TIDM58KM
RNS Number : 9104C
AT & T Inc.
08 May 2012
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 March 31, 2012
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 April 30, 2012 there were 5,863 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
March 31,
2012 2011
--------------------------------------------------------- --------- --------
Operating Revenues
Wireless service $ 14,566 $ 13,961
Data 7,795 7,171
Voice 5,893 6,550
Directory 744 868
Other 2,824 2,697
--------------------------------------------------------- --------- --------
Total operating revenues 31,822 31,247
--------------------------------------------------------- --------- --------
Operating Expenses
Cost of services and sales (exclusive of depreciation
and amortization shown separately below) 12,913 12,813
Selling, general and administrative 8,248 8,042
Depreciation and amortization 4,560 4,584
--------------------------------------------------------- --------- --------
Total operating expenses 25,721 25,439
--------------------------------------------------------- --------- --------
Operating Income 6,101 5,808
--------------------------------------------------------- --------- --------
Other Income (Expense)
Interest expense (859) (846)
Equity in net income of affiliates 223 249
Other income (expense) - net 52 59
--------------------------------------------------------- --------- --------
Total other income (expense) (584) (538)
--------------------------------------------------------- --------- --------
Income Before Income Taxes 5,517 5,270
Income tax expense 1,865 1,802
--------------------------------------------------------- --------- --------
Net Income 3,652 3,468
--------------------------------------------------------- --------- --------
Less: Net Income Attributable to Noncontrolling Interest (68) (60)
--------------------------------------------------------- --------- --------
Net Income Attributable to AT&T $ 3,584 $ 3,408
========================================================= ========= ========
Basic Earnings Per Share Attributable to AT&T $ 0.60 $ 0.57
Diluted Earnings Per Share Attributable to AT&T $ 0.60 $ 0.57
--------------------------------------------------------- --------- --------
Weighted Average Number of Common Shares Outstanding
- Basic (in millions) 5,918 5,925
Weighted Average Number of Common Shares Outstanding
- with Dilution (in millions) 5,940 5,945
Dividends Declared Per Common Share $ 0.44 $ 0.43
========================================================= ========= ========
See Notes to Consolidated Financial Statements.
AT&T INC.
----------------------------------------------------------- -------- -------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
----------------------------------------------------------- -------- -------
Three months ended
March 31,
2012 2011
----------------------------------------------------------- ------------ --------
Net income $ 3,652 $ 3,468
Other comprehensive income, net of tax:
Foreign currency translation adjustments (includes
$1 and $0 attributable to
noncontrolling interest), net of taxes of $131 and
$50 243 93
Net unrealized gains (losses) on available-for-sale
securities:
Unrealized gains, net of taxes of $54 and $27 101 49
Reclassification adjustment realized in net income,
net of taxes of $(3) and $(19) (6) (35)
Net unrealized gains (losses) on cash flow hedges:
Unrealized gains, net of taxes of $0 and $4 - 7
Reclassification adjustment included in net income,
net of taxes of
$3 and $1 6 2
Amortization of net prior service credit included
in net income, net of taxes of
$(84) and $(71) (137) (115)
----------------------------------------------------------- -------- -------
Other comprehensive income 207 1
----------------------------------------------------------- -------- -------
Total comprehensive income 3,859 3,469
Less: Total comprehensive income attributable to
noncontrolling interest (69) (60)
----------------------------------------------------------- -------- -------
Total Comprehensive Income Attributable to AT&T $ 3,790 $ 3,409
=========================================================== ======== =======
See Notes to Consolidated Financial Statements.
AT&T INC.
-----------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
-----------------------------------------------------------------------------------
December
March 31, 31,
2012 2011
-------------------------------------------------------- ------------- ----------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 2,442 $ 3,185
Accounts receivable - net of allowances for doubtful
accounts of $784 and $878 13,167 13,606
Prepaid expenses 1,706 1,155
Deferred income taxes 1,463 1,470
Other current assets 1,987 3,611
-------------------------------------------------------- --------- ---------
Total current assets 20,765 23,027
-------------------------------------------------------- --------- ---------
Property, plant and equipment 260,211 260,279
Less: accumulated depreciation and amortization (152,980) (153,192)
-------------------------------------------------------- --------- ---------
Property, Plant and Equipment - Net 107,231 107,087
-------------------------------------------------------- --------- ---------
Goodwill 70,929 70,842
Licenses 51,782 51,374
Customer Lists and Relationships - Net 2,385 2,757
Other Intangible Assets - Net 5,203 5,212
Investments in Equity Affiliates 4,302 3,718
Other Assets 6,759 6,327
-------------------------------------------------------- --------- ---------
Total Assets $ 269,356 $ 270,344
======================================================== ========= =========
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 6,775 $ 3,453
Accounts payable and accrued liabilities 17,593 19,858
Advanced billing and customer deposits 3,966 3,872
Accrued taxes 1,601 1,003
Dividends payable 2,585 2,608
-------------------------------------------------------- --------- ---------
Total current liabilities 32,520 30,794
-------------------------------------------------------- --------- ---------
Long-Term Debt 58,934 61,300
-------------------------------------------------------- --------- ---------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 26,136 25,748
Postemployment benefit obligation 34,113 34,011
Other noncurrent liabilities 12,466 12,694
-------------------------------------------------------- --------- ---------
Total deferred credits and other noncurrent liabilities 72,715 72,453
-------------------------------------------------------- --------- ---------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized
at March 31, 2012 and
December 31, 2011: issued 6,495,231,088 at March
31, 2012 and December 31, 2011) 6,495 6,495
Additional paid-in capital 91,032 91,156
Retained earnings 26,446 25,453
Treasury stock (620,517,527 at March 31, 2012 and
568,719,202
at December 31, 2011, at cost) (22,460) (20,750)
Accumulated other comprehensive income 3,386 3,180
Noncontrolling interest 288 263
-------------------------------------------------------- --------- ---------
Total stockholders' equity 105,187 105,797
-------------------------------------------------------- --------- ---------
Total Liabilities and Stockholders' Equity $ 269,356 $ 270,344
======================================================== ========= =========
See Notes to Consolidated Financial Statements.
AT&T INC.
