att3q0910q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended September 30, 2009
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
to
Commission
File Number 1-8610
AT&T
INC.
Incorporated
under the laws of the State of Delaware
I.R.S.
Employer Identification Number 43-1301883
208 S.
Akard St., Dallas, Texas 75202
Telephone
Number: (210) 821-4105
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes [X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer,” “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
|
[X]
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|
Accelerated
filer
|
[ ]
|
Non-accelerated
filer
|
[ ]
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
[ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
At October
31, 2009, there were 5,901 million common shares outstanding.
PART
I - FINANCIAL INFORMATION
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|
Item 1. Financial
Statements
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|
|
AT&T
INC.
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Dollars
in millions except per share amounts
|
|
(Unaudited)
|
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Operating
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
service
|
|
$ |
12,372 |
|
|
$ |
11,227 |
|
|
$ |
35,978 |
|
|
$ |
32,726 |
|
Voice
|
|
|
7,940 |
|
|
|
9,313 |
|
|
|
24,702 |
|
|
|
28,525 |
|
Data
|
|
|
6,424 |
|
|
|
6,144 |
|
|
|
18,981 |
|
|
|
18,170 |
|
Directory
|
|
|
1,162 |
|
|
|
1,333 |
|
|
|
3,622 |
|
|
|
4,114 |
|
Other
|
|
|
2,957 |
|
|
|
3,325 |
|
|
|
8,877 |
|
|
|
9,417 |
|
Total
operating revenues
|
|
|
30,855 |
|
|
|
31,342 |
|
|
|
92,160 |
|
|
|
92,952 |
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost
of sales (exclusive of depreciation and amortization shown separately
below)
|
|
|
12,885 |
|
|
|
13,022 |
|
|
|
37,605 |
|
|
|
36,914 |
|
Selling,
general and administrative
|
|
|
7,672 |
|
|
|
7,724 |
|
|
|
23,225 |
|
|
|
23,034 |
|
Depreciation
and amortization
|
|
|
4,910 |
|
|
|
4,978 |
|
|
|
14,699 |
|
|
|
14,839 |
|
Total
operating expenses
|
|
|
25,467 |
|
|
|
25,724 |
|
|
|
75,529 |
|
|
|
74,787 |
|
Operating
Income
|
|
|
5,388 |
|
|
|
5,618 |
|
|
|
16,631 |
|
|
|
18,165 |
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(853 |
) |
|
|
(858 |
) |
|
|
(2,581 |
) |
|
|
(2,577 |
) |
Equity
in net income of affiliates
|
|
|
181 |
|
|
|
257 |
|
|
|
549 |
|
|
|
712 |
|
Other
income (expense) – net
|
|
|
27 |
|
|
|
(23 |
) |
|
|
43 |
|
|
|
97 |
|
Total
other income (expense)
|
|
|
(645 |
) |
|
|
(624 |
) |
|
|
(1,989 |
) |
|
|
(1,768 |
) |
Income
Before Income Taxes
|
|
|
4,743 |
|
|
|
4,994 |
|
|
|
14,642 |
|
|
|
16,397 |
|
Income
taxes
|
|
|
1,468 |
|
|
|
1,705 |
|
|
|
4,890 |
|
|
|
5,746 |
|
Net
Income
|
|
|
3,275 |
|
|
|
3,289 |
|
|
|
9,752 |
|
|
|
10,651 |
|
Less:
Net Income Attributable to Noncontrolling Interest
|
|
|
(83 |
) |
|
|
(59 |
) |
|
|
(236 |
) |
|
|
(188 |
) |
Net
Income Attributable to AT&T
|
|
$ |
3,192 |
|
|
$ |
3,230 |
|
|
$ |
9,516 |
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|
$ |
10,463 |
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Basic
Earnings Per Share Attributable to AT&T
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|
$ |
0.54 |
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|
$ |
0.55 |
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|
$ |
1.61 |
|
|
$ |
1.76 |
|
Diluted
Earnings Per Share Attributable to AT&T
|
|
$ |
0.54 |
|
|
$ |
0.55 |
|
|
$ |
1.61 |
|
|
$ |
1.75 |
|
Weighted Average Number of
Common
Shares Outstanding
– Basic (in
millions)
|
|
|
5,901 |
|
|
|
5,893 |
|
|
|
5,899 |
|
|
|
5,938 |
|
Dividends
Declared Per Common Share
|
|
$ |
0.410 |
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|
$ |
0.400 |
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$ |
1.230 |
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|
$ |
1.200 |
|
See Notes
to Consolidated Financial Statements.
AT&T
INC.
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
Dollars
in millions except per share amounts
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,167 |
|
|
$ |
1,792 |
|
Accounts
receivable – net of allowances for
|
|
|
|
|
|
|
|
|
uncollectibles of $1,345 and
$1,270
|
|
|
14,796 |
|
|
|
16,047 |
|
Prepaid
expenses
|
|
|
1,791 |
|
|
|
1,538 |
|
Deferred
income taxes
|
|
|
991 |
|
|
|
1,014 |
|
Other
current assets
|
|
|
2,176 |
|
|
|
2,165 |
|
Total
current assets
|
|
|
25,921 |
|
|
|
22,556 |
|
Property,
plant and equipment
|
|
|
225,669 |
|
|
|
218,579 |
|
Less: accumulated depreciation and
amortization
|
|
|
(127,348 |
) |
|
|
(119,491 |
) |
Property,
Plant and Equipment – Net
|
|
|
98,321 |
|
|
|
99,088 |
|
Goodwill
|
|
|
71,727 |
|
|
|
71,829 |
|
Licenses
|
|
|
47,946 |
|
|
|
47,306 |
|
Customer
Lists and Relationships – Net
|
|
|
7,814 |
|
|
|
10,582 |
|
Other
Intangible Assets – Net
|
|
|
5,656 |
|
|
|
5,824 |
|
Investments
in Equity Affiliates
|
|
|
2,813 |
|
|
|
2,332 |
|
Other
Assets
|
|
|
6,370 |
|
|
|
5,728 |
|
Total
Assets
|
|
$ |
266,568 |
|
|
$ |
265,245 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Debt
maturing within one year
|
|
$ |
6,755 |
|
|
$ |
14,119 |
|
Accounts
payable and accrued liabilities
|
|
|
18,093 |
|
|
|
20,032 |
|
Advanced
billing and customer deposits
|
|
|
4,036 |
|
|
|
3,849 |
|
Accrued
taxes
|
|
|
1,965 |
|
|
|
1,874 |
|
Dividends
payable
|
|
|
2,419 |
|
|
|
2,416 |
|
Total
current liabilities
|
|
|
33,268 |
|
|
|
42,290 |
|
Long-Term
Debt
|
|
|
65,909 |
|
|
|
60,872 |
|
Deferred
Credits and Other Noncurrent Liabilities
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
22,279 |
|
|
|
19,196 |
|
Postemployment
benefit obligation
|
|
|
31,750 |
|
|
|
31,930 |
|
Other
noncurrent liabilities
|
|
|
13,361 |
|
|
|
14,207 |
|
Total
deferred credits and other noncurrent liabilities
|
|
|
67,390 |
|
|
|
65,333 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Common
shares issued ($1 par value)
|
|
|
6,495 |
|
|
|
6,495 |
|
Capital
in excess of par value
|
|
|
91,678 |
|
|
|
91,728 |
|
Retained
earnings
|
|
|
38,841 |
|
|
|
36,591 |
|
Treasury
shares (at cost)
|
|
|
(21,280 |
) |
|
|
(21,410 |
) |
Accumulated
other comprehensive loss
|
|
|
(16,161 |
) |
|
|
(17,057 |
) |
Noncontrolling
interest
|
|
|
428 |
|
|
|
403 |
|
Total
stockholders’ equity
|
|
|
100,001 |
|
|
|
96,750 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
266,568 |
|
|
$ |
265,245 |
|
See Notes
to Consolidated Financial Statements.
