of Directors. 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 LTE 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. DOJ notice of the transaction as required under the HSR Act. In April 2011, we filed our application for approval of the merger with the 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 . We anticipate closing the transaction by the end of the first quarter 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 obligations of the lenders under the agreement to provide advances will terminate on September 20, 2012, unless prior to that date: (i) we reduce to $0 the commitments of the lenders under the agreement, (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 a debt-to-EBITDA (earnings before interest, income taxes, depreciation and amortization, and other modifications described in the agreement) financial ratio covenant effective after the acquisition closes, that AT&T will maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.0 to 1.0.

We must repay all advances no later than the first anniversary of the date on which advances are made. The agreement also provides that in the event of certain asset sales or certain debt or stock offerings, we must use the net proceeds to prepay any outstanding advances or to reduce the amount of the lenders’ commitments.

Purchase of Wireless Partnership Minority Interest  On July 1, 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. Our decision to purchase Convergys’ minority stake was driven by financial and operational

 

30


AT&T INC.

JUNE 30, 2011

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

considerations, and because we acquired minority interests in partnerships we already controlled, regulatory approvals for this transaction were not required. We expect no significant impact on our financial results from this transaction.

Tender of Telmex Shares On August 1, 2011, the Board of Directors of América Móvil approved a tender offer for the remaining outstanding shares of Telmex that were not already owned by América Móvil. The offer was for $10.50 Mexican pesos per share (payable in cash). We have announced our intent to tender all of shares of Telmex for an estimated $1,370 of cash (using August 1, 2011 exchange rate). assuming the tender offer launched and it is completed, we expect to record a gain of approximately $0.01 to $0.03 per diluted share after tax as a result of this sale.

COMPETITIVE AND REGULATORY ENVIRONMENT

Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided, and regulation is generally limited to operational licensing authority for the provision of services to enterprise customers.

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. Where appropriate, we are pursuing additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers. The current FCC appears to be more open to maintaining or expanding regulatory requirements on entities subject to its jurisdiction and has declared a national policy objective of ensuring that all Americans have access to broadband technologies and services. To that end, the FCC delivered a National Broadband Plan to Congress in 2010. The FCC has issued dozens of notices seeking comment on whether and how it should modify its rules and policies on a host of issues, which would affect all segments of the communications industry, to achieve universal access to broadband. These issues include rules and policies relating to universal service support, intercarrier compensation and regulation of special access services, as well as a variety of others that could have an impact on AT&T’s operations and revenues. The Commission has opened proceedings to address some of these issues. For example, in February 2011, the Commission released a notice of proposed rulemaking to consider whether and how it should modify its policies and rules relating to intercarrier compensation and universal service support to encourage deployment of broadband to all Americans. However, at this stage, it is too early to assess what, if any, action the Commission may take on these issues, and what the impact of any such changes could have on us.

In addition, states representing a majority of our local service access lines have adopted legislation that enables new video entrants to acquire a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer competitive video services. We also are supporting efforts to update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and depends on many factors.

Our wireless operations operate in robust competitive markets but are likewise subject to substantial governmental regulation. Wireless communications providers must be licensed by the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the rules and policies governing the use of the spectrum as adopted by the FCC. The FCC has recognized the importance of providing carriers with access to adequate spectrum to permit continued wireless growth and has begun investigating how to develop policies to promote that goal. While wireless communications providers’ prices and service offerings are generally not subject to state regulation, states continue to attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.

Wireless Broadband Competition  On April 7, 2011, the FCC released a wireless data roaming order requiring wireless carriers to offer wireless data roaming services on “commercially reasonable terms” to other wireless carriers in places where those operators do not have their own systems. As of August 3, 2011, AT&T had signed a total of 16 agreements covered by the order, 12 of which were signed since the order was released. We do not expect this order to have a material impact on our operating results.

 

31


AT&T INC.