----------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
----------------------------------------------------------------------------------
Three months ended
March 31,
2012 2011
---------------------------------------------------------- ------------ --------
Operating Activities
Net income $ 3,652 $ 3,468
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,560 4,584
Undistributed earnings from investments in equity
affiliates (223) (233)
Provision for uncollectible accounts 328 292
Deferred income tax expense and noncurrent unrecognized
tax benefits 337 731
Net gain from impairment and sale of investments (9) (41)
Changes in operating assets and liabilities:
Accounts receivable 111 72
Other current assets 1,082 708
Accounts payable and accrued liabilities (1,573) (1,309)
Other - net (469) (540)
---------------------------------------------------------- -------- -------
Total adjustments 4,144 4,264
---------------------------------------------------------- -------- -------
Net Cash Provided by Operating Activities 7,796 7,732
---------------------------------------------------------- -------- -------
Investing Activities
Construction and capital expenditures:
Capital expenditures (4,261) (4,133)
Interest during construction (65) (35)
Acquisitions, net of cash acquired (433) (54)
Dispositions 16 11
Sales of securities, net of investment 5 127
Other 1 9
---------------------------------------------------------- -------- -------
Net Cash Used in Investing Activities (4,737) (4,075)
---------------------------------------------------------- -------- -------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less - (36)
Issuance of long-term debt 2,986 -
Repayment of long-term debt (2,204) (1,264)
Purchase of treasury stock (2,066) -
Issuance of treasury stock 218 18
Dividends paid (2,606) (2,540)
Other (130) 119
---------------------------------------------------------- -------- -------
Net Cash Used in Financing Activities (3,802) (3,703)
---------------------------------------------------------- -------- -------
Net decrease in cash and cash equivalents (743) (46)
Cash and cash equivalents beginning of year 3,185 1,437
---------------------------------------------------------- -------- -------
Cash and Cash Equivalents End of Period $ 2,442 $ 1,391
========================================================== ======== =======
Cash paid during the three months ended March 31
for:
Interest $ 1,224 $ 1,096
Income taxes, net of refunds $ (712) $ (511)
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)
---------------------------------------------------------------------------
March 31, 2012
------------------
Shares Amount
------------------------------------------------------- ------ ----------
Common Stock
Balance at beginning of year 6,495 $ 6,495
Issuance of stock - -
------------------------------------------------------- ------ ---------
Balance at end of period 6,495 $ 6,495
======================================================= ====== =========
Additional Paid-In Capital
Balance at beginning of year $ 91,156
Issuance of treasury stock 74
Share-based payments (198)
------------------------------------------------------- ------ ---------
Balance at end of period $ 91,032
======================================================= ====== =========
Retained Earnings
Balance at beginning of year $ 25,453
Net income attributable to AT&T ($0.60 per diluted
share) 3,584
Dividends to stockholders ($0.44 per share) (2,584)
Other (7)
------------------------------------------------------- ------ ---------
Balance at end of period $ 26,446
======================================================= ====== =========
Treasury Stock
Balance at beginning of year (568) $ (20,750)
Purchase of stock (68) (2,066)
Issuance of treasury stock 15 356
------------------------------------------------------- ------ ---------
Balance at end of period (621) $ (22,460)
======================================================= ====== =========
Accumulated Other Comprehensive Income Attributable
to AT&T, net of tax:
Balance at beginning of year $ 3,180
Other comprehensive income attributable to AT&T 206
------------------------------------------------------- ------ ---------
Balance at end of period $ 3,386
======================================================= ====== =========
Noncontrolling Interest:
Balance at beginning of year $ 263
Net income attributable to noncontrolling interest 68
Distributions (44)
Translation adjustments attributable to noncontrolling
interest, net of taxes 1
------------------------------------------------------- ------ ---------
Balance at end of period $ 288
======================================================= ====== =========
Total Stockholders' Equity at beginning of year $ 105,797
======================================================= ====== =========
Total Stockholders' Equity at end of period $ 105,187
======================================================= ====== =========
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, 2011.
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, including a reclassification of certain
operating expenses based on an enhanced activity-based expense
tracking system.
Comprehensive Income Reporting We have adopted Financial
Accounting Standards Board guidance that requires the reporting of
comprehensive income, either as a separate financial statement (our
election) or a continuation of the consolidated statements of
income. We disclose the related tax effect for each item on the
face of the statement.
Employee Separations We established obligations for expected
termination benefits provided under existing plans to former or
inactive employees after employment but before retirement. At March
31, 2012, we had severance accruals of $230 and at December 31,
2011, we had severance accruals of $335.
NOTE 2. 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 months ended March 31, 2012
and 2011, are shown in the table below:
Three months ended
March 31,
2012 2011
------------------------------------------------------- ------------ --------
Numerators
Numerator for basic earnings per share:
Net income $ 3,652 $ 3,468
Net income attributable to noncontrolling interest (68) (60)
------------------------------------------------------- -------- -------
Net income attributable to AT&T 3,584 3,408
Dilutive potential common shares:
Other share-based payment 3 3
------------------------------------------------------- -------- -------
Numerator for diluted earnings per share $ 3,587 $ 3,411
======================================================= ======== =======
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding 5,918 5,925
Dilutive potential common shares:
Stock options 4 4
Other share-based payment 18 16
------------------------------------------------------- -------- -------
Denominator for diluted earnings per share 5,940 5,945
======================================================= ======== =======
Basic earnings per share attributable to AT&T $ 0.60 $ 0.57
Diluted earnings per share attributable to AT&T $ 0.60 $ 0.57
======================================================= ======== =======
At March 31, 2012 and 2011, we had issued and outstanding
options to purchase approximately 28 million and 98 million shares
of AT&T common stock. For the quarter ended March 31, 2012 and
2011, the exercise prices of 5 million and 60 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 March 31, 2012
and 2011, the exercise prices of 22 million and 34 million vested
stock options were below market price.
NOTE 3. 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 based on our strategic direction of the
business, needs of the network (wireless or wireline) providing
services and other assets needed to provide emerging services to
our customers. 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 Wireless segment results have
been restated to include the operating results of a subsidiary that
provides services for subscribers to wirelessly monitor their home
that was previously reported in the Wireline segment.
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 Wireline segment results have been restated to
exclude the operating results of the business moved to our Wireless
segment and to include the operating results of customer
information services, which were previously reported in our Other
segment's results.
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. In April 2012, we announced an agreement to sell our
Advertising Solutions and Interactive businesses (see Note 6).
The Other segment includes 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. The Other segment results have been restated to
exclude the operating results of customer information services,
which are now reported in our Wireline segment's results.
In the following tables, we show how our segment results are
reconciled to our consolidated results reported.
For the three months ended
March 31, 2012
----------- ------------
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations Results
----------------------------- -------- -------- ----------- ------ -------------- ------------
Total segment operating
revenues $ 16,136 $ 14,928 $ 744 $ 14 $ - $ 31,822
----------------------------- -------- -------- ----------- ------ -------------- ------------
Operations and support
expenses 10,083 10,297 547 234 - 21,161
Depreciation and amortization
expenses 1,666 2,808 77 9 - 4,560
----------------------------- -------- -------- ----------- ------ -------------- ------------
Total segment operating
expenses 11,749 13,105 624 243 - 25,721
----------------------------- -------- -------- ----------- ------ -------------- ------------
Segment operating income
(loss) 4,387 1,823 120 (229) - 6,101
Interest expense - - - - 859 859
Equity in net income
(loss) of affiliates (13) - - 236 - 223
Other income (expense)
- net - - - - 52 52
----------------------------- -------- -------- ----------- ------ -------------- ------------
Segment income (loss)
before income taxes $ 4,374 $ 1,823 $ 120 $ 7 $ (807) $ 5,517
============================= ======== ======== =========== ====== ============== ============
For the three months ended
March 31, 2011
----------- ------------
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations Results
----------------------------- -------- -------- ----------- ------ -------------- ------------
Total segment operating
revenues $ 15,310 $ 15,051 $ 868 $ 18 $ - $ 31,247
----------------------------- -------- -------- ----------- ------ -------------- ------------
Operations and support
expenses 9,861 10,312 572 110 - 20,855
Depreciation and amortization
expenses 1,506 2,958 106 14 - 4,584
----------------------------- -------- -------- ----------- ------ -------------- ------------
Total segment operating
expenses 11,367 13,270 678 124 - 25,439
----------------------------- -------- -------- ----------- ------ -------------- ------------
Segment operating income
(loss) 3,943 1,781 190 (106) - 5,808
Interest expense - - - - 846 846
Equity in net income
of affiliates (4) - - 253 - 249
Other income (expense)
- net - - - - 59 59
----------------------------- -------- -------- ----------- ------ -------------- ------------
Segment income (loss)
before income taxes $ 3,939 $ 1,781 $ 190 $ 147 $ (787) $ 5,270
============================= ======== ======== =========== ====== ============== ============
NOTE 4. 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 2012.
