TIDM58KM
RNS Number : 0605M
AT & T Inc.
09 August 2011
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
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definition of "accelerated
filer," "large accelerated filer" and "smaller reporting company"
in Rule 12b-2 of the Exchange Act.
Large accelerated [X] Accelerated filer [
filer ]
Non-accelerated [ (Do not check if a smaller Smaller reporting [
filer ] reporting company) 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.
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.
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.
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.
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.
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 Six months ended
June 30, 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) 6 (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 3 3 5 6
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) 7 (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
========================== === ======= ======= === ====== ======
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 Six months ended
June 30, 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 3 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 5 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.
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(R) 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.
For the three months
ended June 30, 2011
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations 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
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations 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
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations Results
-------------- -------- -------- ----------- ----- -------------- ------------
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
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations 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
============== ======== ======== =========== ===== ============== ============
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Substantially all of our employees are covered by one of various
noncontributory pension and death benefit plans. We also provide
certain medical, dental and life insurance benefits to certain
retired employees under various plans and accrue actuarially
determined postretirement benefit costs as active employees earn
these benefits. Our objective in funding these plans, in
combination with the standards of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), is to accumulate assets
sufficient to meet the plans' obligations to provide benefits to
employees upon their retirement. No significant cash contributions
are required under ERISA regulations during 2011.
The following details pension and postretirement benefit costs
included in operating expenses (in cost of sales and selling,
general and administrative expenses) in the accompanying
consolidated statements of income. In the following table, gains
are denoted with parentheses. A portion of these expenses is
capitalized as part of the benefit load on internal construction
and capital expenditures, providing a small reduction in the net
expense recorded.
Three months ended Six months ended
June 30, 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.
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 Fair Carrying Fair
Amount Value Amount 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 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 Derivatives(1)
Interest rate swaps - 525 - 525
Cross-currency swaps - 449 - 449
Interest rate locks - - - -
Foreign exchange contracts - 13 - 13
Liability Derivatives(1)
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 Derivatives(1)
Interest rate swaps - 537 - 537
Cross-currency swaps - 327 - 327
Interest rate locks - 11 - 11
Foreign exchange contracts - 6 - 6
Liability Derivatives(1)
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.
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 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, December 31,
2011 2010
--------------------------- ---------- --------------
Interest rate swaps $ 11,800 $ 11,050
Cross-currency swaps 7,502 7,502
Interest rate locks 800 3,400
Foreign exchange contracts 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, June 30, June 30, June 30,
2011 2010 2011 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.
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.
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 Six Months
Ended Ended
June 30, 2010 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 America Movil, S.A. de C.V. (America Movil) approved a
tender offer for the remaining outstanding shares of Telefonos de
Mexico, S.A. de C.V. (Telmex) that were not already owned by
America Movil. 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.
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
------------------------- -------------------------
Percent Percent
2011 2010 Change 2011 2010 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(R) (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.
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 America Movil, S.A. de C.V.
(America Movil).
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 America Movil
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.
Selected Financial and Operating Data
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 ratio(5,7) 36.8% 40.4%
Ratio of earnings to fixed charges(6,7) 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.
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."
Wireless
Segment Results
Second Quarter Six-Month Period
------------------------- -------------------------
Percent Percent
2011 2010 Change 2011 2010 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
--------------------- -----------------------
Percent Percent
2011 2010 Change 2011 2010 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 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 was 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(R) 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(R) ), 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.
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.
Equipmentrevenues 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.
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
------------------------- -------------------------
Percent Percent
2011 2010 Change 2011 2010 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.
Operating Results
Datarevenues 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 of $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.
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.
June 30, June 30, Percent
(in 000s) 2011 2010 Change
---------------------------------------- -------- -------- -------
Switched Access Lines(1)
Retail Consumer 20,712 24,452 (15.3)%
Retail Business(2) 16,293 17,728 (8.1)
---------------------------------------- -------- --------
Retail Subtotal(2) 37,005 42,180 (12.3)
---------------------------------------- -------- --------
Wholesale Subtotal(2) 2,216 2,480 (10.6)
Total Switched Access Lines(2,3) 39,275 44,730 (12.2)%
======================================== ======== ======== =======
Total Retail Consumer Voice
Connections(6) 22,735 25,780 (11.8)%
======================================== ======== ======== =======
Total Wireline Broadband Connections(4) 16,473 15,952 3.3%
======================================== ======== ======== =======
Satellite service(5) 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
--------------------- -----------------------
Percent Percent
2011 2010 Change 2011 2010 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 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
----------------------- -----------------------
Percent Percent
2011 2010 Change 2011 2010 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 America Movil,
partially offset by decreased results at Telefonos de Mexico, S.A.
de C.V. (Telmex). In June 2010, America Movil acquired control of
Telmex and Telmex Internacional, which contributed to the improved
operating results at America Movil in 2011.