AT&T
INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Dollars
in millions, increase (decrease) in cash and cash
equivalents
|
|
(Unaudited)
|
|
|
|
Nine months
ended
|
|
|
September
30,
|
|
|
2009
|
|
|
2008
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,752 |
|
|
$ |
10,651 |
|
Adjustments
to reconcile net income to
|
|
|
|
|
|
|
|
|
net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
14,699 |
|
|
|
14,839 |
|
Provision for uncollectible
accounts
|
|
|
1,384 |
|
|
|
1,297 |
|
Deferred income tax
expense
|
|
|
2,574 |
|
|
|
4,063 |
|
Net (gain) loss from impairment
on sale of investments
|
|
|
89 |
|
|
|
(2 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(133 |
) |
|
|
(1,597 |
) |
Other
current assets
|
|
|
(288 |
) |
|
|
616 |
|
Accounts
payable and accrued liabilities
|
|
|
(361 |
) |
|
|
(5,958 |
) |
Stock-based
compensation tax benefit
|
|
|
- |
|
|
|
(15 |
) |
Other -
net
|
|
|
(2,235 |
) |
|
|
(1,121 |
) |
Total
adjustments
|
|
|
15,729 |
|
|
|
12,122 |
|
Net
Cash Provided by Operating Activities
|
|
|
25,481 |
|
|
|
22,773 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Construction
and capital expenditures
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(11,067 |
) |
|
|
(14,388 |
) |
Interest during
construction
|
|
|
(553 |
) |
|
|
(455 |
) |
Acquisitions,
net of cash acquired
|
|
|
(184 |
) |
|
|
(10,086 |
) |
Dispositions
|
|
|
205 |
|
|
|
1,444 |
|
Investments
in securities, net of sales
|
|
|
(14 |
) |
|
|
(103 |
) |
Sale
of other investments
|
|
|
- |
|
|
|
436 |
|
Other
|
|
|
44 |
|
|
|
33 |
|
Net
Cash Used in Investing Activities
|
|
|
(11,569 |
) |
|
|
(23,119 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Net
change in short-term borrowings with
|
|
|
|
|
|
|
|
|
original maturities of three
months or less
|
|
|
(3,918 |
) |
|
|
5,188 |
|
Issuance
of long-term debt
|
|
|
8,161 |
|
|
|
10,924 |
|
Repayment
of long-term debt
|
|
|
(6,170 |
) |
|
|
(3,143 |
) |
Purchase
of treasury shares
|
|
|
- |
|
|
|
(6,077 |
) |
Issuance
of treasury shares
|
|
|
8 |
|
|
|
317 |
|
Dividends
paid
|
|
|
(7,252 |
) |
|
|
(7,150 |
) |
Stock-based
compensation tax benefit
|
|
|
- |
|
|
|
15 |
|
Other
|
|
|
(366 |
) |
|
|
(104 |
) |
Net
Cash Used in Financing Activities
|
|
|
(9,537 |
) |
|
|
(30 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,375 |
|
|
|
(376 |
) |
Cash
and cash equivalents beginning of year
|
|
|
1,792 |
|
|
|
1,970 |
|
Cash
and Cash Equivalents End of Period
|
|
$ |
6,167 |
|
|
$ |
1,594 |
|
|
|
|
|
|
|
|
|
|
Cash
paid during the nine months ended September 30 for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
3,307 |
|
|
$ |
3,068 |
|
Income taxes, net of
refunds
|
|
$ |
2,535 |
|
|
$ |
5,217 |
|
See Notes
to Consolidated Financial Statements.