The following details pension and postretirement benefit costs
included in operating expenses (in cost of services and sales, and
selling, general and administrative expenses) in the accompanying
consolidated statements of income. We recognize actual gains and
losses on pension and postretirement plan assets in our operating
results at our annual measurement date of December 31, unless
earlier remeasurements are required.
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 projects, providing a small reduction
in the net expense recorded.
Three months ended
March 31,
2012 2011
------------------------------------------------------ ------------ --------
Pension cost:
Service cost - benefits earned during the period $ 310 $ 297
Interest cost on projected benefit obligation 700 740
Expected return on assets (880) (922)
Amortization of prior service (credit) (4) (4)
------------------------------------------------------ -------- -------
Net pension cost $ 126 $ 111
====================================================== ======== =======
Postretirement cost:
Service cost - benefits earned during the period $ 84 $ 90
Interest cost on accumulated postretirement benefit
obligation 447 513
Expected return on assets (200) (260)
Amortization of prior service (credit) (217) (174)
------------------------------------------------------ -------- -------
Net postretirement cost $ 114 $ 169
====================================================== ======== =======
Combined net pension and postretirement cost $ 240 $ 280
====================================================== ======== =======
Our combined net pension and postretirement cost decreased $40
in the first quarter of 2012. The decrease was primarily related to
higher amortization of prior service credits due to our plan change
that provides prescription drug benefits on a group basis under
Medicare Part D, as allowed under federal healthcare law.
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 $31 in the first quarter of 2012,
of which $29 was interest cost and $35 for the first quarter of
2011, of which $31 was interest cost.
NOTE 5. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a
three-tiered fair value hierarchy that gives highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy are described below:
Level 1 Inputs to the valuation methodology are unadjusted
quoted prices for identical assets or liabilities in active markets
that we have the ability to access.
Level 2 Inputs to the valuation methodology include:
-- Quoted prices for similar assets and liabilities in active markets.
-- Quoted prices for identical or similar assets or liabilities in inactive markets.
-- Inputs other than quoted market prices that are observable for the asset or liability.
-- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
-- Fair value is often based on developed models in which there
are few, if any, external observations.
The fair value measurement level of an asset or liability 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, 2011.
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:
March 31, 2012 December 31, 2011
------------------ ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------- -------- -------- ------------ -------
Notes and debentures $ 65,472 $ 74,525 $ 64,514 $73,738
Investment securities 2,272 2,272 2,092 2,092
====================== ======= ======= === ======= ======
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. The fair value measurements used for notes and
debentures are considered Level 2 under the Fair Value Measurement
and Disclosure framework.
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 $146 less than one
year, $59 within one to three years, $75 within three to five
years, and $280 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 March 31, 2012 and December 31,
2011:
March 31, 2012
------------------------------------------------------------------------------------
Level 1 Level 2 Level 3 Total
----------------------------- ----------------------- ----------------------- ----------- ---------------------
Available-for-Sale Securities
Domestic equities $ 1,073 $ - $ - $ 1,073
International equities 534 - - 534
Fixed income bonds - 560 - 560
Asset Derivatives(1)
Interest rate swaps - 434 - 434
Cross-currency swaps - 248 - 248
Foreign exchange contracts - 2 - 2
Liability Derivatives(1)
Cross-currency swaps - (701) - (701)
Foreign exchange contracts - (4) - (4)
============================== === ================== === ================== === ====== =================
December 31, 2011
------------------------------------------------------------------------------------
Level 1 Level 2 Level 3 Total
----------------------------- ----------------------- ----------------------- ----------- ---------------------
Available-for-Sale Securities
Domestic equities $ 947 $ - $ - $ 947
International equities 495 - - 495
Fixed income bonds - 562 - 562
Asset Derivatives(1)
Interest rate swaps - 521 - 521
Cross-currency swaps - 144 - 144
Foreign exchange contracts - 2 - 2
Liability Derivatives(1)
Cross-currency swaps - (820) - (820)
Interest rate locks - (173) - (173)
Foreign exchange contracts - (9) - (9)
============================== === ================== === ================== === ====== =================
(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 three
months ended March 31, 2012 and March 31, 2011, 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 three months ended March
31, 2012 and March 31, 2011, 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. Over the next 12 months, we expect to
reclassify $46 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks. In
February 2012, we utilized $800 notional value of interest rate
locks related to our February 2012 debt issuance.
We hedge a 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 nondesignated, 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 three months ended March 31, 2012
and March 31, 2011, 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 March 31, 2012, we had posted collateral of
$39 (a deposit asset) and held collateral of $23 (a receipt
liability). Under the agreements, if our credit rating had been
downgraded one rating level by Moody's Investors Service and Fitch,
Inc. before the final collateral exchange in March, we would have
been required to post additional collateral of $102. At December
31, 2011, we had posted collateral of $98 (a deposit asset) and had
no held collateral (a receipt liability). 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:
December
March 31, 31,
2012 2011
--------------------------- ----------- --------
Interest rate swaps $ 7,800 $ 8,800
Cross-currency swaps 7,502 7,502
Interest rate locks - 800
Foreign exchange contracts 208 207
--------------------------- ------- -------
Total $ 15,510 $ 17,309
=========================== ======= =======
Following is the related hedged items affecting our financial position
and performance:
Effect of Derivatives on the Consolidated Statements
of Income
---------------------------------------------------------- ---- ------- -------
Three months ended
----------------------------------------------------------
March 31, March 31,
Fair Value Hedging Relationships 2012 2011
---------------------------------------------------------- ------------- -----------
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (61) $ (86)
Gain (Loss) on long-term debt 61 86
========================================================== ==== ======= =======
In addition, the net swap settlements that accrued and settled
in the quarter ended March 31 were also reported as reductions of
interest expense.
Three months ended
--------------------------------------------------------
March 31, March 31,
Cash Flow Hedging Relationships 2012 2011
-------------------------------------------------------- ------------- -----------
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ (5) $ (32)
Interest rate locks:
Gain (Loss) recognized in accumulated OCI - 35
Interest income (expense) reclassified from accumulated
OCI into income (9) (3)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI 5 8
======================================================== === ======== =======
The balance of the unrealized derivative gain (loss) in
accumulated OCI was $(415) at March 31, 2012 and $(421) at December
31, 2011.