Our equity in net income of affiliates by major investment is
listed below:
Second Quarter Six-Month Period
--------------------- -----------------------
2011 2010 2011 2010
---------------------- ---------- --------- ----------- ----------
America Movil $ 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
====================== === ===== ===== === ====== === =====
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 Corporation (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 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 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 America Movil approved a tender offer for the
remaining outstanding shares of Telmex that were not already owned
by America Movil. 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.
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.
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.
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.
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.
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.
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.
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
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
EXHIBIT 12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Six Months Ended
June 30,
(Unaudited) Year Ended December 31,
---------------- -------------------------------------------------
2011 2010 2010 2009 2008(1) 2007 2006
------- ------- ------- ------- -------- ------- ------------
Earnings:
Income (loss) from
continuing
operations before
income taxes $10,821 $11,648 $18,238 $18,518 $(4,572) $27,186 $ 18,638
Equity in net income of
affiliates included
above (456) (412) (762) (734) (819) (692) (2,043)
Fixed charges 2,348 2,389 4,786 5,071 4,943 4,489 2,166
Distributed income of
equity affiliates 39 35 161 317 164 395 97
Interest capitalized (77) (379) (772) (740) (659) (171) (73)
------ ------ ------ ------ ------- ------ -----------
Earnings,
as
adjusted $12,675 $13,281 $21,651 $22,432 $ (943) $31,207 $ 18,785
====== ====== ====== ====== ======= ====== ===========
Fixed Charges:
Interest expense $ 1,694 $ 1,519 $ 2,994 $ 3,368 $ 3,369 $ 3,460 $ 1,800
Interest capitalized 77 379 772 740 659 171 73
Dividends on preferred
securities - - - - 4 3 3
Portion of rental
expense representative
of interest factor 577 491 1,020 963 911 855 290
------ ------ ------ ------ ------- ------ -----------
Fixed
Charges $ 2,348 $ 2,389 $ 4,786 $ 5,071 $ 4,943 $ 4,489 $ 2,166
====== ====== ====== ====== ======= ====== ===========
Ratio of Earnings to
Fixed Charges 5.40 5.56 4.52 4.42 - 6.95 8.67
(1 ) Earnings were not sufficient to cover fixed charges in
2008. The deficit was $943.
CERTIFICATION
I, Randall Stephenson, certify that:
1. I have reviewed this report on Form 10-Q of AT&T
Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 5, 2011
/s/ Randall Stephenson
Randall Stephenson Chairman of the Board,
Chief Executive Officer and President
CERTIFICATION
I, John J. Stephens, certify that:
1. I have reviewed this report on Form 10-Q of AT&T
Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 5, 2011
/s/ John J. Stephens
John J. Stephens Senior Executive Vice President
and Chief Financial Officer
Certification of Periodic Financial Reports
Pursuant to 18 U.S.C. Section 1350, each of the undersigned
officers of AT&T Inc. (the "Company") hereby certifies that the
Company's Quarterly Report on Form 10-Q for the three months ended
June 30, 2011 (the "Report") fully complies with the requirements
of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934 and that information contained in the Report
fairly presents, in all material respects, the financial condition
and results of operations of the Company.
August 5, 2011 August 5, 2011
By: /s/ Randall Stephenson By: /s/ John J. Stephens
Randall Stephenson John J. Stephens
Chairman of the Board, Chief Executive Officer Senior Executive
Vice President
and President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant
to 18 U.S.C. Section 1350 and is not being filed as part of the
Report or as a separate disclosure document. This certification
shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 ("Exchange Act") or otherwise
subject to liability under that section. This certification shall
not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act except to the extent
this Exhibit 32 is expressly and specifically incorporated by
reference in any such filing.
A signed original of this written statement required by Section
906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the
electronic version of this written statement required by Section
906, has been provided to AT&T Inc. and will be retained by
AT&T Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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