|
|
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
Dollars
and shares in millions, except per share amounts
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Nine
months ended
|
|
|
|
September
30, 2009
|
|
|
|
Shares
|
|
|
Amount
|
|
Common
Stock
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
6,495 |
|
|
$ |
6,495 |
|
Balance
at end of period
|
|
|
6,495 |
|
|
$ |
6,495 |
|
|
|
|
|
|
|
|
|
|
Capital
in Excess of Par Value
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
|
|
|
$ |
91,728 |
|
Issuance
of shares
|
|
|
|
|
|
|
26 |
|
Share-based
payments
|
|
|
|
|
|
|
(76 |
) |
Balance
at end of period
|
|
|
|
|
|
$ |
91,678 |
|
|
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
|
|
|
$ |
36,591 |
|
Net
income attributable to AT&T ($1.61 per diluted share)
|
|
|
|
|
|
|
9,516 |
|
Dividends
to stockholders ($1.23 per share)
|
|
|
|
|
|
|
(7,255 |
) |
Other
|
|
|
|
|
|
|
(11 |
) |
Balance
at end of period
|
|
|
|
|
|
$ |
38,841 |
|
|
|
|
|
|
|
|
|
|
Treasury
Shares
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(602 |
) |
|
$ |
(21,410 |
) |
Issuance
of shares
|
|
|
7 |
|
|
|
130 |
|
Balance
at end of period
|
|
|
(595 |
) |
|
$ |
(21,280 |
) |
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss), net of tax
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
|
|
|
$ |
(17,057 |
) |
Other
comprehensive income (see Note 2)
|
|
|
|
|
|
|
896 |
|
Balance
at end of period
|
|
|
|
|
|
$ |
(16,161 |
) |
|
|
|
|
|
|
|
|
|
Noncontrolling
Interest
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
|
|
|
$ |
403 |
|
Net
income
|
|
|
|
|
|
|
236 |
|
Distributions
|
|
|
|
|
|
|
(209 |
) |
Translation
adjustments
|
|
|
|
|
|
|
(2 |
) |
Balance
at end of period
|
|
|
|
|
|
$ |
428 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity as of December 31, 2008
|
|
|
|
|
|
$ |
96,750 |
|
Changes
attributable to AT&T stockholders
|
|
|
|
|
|
|
3,226 |
|
Changes
attributable to noncontrolling interest
|
|
|
|
|
|
|
25 |
|
Total
stockholders’ equity as of September 30, 2009
|
|
|
|
|
|
$ |
100,001 |
|
See
Notes to Consolidated Financial Statements.
|
|
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
Dollars
in millions except per share amounts
NOTE
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of
Presentation Throughout this document, AT&T Inc. is
referred to as “AT&T,” “we” or the “Company.” The consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission that permit reduced disclosure for interim
periods. We believe that these consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the results for the interim periods shown. The results for the interim
periods are not necessarily indicative of results 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, 2008.
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.
For
interim periods, we calculate income taxes by determining an expected annual
effective tax rate and applying that rate to pre-tax income for the period. The
resulting tax expense is then adjusted for the impact of significant events or
issues that arise during the period, such as enactment of tax legislation or
resolution of tax controversies. During the third quarter of 2009, we recorded a
benefit related to the favorable resolution of federal and state audit issues,
which resulted in a decrease to our effective tax rate for the
period.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) 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.
Valuation and Other
Adjustments In accordance with GAAP, we established obligations for
expected termination benefits provided under existing plans to former or
inactive employees after employment but before retirement. These benefits
include severance payments, workers’ compensation, disability, medical
continuation coverage, and other benefits. At September 30, 2009, we had
severance accruals of $516. At December 31, 2008, we had severance accruals of
$752.
Included
in the current liabilities reported on our consolidated balance sheets are
accruals established prior to 2009. These liabilities include accruals for
severance, lease terminations and equipment removal costs associated with our
acquisitions of AT&T Corp., BellSouth Corporation and Dobson Communications
Corporation. Following is a summary of the accruals recorded at December 31,
2008, cash payments made during 2009, and the adjustments thereto.
|
|
12/31/08
|
|
|
Cash
|
|
|
Adjustments
|
|
|
9/30/09
|
|
|
|
Balance
|
|
|
Payments
|
|
|
and
Accruals
|
|
|
Balance
|
|
Severance
accruals paid from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
funds
|
|
$ |
140 |
|
|
$ |
(105 |
) |
|
$ |
(23 |
) |
|
$ |
12 |
|
Pension
and postemployment
benefit
plans
|
|
|
103 |
|
|
|
(4 |
) |
|
|
- |
|
|
|
99 |
|
Lease
terminations
|
|
|
387 |
|
|
|
(54 |
) |
|
|
(16 |
) |
|
|
317 |
|
Equipment
removal and other related costs
|
|
|
88 |
|
|
|
(38 |
) |
|
|
(6 |
) |
|
|
44 |
|
Total
|
|
$ |
718 |
|
|
$ |
(201 |
) |
|
$ |
(45 |
) |
|
$ |
472 |
|
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
Recent
Accounting Standards
Accounting Standards
Codification In June 2009, the FASB issued standards that
established the FASB Accounting Standards Codification (ASC or Codification) as
the source of authoritative GAAP by the FASB for nongovernmental entities. The
ASC supersedes all non-SEC accounting and reporting standards that existed at
the ASC’s effective date. The FASB uses Accounting Standards Updates (ASU) to
amend the ASC. These standards are effective for interim and annual periods
ending after September 15, 2009 (i.e., the quarterly period ended September 30,
2009, for us).
Subsequent
Events In May 2009, the FASB issued a standard that
established general standards of accounting for and disclosing events that occur
after the balance sheet date but before financial statements are issued or are
available for issuance. They were effective for interim and annual periods
ending after June 15, 2009 (i.e., the quarterly period ended June 30, 2009, for
us). In preparing the accompanying unaudited consolidated financial statements,
we have reviewed all known events that have occurred after September 30, 2009,
and through the filing on November 5, 2009, for inclusion in the financial
statements and footnotes.
Noncontrolling Interests
Reporting In December 2007, the FASB issued a standard that
requires noncontrolling interests held by parties other than the parent in
subsidiaries to be clearly identified, labeled, and presented in the
consolidated statements of financial position within equity, but separate from
the parent’s equity. For us, the new standard became effective January 1, 2009,
with restatement of prior financial statements and had no material impact on our
financial position and results of operations.
Fair Value Measurement and
Disclosures In April 2009, the FASB issued staff positions
that require enhanced disclosures, including interim disclosures, on financial
instruments, determination of fair value in turbulent markets, and recognition
and presentation of other-than-temporary impairments. These staff positions were
effective for interim and annual reporting periods beginning in our second
quarter of 2009, and they have increased quarterly disclosures but have not had
an impact on our financial position and results of operations (see Note
6).
In August
2009, the FASB issued ASU 2009-5, “Measuring Liabilities at Fair Value” (ASU
2009-5), which amends existing GAAP for fair value measurement guidance by
clarifying the fair value measurement requirements for liabilities that lack a
quoted price in an active market. Per the Codification, a valuation technique
based on a quoted market price for the identical or similar liability when
traded as an asset or another valuation technique (e.g., an income or market
approach) that is consistent with the underlying principles of GAAP for fair
value measurements would be appropriate. ASU 2009-5 was effective August 2009,
the issuance date, and had no material impact on our financial position or
results of operations.