NOTE 6. SUBSEQUENT EVENTS
Advertising Solutions Sale On April 9, 2012, we announced an
agreement to sell our Advertising Solutions and Interactive
businesses to an affiliate of Cerberus Capital Management, L.P. for
approximately $750 in cash (subject to adjustment primarily related
to timing of closing), a $200 note and a 47% equity interest in the
new company (known as YP Holdings LLC). The transaction is expected
to close in mid-year 2012 and we do not expect to record a material
gain or loss.
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,
2011. 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 first quarter
of 2012 and 2011 are summarized as follows:
First Quarter
-------------------------
Percent
2012 2011 Change
-------------------------------------- ------- ------- -------
Operating Revenues $31,822 $31,247 1.8%
-------------------------------------- ------ ------
Operating expenses
Cost of services and sales 12,913 12,813 0.8
Selling, general and administrative 8,248 8,042 2.6
Depreciation and amortization 4,560 4,584 (0.5)
-------------------------------------- ------ ------
Total Operating Expenses 25,721 25,439 1.1
-------------------------------------- ------ ------
Operating Income 6,101 5,808 5.0
-------------------------------------- ------ ------
Income Before Income Taxes 5,517 5,270 4.7
Net Income 3,652 3,468 5.3
Net Income Attributable to AT&T $ 3,584 $ 3,408 5.2%
====================================== ====== ====== =======
Overview
Operating income increased $293, or 5.0%, in the first quarter
of 2012. The increase was primarily due to continued growth in
wireless service and equipment revenue, driven mostly by subscriber
and data revenue growth, along with increased revenues from
AT&T U-verse(R) (U-verse) services and strategic business
services. Partially offsetting the increased revenues were higher
operating expenses primarily related to growth in U-verse
subscribers and commissions on smartphones. Our operating income
margin in the first quarter increased from 18.6% in 2011 to 19.2%
in 2012. The table above reflects the reclassification of certain
cost of services and sales expenses to selling, general and
administrative expenses based on an enhanced activity-based expense
tracking system. This reclassification was not material and did not
impact total operating expenses, operating income or our operating
income margin.
Operating revenues increased $575, or 1.8%, in the first quarter
of 2012. The increase reflects continued growth in wireless service
and equipment revenues, driven by growth in the subscriber base and
the increasing percentage of smartphone customers which contribute
to higher wireless data revenues. In addition, higher wireline data
revenues from U-verse services and strategic business services
contributed to the increase. The increases were partially offset by
continued declines in Wireline voice and print directory
advertising revenues.
Revenue growth continues to be tempered by declines in our voice
revenues. Total switched access lines decreased 12.7% since March
31, 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 $100, or 0.8%, in
the first quarter of 2012. The increases were primarily due to
increased wireline costs of goods sold attributable to U-verse
subscriber growth, higher Universal Service Fund (USF) fees and
wireless network costs.
Selling, general and administrative expenses increased $206, or
2.6%, in the first quarter of 2012. The increases were primarily
due to higher employee related expenses and increased commissions
paid on smartphone upgrades. The increases were partially offset by
decreased sales and advertising costs.
Depreciation and amortization expense decreased $24, or 0.5%, in
the first quarter of 2012. The decrease is primarily related to
lower amortization of intangibles for customer lists related to
acquisitions, partially offset by increased depreciation associated
with ongoing capital spending for network upgrades and
expansion.
Interest expense increased $13, or 1.5%, in the first quarter of
2012. The increase in interest expense was primarily due to higher
amortization expense associated with the early redemption of
debt.
Equity in net income of affiliates decreased $26, or 10.4%, in
the first quarter of 2012 primarily due to the sale of our
ownership in Telefonos de Mexico, S.A. de C.V. (Telmex) to America
Movil, S.A. de C.V. (America Movil) in the fourth quarter of
2011.
Other income (expense) - net We had other income of $52 in the
first quarter of 2012, compared to other income of $59 in the first
quarter of 2011. Results for first quarter 2012 included a $10 gain
on the sale of investments, $33 of leveraged lease income and $15
of interest and dividend income. Results for first quarter 2011
included a $40 net gain on the sale of investments, $7 of leveraged
lease income and $13 of interest and dividend income.
Income taxes increased $63, or 3.5%, in the first quarter of
2012. Our effective tax rate was 33.8% for the first quarter 2012,
compared to 34.2% for first quarter 2011.
Selected Financial and Operating Data
---------------------------------------------- ------- -------
March 31,
2012 2011
---------------------------------------------- ------- -------
Wireless customers (000) 103,940 97,519
Network access lines in service (000) 35,436 40,596
Total wireline broadband connections (000)(1) 16,530 16,486
Debt ratio(2) 38.4% 36.6%
Ratio of earnings to fixed charges(3) 5.24 5.25
Number of AT&T employees 252,330 260,690
============================================== ======= =======
(1) Prior-year amounts restated to conform to current-period
reporting methodology.
(2) 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 available to pay down debt. See our "Liquidity and Capital
Resources" section for discussion.
(3) See Exhibit 12.
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 3 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 based on our strategic direction of the
business, needs of the network (wireless or wireline) providing
services and other assets needed to provide emerging services to
our customers. 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 Wireless segment results have
been restated to include the operating results of a subsidiary that
provides services for subscribers to wirelessly monitor their homes
that was previously reported in the Wireline segment's results.
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 Wireline segment results have been restated to
exclude the operating results of the business moved to our Wireless
segment and to include the operating results of customer
information services, which were previously reported in our Other
segment's results.
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. In April 2012, we announced an agreement to sell our
Advertising Solutions and Interactive businesses (see Note 6).
The Other segment includes 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
plans. The Other segment results have been restated to exclude the
operating results of customer information services, which are now
reported in our Wireline segment's results.
Operations and support expenses 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 service
costs, net of amounts capitalized as part of construction labor,
are also included to the extent that they are associated with these
employees. Our Wireless and Wireline segments also include certain
network planning and engineering expenses, information technology,
our repair technicians and repair services, and property taxes as
operations and support expenses.
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
----------------------------------- ------ ------ -------
First Quarter
-------------------------
Percent
2012 2011 Change
----------------------------------- ------- ------- -------
Segment operating revenues
Service $14,566 $13,961 4.3%
Equipment 1,570 1,349 16.4
----------------------------------- ------ ------
Total Segment Operating Revenues 16,136 15,310 5.4
----------------------------------- ------ ------
Segment operating expenses
Operations and support 10,083 9,861 2.3
Depreciation and amortization 1,666 1,506 10.6
----------------------------------- ------ ------
Total Segment Operating Expenses 11,749 11,367 3.4
----------------------------------- ------ ------
Segment Operating Income 4,387 3,943 11.3
Equity in Net Loss of Affiliates (13) (4) -
----------------------------------- ------ ------
Segment Income $ 4,374 $ 3,939 11.0%
=================================== ====== ====== =======
The following table highlights other key measures of performance
for the Wireless segment:
First Quarter
--------------------------
Percent
2012 2011 Change
------------------------------------------------- -------- ------- -------
Wireless Subscribers (000)(1) 103,940 97,519 6.6%
Gross Subscriber Additions (000)(2) 5,278 5,907 (10.6)
Net Subscriber Additions (000)(2) 726 1,984 (63.4)
Total Churn 1.47% 1.36% 11 BP
Postpaid Subscribers (000) 69,403 68,062 2.0%
Net Postpaid Subscriber Additions (000)(2) 187 62 -
Postpaid Churn 1.10% 1.18% (8) BP
Prepaid Subscribers (000) 7,368 6,613 11.4%
Net Prepaid Subscriber Additions (000)(2) 125 85 47.1
Reseller Subscribers (000) 13,869 12,241 13.3%
Net Reseller Subscriber Additions (000)(2) 184 561 (67.2)
Connected Device Subscribers (000)(3) 13,300 10,603 25.4%
Net Connected Device Subscriber Additions
(000) 230 1,276 (82.0)
================================================= ======== ======= =======
(1) Represents 100% of AT&T Mobility wireless customers.