JUNE 30, 2011

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

LIQUIDITY AND CAPITAL RESOURCES

We had $3,831 in cash and cash equivalents available at June 30, 2011. Cash and cash equivalents included cash of $329 and money market funds and other cash equivalents of $3,502. In the first six months of 2011, cash inflows were primarily provided by cash receipts from operations and the issuance of long-term debt. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, dividends to stockholders and the repayment of debt. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities

During the first six months of 2011, cash provided by operating activities was $16,757, compared to $15,811 for the first six months of 2010. Our higher operating cash flow reflects decreased tax payments of $2,645 and higher net income partially offset by employee and other accrued liabilities.

Cash Used in or Provided by Investing Activities

For the first six months of 2011, cash used in investing activities totaled $9,450 and consisted primarily of $9,405 for capital expenditures, excluding interest during construction.

Our capital expenditures are primarily for our wireless and wireline subsidiaries’ networks, our U-verse services and support systems for our communications services. The Wireline segment represented 54% of the total capital expenditures, excluding interest during construction, and increased 6% in the first six months. Wireline expenditures increased due to greater demand for Ethernet access and high-speed data services. Capital spending in our Wireless segment, excluding capitalized interest during construction, represented 46% of our total spending and increased 42% in the first six months. Wireless expenditures were primarily used for network capacity expansion, integration and upgrades to our High-Speed Downlink Packet Access network and the initial deployment of LTE (4G) equipment for our expected summer 2011 commercial launch.

We expect that our capital expenditures during 2011 will be in the $20,000 range, assuming that the regulatory environment remains favorable for investment. We continue to expect to fund 2011 capital expenditures for our Wireless and Wireline segments, including international operations, using cash from operations and incremental borrowings, depending on interest rate levels and overall market conditions. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory considerations.

Cash Used in or Provided by Financing Activities

For the six months of 2011, our financing activities were proceeds of $2,985 from our April issuance of $1,750 of 2.95% global notes due 2016 and $1,250 of 4.45% global notes due 2021 (the proceeds of which were used for general purposes). Our other financing activities primarily consisted of the payment of dividends and the repayment of debt.

We paid dividends of $5,082 during the first six months of 2011, compared with $4,960 for the first six months of 2010, primarily reflecting an increase in the quarterly dividend approved by our Board of Directors in December 2010. Dividends declared by our Board of Directors totaled $0.43 per share in the second quarter and $0.86 per share for the first six months of 2011 and $0.42 per share in the second quarter and $0.84 per share for the first six months of 2010. Our dividend policy considers the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

 

32


AT&T INC.

JUNE 30, 2011

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

 

At June 30, 2011, we had $7,910 of debt maturing within one year, which included $7,888 of long-term debt maturities, $5 of commercial paper and $17 of other short-term borrowings. Debt maturing within one year includes the following notes that may be put back to us by the holders:

 

   

$1,000 of annual put reset securities issued by BellSouth that may be put back to us, each April until maturity in 2021. No such put was exercised during April 2011.

 

   

An accreting zero-coupon note, that beginning in May 2012, may be redeemed each May, until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.

During the first six months of 2011, we repaid $1,290 of long-term debt with a weighted average interest rate of 6.23%. Additionally, in April 2011, we filed a registration statement with the Securities and Exchange Commission to exchange $3,500 of previously issued privately held notes for registered notes.

In December 2010, we entered into two revolving credit facilities with a syndicate of banks – a four-year, $5,000 agreement and a $3,000, 364-day agreement. In the event advances are made under either agreement, those advances would be used for general corporate purposes, which could include repayment of maturing commercial paper. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under each agreement. Under each agreement, we can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. Under the four-year agreement, we must maintain a debt-to-EBITDA, including modifications described in the agreement, financial debt ratio of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. Both agreements also contain a negative pledge covenant, which generally provides that if we pledge assets or permit liens on our property, then any advances must also be secured. At June 30, 2011, we had no advances outstanding under either agreement and were in compliance with all covenants under each agreement.

Other

Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by our international equity investees. At June 30, 2011, our debt ratio was 36.8%, compared to 40.4% at June 30, 2010, and 37.1% at December 31, 2010. The debt ratio is affected by the same factors that affect total capital, and reflects our continued reduction in debt.

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.