In
September 2009, the FASB issued ASU 2009-12, “Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent)” (ASU 2009-12),
which provides guidance for an investor on using the net asset value per share
provided by an investee to estimate the fair value of an alternative investment
when the fair value for the primary investment is not readily determinable. It
affects certain investments that are required or permitted by GAAP to be
measured or disclosed at fair value on a recurring or nonrecurring basis. It
requires disclosures by major category of investment about certain attributes
(e.g., applicable redemption restrictions, unfunded commitments to the issuer of
the investments, and the investment strategies of that issuer). ASU 2009-12 will
be effective for interim and annual periods ending on or after December 15, 2009
(i.e., the year ending December 31, 2009, for us). Fair value standards apply
not only to the investments we hold but also to investments held by our benefit
plans. We are currently evaluating the impact on our financial position and
results of operations.
Variable Interest
Entities In June 2009, the FASB issued a standard that
requires an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity. This standard is effective for both
interim and annual periods as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009 (i.e., January 1,
2010, for us), and we are currently evaluating its impact on our financial
position and results of operations.
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
Revenue Arrangements with Multiple
Deliverables In October 2009, the FASB issued ASU 2009-13,
“Multiple-Deliverable Revenue Arrangements” (ASU 2009-13), which addresses how
revenues should be allocated among all products and services included in our
sales arrangements. It establishes a selling price hierarchy for determining the
selling price of each product or service, with vendor-specific objective
evidence (VSOE) at the highest level, third-party evidence of VSOE at the
intermediate level, and a best estimate at the lowest level. It replaces “fair
value” with “selling price” in revenue allocation guidance. It also
significantly expands the disclosure requirements for such arrangements. ASU
2009-13 will be effective prospectively for sales entered into or materially
modified in fiscal years beginning on or after June 15, 2010 (i.e., the year
beginning January 1, 2011, for us). The FASB permits early adoption of ASU
2009-13, applied retrospectively, to the beginning of the year of adoption. We
are currently evaluating the impact on our financial position and results of
operations.
Software In October
2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include
Software Elements” (ASU 2009-14), which clarifies the guidance for allocating
and measuring revenue, including how to identify software that is out of the
scope. ASU 2009-14 amends accounting and reporting guidance for revenue
arrangements involving both tangible products and software that is “more than
incidental to the tangible product as a whole” and the hardware components
will also be outside of the scope of software revenue guidance and may result in
more revenue recognized at the time of the hardware sale. Additional disclosures
will discuss allocation of revenue to products and services and the significant
judgments applied in the revenue allocation method, including impacts on the
timing and amount of revenue recognition. ASU 2009-14 will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 (i.e., the year beginning
January 1, 2011, for us). ASU 2009-14 has the same effective date, including
early adoption provisions, as ASU 2009-13. Companies must adopt ASU 2009-14 and
ASU 2009-13 at the same time. We are currently evaluating the impact on our
financial position and results of operations.
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
NOTE
2. COMPREHENSIVE INCOME
The
components of our comprehensive income for the three and nine months ended
September 30, 2009 and 2008 include net income, adjustments to stockholders’
equity for the foreign currency translation adjustment, net unrealized gain
(loss) on available-for-sale securities, net unrealized gain (loss) on cash flow
hedges and defined benefit postretirement plans. The foreign currency
translation adjustment was due to exchange rate fluctuations in our foreign
affiliates’ local currencies and the reclassification adjustment on cash flow
hedges was due to the amortization of losses from our interest rate
locks.
Following
is our comprehensive income with the respective tax impacts for the three months
and nine months periods ending September 30, 2009 and 2008:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
3,275 |
|
|
$ |
3,289 |
|
|
$ |
9,752 |
|
|
$ |
10,651 |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment (includes $6, $3, $(2) and $8 attributable
to noncontrolling interest), net of taxes of $1, $(75), $45 and
$(15)
|
|
|
2 |
|
|
|
(139 |
) |
|
|
86 |
|
|
|
(29 |
) |
Net
unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses), net of taxes of $115, $(118), $130 and
$(153)
|
|
|
229 |
|
|
|
(220 |
) |
|
|
258 |
|
|
|
(284 |
) |
Less
reclassification adjustment realized in net income, net of taxes of $(17),
$(6), $24 and $(15)
|
|
|
(34 |
) |
|
|
(12 |
) |
|
|
43 |
|
|
|
(28 |
) |
Net
unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on cross currency swaps, net of taxes of $(26), $24, $169
and $(28)
|
|
|
(52 |
) |
|
|
44 |
|
|
|
316 |
|
|
|
(52 |
) |
Unrealized
gain (loss) on interest rate locks, net of taxes of $(30), $0, $(1) and
$(2)
|
|
|
(60 |
) |
|
|
- |
|
|
|
(10 |
) |
|
|
(3 |
) |
Reclassification
adjustment for losses on cash flow hedges included in net income, net of
taxes of $2, $2, $6 and $6
|
|
|
4 |
|
|
|
4 |
|
|
|
11 |
|
|
|
13 |
|
Defined
benefit postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net actuarial (gain) loss and prior service benefit included in net
income,
net of taxes of $32, $(17), $99 and $(50)
|
|
|
64 |
|
|
|
(31 |
) |
|
|
190 |
|
|
|
(90 |
) |
Other
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
(1 |
) |
Other
comprehensive income (loss)
|
|
|
153 |
|
|
|
(355 |
) |
|
|
894 |
|
|
|
(474 |
) |
Less:
Total comprehensive income attributable to the noncontrolling
interest
|
|
|
(89 |
) |
|
|
(62 |
) |
|
|
(234 |
) |
|
|
(196 |
) |
Total Comprehensive
IncomeAttributable
to AT&T
|
|
$ |
3,339 |
|
|
$ |
2,872 |
|
|
$ |
10,412 |
|
|
$ |
9,981 |
|
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
NOTE
3. EARNINGS PER SHARE
A
reconciliation of the numerators and denominators of basic earnings per share
and diluted earnings per share for net income for the three and nine months
ended September 30, 2009 and 2008 are shown in the table below:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerators
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to AT&T
|
|
$ |
3,192 |
|
|
$ |
3,230 |
|
|
$ |
9,516 |
|
|
$ |
10,463 |
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
stock-based compensation
|
|
|
2 |
|
|
|
2 |
|
|
|
7 |
|
|
|
7 |
|
Numerator
for diluted earnings per share
|
|
$ |
3,194 |
|
|
$ |
3,232 |
|
|
$ |
9,523 |
|
|
$ |
10,470 |
|
Denominators
(000,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
5,901 |
|
|
|
5,893 |
|
|
|
5,899 |
|
|
|
5,938 |
|
Dilutive potential common
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3 |
|
|
|
6 |
|
|
|
3 |
|
|
|
12 |
|
Other stock-based
compensation
|
|
|
18 |
|
|
|
22 |
|
|
|
20 |
|
|
|
21 |
|
Denominator
for diluted earnings per share
|
|
|
5,922 |
|
|
|
5,921 |
|
|
|
5,922 |
|
|
|
5,971 |
|
Basic
earnings per share
|
|
$ |
0.54 |
|
|
$ |
0.55 |
|
|
$ |
1.61 |
|
|
$ |
1.76 |
|
Diluted
earnings per share
|
|
$ |
0.54 |
|
|
$ |
0.55 |
|
|
$ |
1.61 |
|
|
$ |
1.75 |
|
At
September 30, 2009, we had issued and outstanding options to purchase
approximately 180 million shares of AT&T common stock. The exercise prices
of options to purchase a weighted average of 158 million shares in the third
quarter and 165 million for the first nine months were above the average market
price of AT&T stock. Accordingly, we did not include these amounts in
determining the dilutive potential common shares for the respective period. At
September 30, 2009, the exercise price of 19 million share options was below
market price.