(2) Excludes merger and acquisition-related additions during the period.
(3) Includes data-centric devices such as eReaders, home security
and automobile monitoring systems, and fleet management. Tablets are
split between postpaid and prepaid subscribers.
Wireless Subscriber Relationships
As the wireless industry continues to mature, we believe that
future wireless growth will increasingly depend on our ability to
offer innovative services and devices and a wireless network that
has sufficient spectrum and capacity to support these innovations
and make them available to more subscribers. To attract and retain
subscribers, we offer a broad handset line and a wide variety of
service plans.
Our handsets offerings include at least 16 smartphones (handsets
with voice and data capabilities using an advanced operating system
to better manage data and Internet access) from nine manufacturers.
As technology evolves, rapid changes are occurring in the handset
and device industry with the continual introduction of new models
(e.g., various Android, Apple, Windows and other smartphones) or
significant revisions of existing models. We believe a broad
offering of a wide variety of smartphones reduces dependence on any
single operating system or manufacturer as these products continue
to evolve in terms of technology and subscriber appeal. In the
first quarter of 2012, we continued to see increasing use of
smartphones by our postpaid subscribers. Of our total postpaid
subscriber base, 59.3% use smartphones, up from 46.2% a year
earlier. 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. 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.
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.
Our postpaid subscribers typically sign a two-year contract,
which includes discounted handsets and early termination fees.
About 88% of our subscribers are on FamilyTalk(R) Plans (family
plans) or business discount plans, which provide for service on
multiple handsets at discounted rates, and such subscribers tend to
have higher retention and lower churn rates. During the first
quarter of 2011, we introduced our Mobile to Any Mobile feature,
which enables our new and existing subscribers with qualifying
messaging plans to make unlimited mobile calls to any mobile number
in the United States, subject to certain conditions. We also offer
data plans at different price levels (tiered data plans) to attract
a wide variety of subscribers and to differentiate us from our
competitors. Our postpaid subscribers on data plans increased 15.1%
in the first quarter of 2012, 60.9% of which were on tiered data
plans as of March 31, 2012, up from 38.3% as of March 31, 2011. A
growing percentage of our postpaid subscribers are on tiered data
plans. Such offerings intend to encourage existing subscribers to
upgrade their current services and/or add connected devices,
attract subscribers from other providers, and minimize subscriber
churn.
As of March 31, 2012, almost 30% of our postpaid smartphone
subscribers use a 4G-capable smartphone. 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.
While we are continuing to invest significant capital in expanding
our network capacity, our capacity constraints could affect the
quality of existing voice and data services and our ability to
launch new, advanced wireless broadband services, unless we are
able to obtain more spectrum. Any spectrum solution will require
that the Federal Communications Commission (FCC) make new or
existing spectrum available to the wireless industry to meet the
needs of our subscribers. We will continue to attempt to address
spectrum and capacity constraints on a market-by-market basis.
Wireless Metrics
Subscriber Additions As of March 31, 2012, we served 103.9
million wireless subscribers, an increase of 6.6%. We continue to
experience slowing growth in the industry's subscriber base as
reflected in a 10.6% decrease in gross subscriber additions (gross
additions) in the first quarter of 2012, primarily related to lower
connected device and reseller additions. Lower net subscriber
additions (net additions) in the first quarter of 2012 were
primarily attributable to lower connected device additions and
higher connected device and reseller churn. The increase in net
postpaid additions in the first quarter of 2012 reflected an
increase in postpaid tablet subscribers as well as lower postpaid
churn.
Average service revenue per user (ARPU) from postpaid
subscribers increased 1.7% in the first quarter of 2012, driven by
an increase in postpaid data services ARPU of 15.3% reflecting
greater use of smartphones and data-centric devices. The growth in
postpaid data services ARPU in the first quarter of 2012 was
partially offset by a 6.2% decrease in postpaid voice and other
service ARPU in the first quarter. Postpaid voice and other service
ARPU declined due to lower access and airtime charges, triggered in
part by continued growth in our family plans subscriber base, which
generates lower ARPU compared to ARPU for our traditional postpaid
subscribers, and lower roaming revenues. About 88% of our postpaid
smartphone subscribers are on family plans or business discount
plans.
Total ARPU declined 2.7% in the first quarter of 2012,
reflecting growth in connected device, tablet and reseller
subscribers. Connected devices and other data-centric devices, such
as tablets, have lower-priced data-only plans compared with our
postpaid smartphone plans, which have voice and data features.
Accordingly, ARPU for these subscribers is typically lower compared
to that generated from our smartphone subscribers on postpaid and
other plans. Data services ARPU increased 11.9% in the first
quarter of 2012, reflecting greater smartphone and data-centric
device use. We expect continued revenue growth from data services
as more subscribers use smartphones and data-centric devices, and
as we continue to expand our network. Voice and other service ARPU
declined 11.1% in the first quarter of 2012 due to voice access and
usage trends and a shift toward a greater percentage of
data-centric devices. 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 canceled service during a period
by the total number of wireless subscribers at the beginning of
that period. The churn rate for the period is equal to the average
of the churn rate for each month of that period. The total churn
rate was higher due to connected device and reseller churn rates in
the first quarter of 2012 due to adjustments for zero-revenue
devices. Postpaid churn was higher last year due to integration
efforts connected to a prior merger.
Operating Results
Our Wireless segment operating income margin in the first
quarter increased from 25.8% in 2011 to 27.2% in 2012. The margin
increase in the first quarter reflected higher data revenues
generated by our postpaid subscribers and operating
efficiencies.
Service revenues are comprised of local voice and data services,
roaming, long-distance and other revenue. Service revenues
increased $605, or 4.3%, in the first quarter of 2012. The
first-quarter increase consisted of the following:
-- Data service revenues increased $1,018, or 19.9%, in the
first quarter of 2012. The increase was primarily due to the
increased number of subscribers and increased Internet access by
subscribers using smartphones and data-centric devices, such as
eReaders, tablets, and mobile navigation devices. Data service
revenues accounted for 42.1% of our wireless service revenues for
the first quarter of 2012, compared to 36.6% last year.
-- Voice and other service revenues decreased $413, or 4.7%, in
the first quarter of 2012. While we had a 6.6% year-over-year
increase in the number of wireless subscribers, ARPU continues to
decline for voice and other non-data wireless services due to voice
access and usage trends.