 

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AT&T INC.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

At June 30, 2011, we had interest rate swaps with a notional value of $11,800 and a fair value of $525.

We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $7,502 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(85) at June 30, 2011. We have rate locks with a notional value of $800 and a fair value of $(55) and foreign exchange contracts with a notional value of $219 and a net fair value of $8 at June 30, 2011.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of June 30, 2011. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of June 30, 2011.

 

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AT&T INC.

JUNE 30, 2011

 

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:

 

Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers’ ability to access financial markets and at favorable rates.

 

Changes in available technology and the effects of such changes, including product substitutions and deployment costs.

 

Increases in our benefit plans’ costs, including increases due to adverse changes in the U.S. and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates and adverse medical cost trends and unfavorable healthcare legislation and regulations.

 

The final outcome of Federal Communications Commission and other federal agency proceedings and reopenings of such proceedings and judicial review, if any, of such proceedings, including issues relating to access charges, broadband deployment, E911 services, competition, net neutrality, unbundled loop and transport elements, wireless license awards and renewals and wireless services, including data roaming agreements.

 

The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings and judicial review, if any, of such proceedings, including proceedings relating to Interconnection terms, access charges, universal service, unbundled network elements and resale and wholesale rates, broadband deployment including our U-verse services, net neutrality, performance measurement plans, service standards and traffic compensation.

 

Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.

 

Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures.

 

The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless operating margins.

 

Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets.

 

The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).

 

The timing, extent and cost of deployment of our U-verse services; the development of attractive and profitable service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

 

Our continued ability to attract and offer a diverse portfolio of devices, some on an exclusive basis.

 

The availability and cost of additional wireless spectrum and regulations relating to licensing and technical standards and deployment and usage, including network management rules.

 

Our ability to manage growth in wireless data services, including network quality.

 

The outcome of pending, threatened or potential litigation, including patent and product safety claims by or against third parties.

 

The impact on our networks and business from major equipment failures, security breaches related to the network or customer information, our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers, severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks.

 

The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.

 

The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions.

 

Our ability to adequately fund our wireless operations, including payment for additional spectrum; network upgrades and technological advancements.

 

Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.

 

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AT&T INC.

JUNE 30, 2011

 

PART II – OTHER INFORMATION

Dollars in millions except per share amounts

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. The additional Risk Factor below reflects our pending acquisition of T-Mobile (See “Other Business Matters”).

The impact of our pending acquisition of T-Mobile, including our ability to obtain governmental approvals on favorable terms including any required divestitures; the risk that such approvals are not obtained and we must pay a break-up fee; the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.

As discussed in Other Business Matters, in March 2011, we agreed to acquire T-Mobile for approximately $39,000. We believe that the acquisition will give us the scale, resources and spectrum to enable us to deploy LTE technology to more customers than otherwise possible and to address impending spectrum and network capacity constraints thereby enabling us to provide higher quality service including fewer dropped calls, fewer failed calls attempted and increased data speeds. In addition, we believe the acquisition will result in cost savings and other potential synergies. Achieving these results first will depend upon obtaining governmental approvals on favorable terms within the time limits set forth in the purchase agreement. Delays in this process could divert attention from ongoing operations on the part of management and employees, adversely affecting customers and suppliers and therefore revenues. If such approvals are obtained, then we must integrate a large number of network and other operational systems and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. While we have successfully merged large companies into our operations in the past, and therefore expect a successful integration in this case, delays in the process could have a material adverse affect on our revenues, expenses, operating results and financial condition. In addition, events outside of our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition.

 

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AT&T INC.

JUNE 30, 2011

 

Item 6. Exhibits

Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.

 

  12      Computation of Ratios of Earnings to Fixed Charges
  31     

Rule 13a-14(a)/15d-14(a) Certifications

           31.1           Certification of Principal Executive Officer

           31.2           Certification of Principal Financial Officer

  32      Section 1350 Certifications
  101      XBRL Instance Document

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   AT&T Inc.
August 5, 2011    /s/ John J. Stephens
   John J. Stephens
  

Senior Executive Vice President

      and Chief Financial Officer

 

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