At
September 30, 2008, we had issued and outstanding options to purchase
approximately 206 million shares of AT&T common stock. The exercise prices
of options to purchase a weighted average of 173 million shares in the third
quarter and 131 million for the first nine months were above the average market
price of AT&T stock. Accordingly, we did not include these amounts in
determining the dilutive potential common shares for the respective period. At
September 30, 2008, the exercise price of 34 million share options was below
market price.
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
NOTE
4. SEGMENT INFORMATION
Our
segments are strategic business units that offer different products and services
over various technology platforms and are managed accordingly. We analyze our
various operating segments based on segment income before income taxes,
reviewing operating revenues, operating expenses (depreciation and
non-depreciation) and equity income for each segment. We make our capital
allocations decisions primarily based on the network (wireless or wireline)
providing services. Interest expense and other income (expense) – net are
managed only on a total company basis and are, accordingly, reflected only in
consolidated results. Therefore, these items are not included in the calculation
of each segment’s percentage of our consolidated results. We have four
reportable segments: (1) wireless, (2) wireline, (3) advertising
solutions and (4) other.
The
wireless segment uses our nationwide network to provide consumer and business
customers with wireless voice and advanced data communications
services.
The
wireline segment uses our regional, national and global network to provide
consumer and business customers with landline voice and data communications
services, AT&T U-verseSM TV,
high-speed broadband and voice services (U-verse) and managed networking to
business customers. Additionally, we offer satellite television services through
our agency arrangements.
The
advertising solutions segment publishes Yellow and White Pages directories and
sells advertising in various media, including directory and Internet-based
advertising, and local search.
The other
segment includes results from Sterling Commerce Inc., customer information
services and all corporate and other operations. This segment includes our
portion of the results from our international equity investments. Also included
in the other segment are impacts of management decisions affecting the company
for which management does not evaluate the individual operating
segments.
In the
following tables, we show how our segment results are reconciled to our
consolidated results. The Wireless, Wireline, Advertising Solutions and Other
columns represent the segment results of each operating segment. The
Consolidation and Elimination column adds in those line items that we manage on
a consolidated basis only: interest expense and other income
(expense) – net. This column also eliminates any intersegment
transactions included in each segment’s results.
Segment
assets at September 30, 2009 were materially unchanged from the year ended
December 31, 2008 with the exception of other segment assets. Our other segment
assets totaled $14,078, which increased $5,376, or 61.8%, primarily due to an
increase in cash.
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
For
the three months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
Consolidation
|
|
Consolidated
|
|
|
Wireless
|
|
Wireline
|
|
Solutions
|
|
Other
|
|
and
Elimination
|
|
Results
|
Revenues
from external customers
|
|
$ |
13,627 |
|
|
$ |
15,706 |
|
|
$ |
1,161 |
|
|
$ |
360 |
|
|
$ |
1 |
|
|
$ |
30,855 |
|
Intersegment
revenues
|
|
|
27 |
|
|
|
598 |
|
|
|
19 |
|
|
|
67 |
|
|
|
(711 |
) |
|
|
- |
|
Total
segment operating revenues
|
|
|
13,654 |
|
|
|
16,304 |
|
|
|
1,180 |
|
|
|
427 |
|
|
|
(710 |
) |
|
|
30,855 |
|
Operations
and support expenses
|
|
|
8,877 |
|
|
|
11,097 |
|
|
|
721 |
|
|
|
571 |
|
|
|
(709 |
) |
|
|
20,557 |
|
Depreciation
and amortization expenses
|
|
|
1,418 |
|
|
|
3,289 |
|
|
|
158 |
|
|
|
45 |
|
|
|
- |
|
|
|
4,910 |
|
Total
segment operating expenses
|
|
|
10,295 |
|
|
|
14,386 |
|
|
|
879 |
|
|
|
616 |
|
|
|
(709 |
) |
|
|
25,467 |
|
Segment
operating income (loss)
|
|
|
3,359 |
|
|
|
1,918 |
|
|
|
301 |
|
|
|
(189 |
) |
|
|
(1 |
) |
|
|
5,388 |
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
853 |
|
|
|
853 |
|
Equity
in net income of affiliates
|
|
|
- |
|
|
|
9 |
|
|
|
- |
|
|
|
172 |
|
|
|
- |
|
|
|
181 |
|
Other
income (expense) – net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27 |
|
|
|
27 |
|
Segment
income (loss) before income taxes
|
|
$ |
3,359 |
|
|
$ |
1,927 |
|
|
$ |
301 |
|
|
$ |
(17 |
) |
|
$ |
(827 |
) |
|
$ |
4,743 |
|
For
the nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
Consolidation
|
|
Consolidated
|
|
|
Wireless
|
|
Wireline
|
|
Solutions
|
|
Other
|
|
and
Elimination
|
|
Results