Equipmentrevenues increased $221, or 16.4%, in the first quarter
of 2012 due to a year-over-year increase in smartphone sales as a
percentage of total device sales to postpaid subscribers. During
the first quarter of 2012, we introduced an increase in the handset
upgrade fee, which also contributed to the year-over-year increase
in equipment revenues.
Operations and support expenses increased $222, or 2.3%, in the
first quarter of 2012. The first-quarter increase was primarily due
to the following:
-- Commission expenses increased $210 due to a year-over-year
increase in smartphone sales as a percentage of total device
sales.
-- Network system, interconnect, and long-distance costs
increased $106 due to higher network traffic, personnel-related
network support costs in conjunction with our network enhancement
efforts, and higher leasing costs.
-- USF fees increased $57 primarily due to federal rate increases.
Partially offsetting these increases were the following:
-- Incollect roaming fees decreased $66 due to lower access and airtime charges.
-- Selling expenses (other than commissions) and administrative
expenses decreased $51 due primarily to a $114 decline in
advertising costs, partially offset by a $81 increase in bad debt
expense due to higher write-offs.
-- Equipment costs decreased $42 reflecting the overall decline
in upgrade activity, which was partially offset by sales of the
more expensive smartphones.
Depreciation and amortization expenses increased $160, or 10.6%,
in the first quarter of 2012. Depreciation expense increased $240,
or 18.8%, in the first quarter primarily due to ongoing capital
spending for network upgrades and expansion. Amortization expense
decreased $80, or 34.5%, in the first quarter primarily due to
lower amortization of intangibles for customer lists related to
acquisitions.
Wireline
Segment Results
--------------------------------- ------- ------- -------
First Quarter
-------------------------------
Percent
2012 2011 Change
--------------------------------- -------- -------- -----------
Segment operating revenues
Data $ 7,795 $ 7,171 8.7%
Voice 5,893 6,550 (10.0)
Other 1,240 1,330 (6.8)
--------------------------------- ------- -------
Total Segment Operating Revenues 14,928 15,051 (0.8)
--------------------------------- ------- -------
Segment operating expenses
Operations and support 10,297 10,312 (0.1)
Depreciation and amortization 2,808 2,958 (5.1)
--------------------------------- ------- -------
Total Segment Operating Expenses 13,105 13,270 (1.2)
--------------------------------- ------- -------
Segment Income $ 1,823 $ 1,781 2.4%
================================= ======= ======= =======
Operating Results
Our Wireline segment operating income increased $42, or 2.4%, in
the first quarter of 2012. Segment operating income margin in the
first quarter increased from 11.8% in 2011 to 12.2% in 2012. Our
increased operating margins reflect increased data revenue growth
and lower depreciation and amortization expenses. Our operating
income and margins continued to be pressured by access line
declines as our 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.
Data revenues increased $624, or 8.7%, in the first quarter of
2012. Data revenues accounted for approximately 52% of wireline
operating revenues in the first quarter of 2012 and 48% in the
first quarter of 2011. Data revenues include strategic business, IP
and traditional data services.
-- Strategic business services, which include Ethernet, Virtual
Private Networks (VPN), Hosting, IP Conferencing and application
services, increased $248, or 19.0%, in the first quarter, primarily
driven by VPN and Ethernet revenue which increased by $160 and $74,
respectively.
-- IP data revenues (excluding strategic services) increased
$476, or 14.9%, in the first quarter primarily driven by higher
U-verse penetration and broadband additions. In the first quarter,
U-verse video revenues increased $258, broadband high-speed
Internet access revenue increased $127 and U-verse voice revenue
increased $61. The increase in IP data revenues reflects continued
growth in the customer base and migration from other traditional
circuit-based services. New and existing U-verse customers are
shifting from traditional landlines and DSL to our U-verse Voice
and High Speed Internet access offerings.
-- Traditional data revenues, which include transport (excluding
Ethernet) and packet-switched data services, decreased $100, or
3.8%, in the first quarter. This decrease was primarily due to
lower demand as customers continue to shift to IP-based technology
such as VPN, U-verse High Speed Internet access and managed
Internet services. We expect these traditional services to continue
to decline as a percentage of our overall data revenues.
Voice revenues decreased $657, or 10.0%, in the first quarter of
2012 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 $402, or 10.0%. The decrease
was driven primarily by a 12.7% 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 $246, or 11.0%. Lower demand
for long-distance service from global businesses and consumer
customers decreased revenues $201 in the first quarter.
Additionally, expected declines in the number of our national
mass-market customers decreased revenues $45 in the first
quarter.
Other operating revenues decreased $90, or 6.8%, in the first
quarter of 2012. Major items included in other operating revenues
are integration services and customer premises equipment,
government-related services and outsourcing, which account for
approximately 60% of total other revenue for both periods.
Operations and support expenses decreased $15, or 0.1%, in the
first quarter of 2012. 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 compensation and benefits.
The first quarter decrease was primarily due to lower operating
tax expense of $56, nonemployee-related expense of $51, decreased
traffic compensation expense of $49, decreased employee related
expense of $45, reflecting ongoing workforce reductions
initiatives, and lower bad debt expense of $32 due to lower revenue
and improvements in cash collections. These decreases were
partially offset by increased cost of sales of $123, primarily
related to U-verse related expenses, increased agent commission
expense of $52 and increased USF fees of $44.
Depreciation and amortization expenses decreased $150, or 5.1%,
for the first quarter of 2012. Depreciation decreased $82, or 3.0%,
primarily due to assets becoming fully depreciated. Amortization
decreased $68, or 29.3%, primarily related to lower amortization of
intangibles for the customer lists associated with
acquisitions.
Supplemental Information
Telephone, Wireline Broadband and Video Connections Summary
Our switched access lines and other services provided by our
local exchange telephone subsidiaries at March 31, 2012 and 2011
are shown below.
March 31, March 31, Percent
(in 000s) 2012 2011 Change
-------------------------------------------- --------- --------- ----------
Switched Access Lines
Retail Consumer 18,095 21,618 (16.3)%
Retail Business(1) 15,256 16,649 (8.4)
-------------------------------------------- --------- ---------
Retail Subtotal(1) 33,351 38,267 (12.8)
-------------------------------------------- --------- ---------
Wholesale Subtotal(1) 2,042 2,271 (10.1)
Total Switched Access Lines(2) 35,436 40,596 (12.7)%
============================================ ========= ========= ======
Total Retail Consumer Voice Connections(5) 20,537 23,479 (12.5)%
============================================ ========= ========= ======
Total Wireline Broadband Connections(1,3,6) 16,530 16,486 0.3%
============================================ ========= ========= ======
Satellite service(4) 1,732 1,886 (8.2)%
U-verse video 3,991 3,205 24.5
-------------------------------------------- --------- ---------
Video Connections 5,723 5,091 12.4%
============================================ ========= ========= ======
(1) Prior-period amounts restated to conform to current-period
reporting methodology.
(2) Total switched access lines include payphone access lines of
43 at March 31, 2012 and 58 at March 31, 2011.
(3) Total wireline broadband connections include DSL, U-verse
High Speed Internet and satellite broadband.
(4) Satellite service includes connections under our agency and
resale agreements.
(5) Includes consumer U-verse VoIP connections of 2,442 at March
31, 2012 and 1,861 at March 31, 2011.
(6) Includes U-verse High Speed Internet connections of 5,941 at
March 31, 2012 and 3,693 at March 31, 2011.
Advertising Solutions
Segment Results
--------------------------------- ---- ---- -------
First Quarter
---------------------
Percent
2012 2011 Change
--------------------------------- ----- ----- -------
Total Segment Operating Revenues $ 744 $ 868 (14.3)%
--------------------------------- ---- ----
Segment operating expenses
Operations and support 547 572 (4.4)
Depreciation and amortization 77 106 (27.4)
--------------------------------- ---- ----
Total Segment Operating Expenses 624 678 (8.0)
--------------------------------- ---- ----
Segment Income $ 120 $ 190 (36.8)%
================================= ==== ==== =======
Operating Results
Our Advertising Solutions segment operating income margin
decreased from 21.9% in the first quarter of 2011 to 16.1% in the
first quarter 2012. The declines were primarily attributable to
decreased print advertising revenue. On April 9, 2012, we announced
an agreement to sell our Advertising Solutions business unit. As
part of the terms of the transaction, we will receive a 47% equity
interest in the new entity. The transaction is expected to close in
mid-year 2012 (See Note 6).
Operating revenues decreased $124, or 14.3%, in the first
quarter of 2012, reflecting migration from print to online
search.
Operating expenses decreased $54, or 8.0%, in the first quarter
of 2012, primarily driven by lower amortization expense of $34, due
to an accelerated method of customer list amortization and
decreased product related expense of $25.
Other
Segment Results
------------------------------------------ ----- ----- -------
First Quarter
-----------------------
Percent
2012 2011 Change
------------------------------------------ ------ ------ -------
Total Segment Operating Revenues $ 14 $ 18 (22.2)%
------------------------------------------ ----- -----
Total Segment Operating Expenses 243 124 96.0
------------------------------------------ ----- -----
Segment Operating Loss (229) (106) -
------------------------------------------ ----- -----
Equity in Net Income of Affiliates 236 253 (6.7)
------------------------------------------ ----- -----
Segment Income from Continuing Operations $ 7 $ 147 (95.2)%
========================================== ===== ===== =======
The Other segment includes results from all corporate and other
operations and 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.
Operating revenues decreased $4, or 22.2%, in the first quarter
of 2012 primarily due to reduced leased equipment revenues.
Operating expenses increased $119, or 96.0%, in the first
quarter of 2012. Increased operating expenses in the first quarter
were primarily due to higher employee-related charges.
Our Other segment also includes our equity investments in
America Movil, 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 decreased $17, or 6.7%, in
the first quarter of 2012 primarily related to our sale of Telmex
to America Movil in late 2011.
Our equity in net income of affiliates by major investment is
listed below:
First Quarter
-------------------
2012 2011
-------------------------------------------------
America Movil $ 237 $ 227
Telmex - 25
Other (1) 1
------------------------------------------------- ----- ----
Other Segment Equity in Net Income of Affiliates $ 236 $ 253
================================================= ===== ====
OTHER BUSINESS MATTERS
U-verse Services We had approximately 4 million U-verse TV
subscribers as of March 31, 2012. U-verse penetration of eligible
living units at the end of the first quarter of 2012, rose to 16.8%
and 27.1% across areas marketed to for 42 months or more.
We believe that our U-verse TV service is 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 requests to offer this service or have refused us
permission to use our existing or new right-of-ways to deploy or
activate our U-verse-related equipment, services and products,
resulting in litigation. Petitions have been filed at the 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 and extent of our
U-verse offerings.
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 ERISA. In October 2006, the court certified two classes.
In May 2008, the court ruled that the concession was an ERISA
pension plan. 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 appealed the
judgment to the Fifth Circuit Court of Appeals and on April 16,
2012, the Fifth Circuit affirmed the lower court's judgment in our
favor dismissing the case. Plaintiffs have the right to appeal the
decision to the U.S. Supreme Court.
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. In December 2011, the Ninth Circuit Court
of Appeals affirmed the dismissals in all cases. In March 2012, the
Plaintiffs in all but three cases filed a petition for writ of
certiorari with the United States Supreme Court. The plaintiffs in
two of the three cases have filed petitions for rehearing with the
Ninth Circuit Court of Appeals, of which one has been denied and
one is pending. The plaintiffs in the third case did not file a
petition in either court. Management believes that any further
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.
Wage and Hour Litigation Two wage and hour cases were filed in
federal court in December 2009 each asserting claims under the Fair
Labor Standards Act (Luque et al. v. AT&T Corp. et al., U.S.
District Court in the Northern District of California) (Lawson et
al. v. BellSouth Telecommunications, Inc., U.S. District Court in
the Northern District of Georgia). Luque also alleges violations of
a California wage and hour law, which varies from the federal law.
In each case, plaintiffs allege that certain groups of wireline
supervisory managers were entitled to paid overtime and seek class
action status as well as damages, attorneys' fees and/or penalties.
Plaintiffs have been granted conditional collective action status
for their federal claims and also are expected to seek class action
status for their state law claims. We have contested the collective
and class action treatment of the claims, the merits of the claims
and the method of calculating damages for the claims. A jury
verdict was entered in favor of the Company in October 2011 in the
U.S. District Court in Connecticut on similar FLSA claims. In April
2012, we settled these cases, subject to court approval, on terms
that will not have a material effect on the Company's financial
statements.
Advertising Solutions and Interactive Business Sale On April 9,
2012, we announced an agreement to sell our Advertising Solutions
and Interactive businesses to an affiliate of Cerberus Capital
Management for approximately $750 in cash (subject to adjustment
primarily related to timing of closing), a $200 note and a 47%
equity interest in the new company (known as YP Holdings LLC). The
transaction is expected to close in mid-year 2012 and we do not
expect to record a material gain or loss.
Labor Contracts Contracts covering approximately 40,000
collectively-bargained wireline employees expired in early April
2012. The Company and the employees' union are continuing to
negotiate new contracts. In the absence of an effective contract,
the union is entitled to call a work stoppage.
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 or expanded certain
regulatory requirements that were imposed decades ago on our
traditional wireline subsidiaries when they operated as legal
monopolies. 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. At the same time, we also seek
to ensure that legacy regulations are not extended to broadband or
wireless services, which are subject to vigorous competition.
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 that the explosive growth of
bandwidth-intensive wireless data services requires the Government
to make more spectrum available. We seek to ensure that we have the
opportunity to obtain the spectrum we need to provide our customers
with high-quality service. 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.