|
Revenues
from external customers
|
|
$ |
39,687 |
|
|
$ |
47,765 |
|
|
$ |
3,621 |
|
|
$ |
1,086 |
|
|
$ |
1 |
|
|
$ |
92,160 |
|
Intersegment
revenues
|
|
|
72 |
|
|
|
1,743 |
|
|
|
59 |
|
|
|
202 |
|
|
|
(2,076 |
) |
|
|
- |
|
Total
segment operating revenues
|
|
|
39,759 |
|
|
|
49,508 |
|
|
|
3,680 |
|
|
|
1,288 |
|
|
|
(2,075 |
) |
|
|
92,160 |
|
Operations
and support expenses
|
|
|
25,620 |
|
|
|
33,659 |
|
|
|
2,221 |
|
|
|
1,404 |
|
|
|
(2,074 |
) |
|
|
60,830 |
|
Depreciation
and amortization expenses
|
|
|
4,288 |
|
|
|
9,787 |
|
|
|
500 |
|
|
|
124 |
|
|
|
- |
|
|
|
14,699 |
|
Total
segment operating expenses
|
|
|
29,908 |
|
|
|
43,446 |
|
|
|
2,721 |
|
|
|
1,528 |
|
|
|
(2,074 |
) |
|
|
75,529 |
|
Segment
operating income (loss)
|
|
|
9,851 |
|
|
|
6,062 |
|
|
|
959 |
|
|
|
(240 |
) |
|
|
(1 |
) |
|
|
16,631 |
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,581 |
|
|
|
2,581 |
|
Equity
in net income of affiliates
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
|
|
531 |
|
|
|
1 |
|
|
|
549 |
|
Other
income (expense) – net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43 |
|
|
|
43 |
|
Segment
income (loss) before income taxes
|
|
$ |
9,851 |
|
|
$ |
6,079 |
|
|
$ |
959 |
|
|
$ |
291 |
|
|
$ |
(2,538 |
) |
|
$ |
14,642 |
|
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
For
the three months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
Consolidation
|
|
Consolidated
|
|
|
Wireless
|
|
Wireline
|
|
Solutions
|
|
Other
|
|
and
Elimination
|
|
Results
|
Revenues
from external customers
|
|
$ |
12,571 |
|
|
$ |
17,003 |
|
|
$ |
1,333 |
|
|
$ |
435 |
|
|
$ |
- |
|
|
$ |
31,342 |
|
Intersegment
revenues
|
|
|
47 |
|
|
|
547 |
|
|
|
17 |
|
|
|
66 |
|
|
|
(677 |
) |
|
|
- |
|
Total
segment operating revenues
|
|
|
12,618 |
|
|
|
17,550 |
|
|
|
1,350 |
|
|
|
501 |
|
|
|
(677 |
) |
|
|
31,342 |
|
Operations
and support expenses
|
|
|
8,838 |
|
|
|
11,456 |
|
|
|
735 |
|
|
|
396 |
|
|
|
(679 |
) |
|
|
20,746 |
|
Depreciation
and amortization expenses
|
|
|
1,401 |
|
|
|
3,352 |
|
|
|
194 |
|
|
|
29 |
|
|
|
2 |
|
|
|
4,978 |
|
Total
segment operating expenses
|
|
|
10,239 |
|
|
|
14,808 |
|
|
|
929 |
|
|
|
425 |
|
|
|
(677 |
) |
|
|
25,724 |
|
Segment
operating income (loss)
|
|
|
2,379 |
|
|
|
2,742 |
|
|
|
421 |
|
|
|
76 |
|
|
|
- |
|
|
|
5,618 |
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
858 |
|
|
|
858 |
|
Equity
in net income of affiliates
|
|
|
- |
|
|
|
9 |
|
|
|
- |
|
|
|
248 |
|
|
|
- |
|
|
|
257 |
|
Other
income (expense) – net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(23 |
) |
|
|
(23 |
) |
Segment
income before income taxes
|
|
$ |
2,379 |
|
|
$ |
2,751 |
|
|
$ |
421 |
|
|
$ |
324 |
|
|
$ |
(881 |
) |
|
$ |
4,994 |
|
For
the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
Consolidation
|
|
Consolidated
|
|
|
Wireless
|
|
Wireline
|
|
Solutions
|
|
Other
|
|
and
Elimination
|
|
Results
|
Revenues
from external customers
|
|
$ |
36,333 |
|
|
$ |
51,149 |
|
|
$ |
4,114 |
|
|
$ |
1,356 |
|
|
$ |
- |
|
|
$ |
92,952 |
|
Intersegment
revenues
|
|
|
143 |
|
|
|
1,633 |
|
|
|
60 |
|
|
|
201 |
|
|
|
(2,037 |
) |
|
|
- |
|
Total
segment operating revenues
|
|
|
36,476 |
|
|
|
52,782 |
|
|
|
4,174 |
|
|
|
1,557 |
|
|
|
(2,037 |
) |
|
|
92,952 |
|
Operations
and support expenses
|
|
|
23,750 |
|
|
|
34,141 |
|
|
|
2,293 |
|
|
|
1,802 |
|
|
|
(2,038 |
) |
|
|
59,948 |
|
Depreciation
and amortization expenses
|
|
|
4,327 |
|
|
|
9,814 |
|
|
|
609 |
|
|
|
88 |
|
|
|
1 |
|
|
|
14,839 |
|
Total
segment operating expenses
|
|
|
28,077 |
|
|
|
43,955 |
|
|
|
2,902 |
|
|
|
1,890 |
|
|
|
(2,037 |
) |
|
|
74,787 |
|
Segment
operating income (loss)
|
|
|
8,399 |
|
|
|
8,827 |
|
|
|
1,272 |
|
|
|
(333 |
) |
|
|
- |
|
|
|
18,165 |
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,577 |
|
|
|
2,577 |
|
Equity
in net income of affiliates
|
|
|
5 |
|
|
|
18 |
|
|
|
- |
|
|
|
689 |
|
|
|
- |
|
|
|
712 |
|
Other
income (expense) – net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
97 |
|
|
|
97 |
|
Segment
income before income taxes
|
|
$ |
8,404 |
|
|
$ |
8,845 |
|
|
$ |
1,272 |
|
|
$ |
356 |
|
|
$ |
(2,480 |
) |
|
$ |
16,397 |
|
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
NOTE
5. PENSION AND POSTRETIREMENT BENEFITS
Substantially
all of our employees are covered by one of various noncontributory pension and
death benefit plans. We also provide certain medical, dental and life insurance
benefits to substantially all retired employees under various plans and accrue
actuarially determined postretirement benefit costs as active employees earn
these benefits. Our objective in funding these plans, in combination with the
standards of the Employee Retirement Income Security Act of 1974, as amended
(ERISA), is to accumulate assets sufficient to meet the plans’ obligations to
provide benefits to employees upon their retirement. No significant cash
contributions are required under ERISA regulations during 2009.