Intercarrier Compensation/Universal Service In October 2011, the
FCC adopted an order fundamentally overhauling its high-cost
universal service program, through which it disburses approximately
$4,500 per year to carriers providing telephone service in
high-cost areas, and its existing intercarrier compensation (ICC)
rules, which govern payments between carriers for the exchange of
traffic. The order adopts rules to address immediately certain
practices that artificially increase ICC payments, as well as other
practices to avoid such payments. The order also establishes a new
ICC regime that will result in the elimination of virtually all
terminating switched access charges and reciprocal compensation
payments over a six-year transition. In the order, the FCC also
repurposed its high-cost universal service program to encourage
providers to deploy broadband facilities in unserved areas. To
accomplish this goal, the FCC will transition support amounts
disbursed through its existing high-cost program to its new Connect
America Fund, which eventually will award targeted high-cost
support amounts to providers through a competitive process. We
support many aspects of the order and new rules. AT&T and other
parties have filed appeals of the FCC's rules, which are pending in
the Tenth Circuit Court of Appeals. Our appeal challenges only
certain, narrow aspects of the order; AT&T intervened in
support of the broad framework adopted by the order. We do not
expect the FCC's rules to have a material impact on our operating
results.
LIQUIDITY AND CAPITAL RESOURCES
We had $2,442 in cash and cash equivalents available at March
31, 2012. Cash and cash equivalents included cash of $365 and money
market funds and other cash equivalents of $2,077. In the first
three months of 2012, cash outflows were primarily used to meet the
needs of the business, including, but not limited to, payment of
operating expenses, funding capital expenditures and repayment of
debt. In addition, we returned value to stockholders through
dividends and by repurchasing shares of common stock. These
outflows were offset by cash provided by cash receipts from
operations and the issuance of long-term debt. We discuss many of
these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first three months of 2012, cash provided by
operating activities was $7,796, compared to $7,732 for the first
three months of 2011. Current year operating cash was positively
affected by our election to pay $200 of retiree postretirement
expenses from plan assets, as opposed to paying these out of
corporate funds.
Cash Used in or Provided by Investing Activities
For the first three months of 2012, cash used in investing
activities totaled $4,737 and consisted primarily of $4,261 for
capital expenditures, excluding interest during construction.
Acquisitions of $433 included wireless spectrum purchases totaling
$376.
Virtually all of our capital expenditures are spent on our
wireless and wireline subsidiaries' networks, our U-verse services
and support systems for our communications services. Capital
spending in our Wireless segment, excluding capitalized interest
during construction, was $2,278, or 53%, of our total spending and
increased 23% in the first three months. Wireless expenditures were
primarily used for network capacity expansion, integration and
upgrades to our High-Speed Downlink Packet Access network and the
deployment of LTE (4G) equipment for our commercial launch. The
Wireline segment which includes U-verse services represented 46% of
the total capital expenditures, excluding interest during
construction, and decreased 13% in the first three months.
We continue to expect that our capital expenditures during 2012
will be approximately $20,000, assuming that the regulatory
environment remains favorable for investment. 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 first three months of 2012, our financing activities
included proceeds of $2,986 from the February 2012 issuance of
$1,000 of 0.875% global notes due 2015, $1,000 of 1.6% global notes
due 2017, and $1,000 of 3.0% global notes due 2022.
In February 2012, we redeemed $1,200 of outstanding 6.375%
senior notes due 2056 and in March 2012, we redeemed $1,000 of
5.875% notes due August 2012.
In December 2010, the Board of Directors authorized the
repurchase of up to 300 million shares of AT&T common stock. We
began buying back stock under this program in 2012. As of March 31,
2012, we have repurchased 67.7 million shares totaling $2,066. We
expect to continue buying back stock under this program.
We paid dividends of $2,606 during the first three months of
2012, compared with $2,540 for the first three months of 2011,
primarily reflecting an increase in the quarterly dividend approved
by our Board of Directors in December 2011. Dividends declared by
our Board of Directors totaled $0.44 per share in the first quarter
of 2012 and $0.43 per share for share for the first three months of
2011. 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 March 31, 2012, we had $6,775 of debt maturing within one
year, all of which were long-term debt maturities. 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 2012.
-- An accreting zero-coupon note that 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.
We have two revolving credit agreements with a syndicate of
banks: a $5,000 agreement expiring in December 2015 and a $3,000
agreement expiring in December 2012. Advances under either
agreement may 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 multi-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 March 31, 2012, 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 America Movil. At March
31, 2012, our debt ratio was 38.4%, compared to 36.6% at March 31,
2011, and 38.0% at December 31, 2011. The debt ratio is affected by
the same factors that affect total capital, and reflects our recent
debt issuances.
At March 31, 2012, we had interest rate swaps with a notional
value of $7,800 and a fair value of $434.
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 $(453) at March 31, 2012. We have foreign exchange
contracts with a notional value of $208 and a net fair value of
$(2) at March 31, 2012.
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 March 31, 2012. 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 March 31,
2012.
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 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, regulations or related court decisions.
-- The final outcome of FCC and other federal agency proceedings
and reopenings of such proceedings and judicial reviews, if any, of
such proceedings, including issues relating to access charges,
intercarrier compensation, universal service, broadband deployment,
E911 services, competition, net neutrality, unbundled loop and
transport elements, availability of new spectrum from the FCC on
fair and balanced terms, 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
reviews, 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
intercarrier and other 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 development of attractive and profitable U-verse 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 wireless devices, some on an exclusive basis.
-- The availability and cost of additional wireless spectrum and
regulations and conditions relating to spectrum use, licensing and
technical standards and deployment and usage, including network
management rules.
-- Our ability to manage growth in wireless data services,
including network quality and acquisition of adequate spectrum at
reasonable costs and terms.
-- 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; or 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 1. Legal Proceedings
On March 29, 2012, attorneys in an investigation led by the
California Attorney General's Office informed the Company of
claimed violations of California state hazardous waste statutes
arising from the disposal of batteries, aerosol cans, and
electronic waste at various California facilities. The Company is
analyzing the claims while cooperating with investigators and
implementing remedial measures where appropriate. At this time, it
is possible that we could face civil penalties in excess of one
hundred thousand dollars but not in an amount that would be
material.
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. For the first quarter 2012, there were no such
material developments.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
(c) A summary of our repurchases of common stock during the first
quarter of 2012 is as follows:
(d)
(c) Maximum Number
(a) (b) (or Approximate
Total Number Dollar Value)
Total of Shares (or of Shares (or
Number Average Units) Purchased Units) That May
of Shares Price Paid as Part of Publicly Yet Be Purchased
(or Units) Per Share Announced Plans Under The Plans
Period Purchased (or Unit) or Programs(1) or Programs
------------------ ------------ -------------- --------------------- ------------------
January 1,
2012 - January
31, 2012 - $ - - 300,000,000
February 1,
2012 - February
29, 2012 36,300,000 29.95 36,300,000 263,700,000
March 1, 2012
- March 31,
2012 31,400,000 31.17 31,400,000 232,300,000
------------------ ------------ --- --------- --------------------- ------------------
Total 67,700,000 $ 30.52 67,700,000
================== ============ === ========= ===================== ==================
(1) In December 2010, we announced our stock repurchase plan, under
which our Board of Directors authorized the
repurchase of up to 300 million shares of our common stock. The
plan has no expiration date.
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.
10 Administrative Plan, amended and restated effective
March 29, 2012
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.
May 4, 2012 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
This information is provided by RNS
The company news service from the London Stock Exchange
END
QRFAPMITMBAMBRT
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