The
following details pension and postretirement benefit costs included in operating
expenses (in cost of sales and selling, general and administrative expenses) in
the accompanying Consolidated Statements of Income. We account for these costs
in accordance with GAAP standards for employers’ accounting for pensions and
other postretirement benefits. In the following table, gains are denoted with
parentheses and losses are not. A portion of these expenses is effectively
capitalized as part of the benefit load on internal construction and capital
expenditures, historically averaging approximately 10%.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Pension
(benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost – benefits earned during the period
|
|
$ |
265 |
|
|
$ |
294 |
|
|
$ |
808 |
|
|
$ |
880 |
|
Interest
cost on projected benefit obligation
|
|
|
835 |
|
|
|
830 |
|
|
|
2,525 |
|
|
|
2,489 |
|
Expected
return on assets
|
|
|
(1,140 |
) |
|
|
(1,400 |
) |
|
|
(3,421 |
) |
|
|
(4,201 |
) |
Amortization
of prior service cost
|
|
|
6 |
|
|
|
34 |
|
|
|
62 |
|
|
|
100 |
|
Recognized
actuarial loss
|
|
|
163 |
|
|
|
1 |
|
|
|
495 |
|
|
|
7 |
|
Net
pension (benefit) cost
|
|
$ |
129 |
|
|
$ |
(241 |
) |
|
$ |
469 |
|
|
$ |
(725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
(benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost – benefits earned during the period
|
|
$ |
81 |
|
|
$ |
108 |
|
|
$ |
257 |
|
|
$ |
322 |
|
Interest
cost on accumulated postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
obligation
|
|
|
595 |
|
|
|
637 |
|
|
|
1,856 |
|
|
|
1,912 |
|
Expected
return on assets
|
|
|
(239 |
) |
|
|
(331 |
) |
|
|
(716 |
) |
|
|
(995 |
) |
Amortization
of prior service benefit
|
|
|
(134 |
) |
|
|
(92 |
) |
|
|
(313 |
) |
|
|
(271 |
) |
Recognized
actuarial loss (gain)
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
Postretirement
cost
|
|
$ |
303 |
|
|
$ |
322 |
|
|
$ |
1,083 |
|
|
$ |
968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
net pension and postretirement cost
|
|
$ |
432 |
|
|
$ |
81 |
|
|
$ |
1,552 |
|
|
$ |
243 |
|
Our
combined net pension and postretirement cost increased $351 in the third quarter
and $1,309 for the first nine months of 2009. The increase was due to lower
expected return on assets and an increase in amortization of actuarial losses,
both primarily from investment losses in 2008. As allowed under GAAP, we use a
method in which gains and losses are amortized only when the net gains or losses
exceed 10 percent of the greater of the projected benefit obligation or the
market-related value of assets (MRVA). Under GAAP, the expected long-term rate
of return is calculated on the MRVA. GAAP requires that actual gains and losses
on pension and postretirement plan assets be recognized in the MRVA equally over
a period of up to five years. However, we use a methodology, allowed under GAAP,
under which we hold the MRVA to within 20% of the actual fair value of plan
assets, which can have the effect of accelerating the recognition of excess
actual gains and losses in the MRVA in less than five years. The use of this
policy increased pre-capitalization pension and postretirement cost by
approximately $400 in the third quarter and $1,200 for the first nine months of
2009. This methodology did not have a significant effect on our 2008 combined
net pension and postretirement benefits.
In August
2009, non-management retirees were informed of medical and drug coverage
changes. In addition, we adopted changes to our pension plans consistent with
the Pension Protection Act. Because of these modifications of retiree benefits,
our amortization of prior service (benefit) cost also changed, reducing costs by
$128 for the third quarter of 2009. We anticipate the fourth quarter will show
cost reductions consistent with the reductions that began in
August.
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
We have
varying types of pension programs providing benefits for substantially all of
certain non-U.S. operations. In addition to the pension and postretirement costs
above, we recorded net pension (benefit) cost for non-U.S. plans of ($2) in the
third quarter and ($4) for the first nine months of 2009 and $4 in the third
quarter and $11 for the first nine months of 2008.
We also
provide senior- and middle-management employees with nonqualified, unfunded
supplemental retirement and savings plans. Net supplemental retirement pension
cost, which is not included in the table above, was $42 in the third quarter,
$35 of which was interest cost, and $125 for the first nine months of 2009, $105
of which was interest cost. Net supplemental retirement pension benefits cost
was $45 in the third quarter, $35 of which was interest cost, and $136 for the
first nine months of 2008, $106 of which was interest cost.
NOTE
6. 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
at September 30, 2009:
|
2009
|
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Notes
and debentures
|
|
$ |
72,471 |
|
|
$ |
76,588 |
|
Commercial
paper
|
|
|
- |
|
|
|
- |
|
Bank
borrowings
|
|
|
25 |
|
|
|
25 |
|
Available-for-sale
securities
|
|
|
1,952 |
|
|
|
1,952 |
|
GAAP
standards require disclosures for financial assets and liabilities that are
remeasured at fair value at least annually. GAAP standards establish a
three-tier fair value hierarchy, which prioritizes the inputs used in measuring
fair value. These tiers include: Level 1, defined as observable inputs such as
quoted prices in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions.
Substantially all of our available-for-sale securities are valued using quoted
market prices (referred to as Level 1). Adjustments to fair value are recorded
in accumulated other comprehensive income (OCI) until the investment is sold or
experiences an other-than-temporary decline in fair value (see Note 2). All of
our derivatives are Level 2.
The fair
values of our notes and debentures were estimated based on quoted market prices,
where available, or on the net present value method of expected future cash
flows using current interest rates. The carrying value of debt with an original
maturity of less than one year approximates market value.
Our
available-for-sale securities are carried at fair value, and realized gains and
losses on these securities were included in “Other income (expense) – net” in
the consolidated statements of income. The fair value of our available-for-sale
securities was principally determined based on quoted market prices, and the
carrying amount of the remaining securities approximates fair value. These
securities include $1,566 of equities, $303 in government fixed income bonds and
$83 of other securities.
Our
short-term investments, other short-term and long-term held-to-maturity
investments and customer deposits are recorded at amortized cost, and the
respective carrying amounts approximate fair values.
Derivatives We use
interest rate swaps, interest rate locks and foreign currency exchange contracts
to manage our market risk to changes in interest rates and foreign exchange
rates. We do not use financial instruments for trading or speculative purposes.
Virtually all of our derivatives are designated as fair value hedges or cash
flow hedges.
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
Fair Value Hedging We designate our
fixed-to-floating interest rates 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. Unrealized gains or losses on interest rate swaps are
recorded at fair market value as assets or liabilities, respectively. 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. 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.
Cash Flow Hedging Unrealized gains or
losses on derivatives designated as cash flow hedges are recorded at fair value
as assets or liabilities respectively for the period they are outstanding. For
derivative instruments designated as cash flow hedges, the effective portion is
reported as a component of OCI until reclassified into interest expense in the
same period the hedged transaction affects earnings. The gain or loss on the
ineffective portion is recognized in income from continuing operations in each
current period.
We
designate our combined interest rate foreign currency swap agreements
(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 period. In the period ending September 30, 2009, no
material 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 at
the time we settle our interest rate locks are amortized into income over the
life of the related debt, except where a material amount is deemed to be
ineffective, which would be immediately reclassified to income. In the nine
months ending September 30, 2009, no material ineffectiveness was measured. Over
the next 12 months, we expect to reclassify $21 from OCI to interest expense due
to the amortization of net losses on historical interest rate locks. Our
unutilized interest rate locks carry mandatory early terminations, the latest
occurring in April 2011.
We enter
into foreign exchange contracts with third parties to manage our exposure to
changes in currency exchange rates related to foreign currency-denominated
transactions. Some of these instruments are designated as cash flow hedges while
others are not, largely based on size and duration. Gains and losses at the time
we settle or take delivery on our designated foreign exchange contracts are
amortized into income over the next few months as the hedged funds are spent by
our foreign subsidiaries, except where a material amount is deemed to be
ineffective, which would be immediately reclassified to income. In the nine
months ended September 30, 2009, no material ineffectiveness was
measured.
The
balance of the derivative loss in accumulated other comprehensive loss was $166
at September 30, 2009, and $483 at December 31, 2008.
Collateral and Credit-Risk
Contingency We have entered into
agreements with most of our derivative counterparties establishing collateral
thresholds based on respective credit ratings and netting agreements. At
September 30, 2009, we held $247 of counterparty collateral (a receipt
liability). Under the agreements, if our credit rating had been downgraded one
rating level, we would have been required to post collateral of $23 (a deposit
asset). 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.
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
Following
is the size of our outstanding derivative positions:
Volume
of Derivative Activity
|
September
30,
|
|
|
2009
|
|
|
Notional
Value
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
9,000 |
|
Cross-currency
swaps
|
|
|
7,502 |
|
Interest
rate locks
|
|
|
2,800 |
|
Foreign
exchange contracts
|
|
|
139 |
|
Following
are our derivative instruments and their related hedged items affecting our
financial position and performance:
Fair
Value of Derivatives in the Consolidated Balance Sheet
Derivatives
designated as hedging instruments and reflected as other assets, other
liabilities and, for a portion of interest rate swaps, accounts
receivable.
|
|
September
30,
|
|
Asset
Derivatives
|
|
2009
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
436 |
|
Cross-currency
swaps
|
|
|
471 |
|
Interest
rate locks
|
|
|
19 |
|
Foreign
exchange contracts
|
|
|
- |
|
Total
|
|
$ |
926 |
|
|
|
September
30,
|
|
Liability
Derivatives
|
|
2009
|
|
|
|
|
|
Cross-currency
swaps
|
|
$ |
(449 |
) |
Interest
rate locks
|
|
|
(92 |
) |
Foreign
exchange contracts
|
|
|
- |
|
Total
|
|
$ |
(541 |
) |
AT&T
INC.
SEPTEMBER
30, 2009
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars
in millions except per share amounts
Effect
of Derivatives on the Consolidated Income Statement
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
Fair
Value Hedge Relationships
|
|
September
30, 2009
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
Interest
rate swaps (Interest expense):
|
|
|
|
|
|
|
Gain/(Loss)
on swap
|
|
$ |
79 |
|
|
$ |
(141 |
) |
Gain/(Loss)
on long-term debt
|
|
|
(79 |
) |
|
|
141 |
|
In
addition, the net swap settlements that accrued and settled in the three
and nine months ended September 30, 2009 were also reported as reductions
of interest expense.
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Hedge Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency
swaps:
|
|
|
|
|
|
|
|
|
Gain/(Loss)
recognized in OCI
|
|
$ |
(78 |
) |
|
$ |
485 |
|
Other
income (expense) reclassified from OCI into income
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Interest
rate locks:
|
|
|
|
|
|
|
|
|
Gain/(Loss)
recognized in OCI
|
|
|
(90 |
) |
|
|
(11 |
) |
Interest
income (expense) reclassified from OCI into income
|
|
|
(6 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
Non-designated
Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts (Other income)
|
|
$ |
- |
|
|
$ |
1 |
|
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Dollars
in millions except per share amounts
RESULTS OF
OPERATIONS
For ease
of reading, AT&T Inc. is referred to as “we,” “AT&T,” or the “Company”
throughout this document and the names of the particular subsidiaries and
affiliates providing the services generally have been omitted. AT&T is a
holding company whose subsidiaries and affiliates operate in the communications
services industry in both the United States and internationally providing
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, 2008. 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 third quarter and for the
first nine months of 2009 and 2008 are summarized as follows:
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Operating
Revenues
|
|
$ |
30,855 |
|
|
$ |
31,342 |
|
|
|
(1.6 |
)% |
|
$ |
92,160 |
|
|
$ |
92,952 |
|
|
|
(0.9 |
)% |
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
12,885 |
|
|
|
13,022 |
|
|
|
(1.1 |
) |
|
|
37,605 |
|
|
|
36,914 |
|
|
|
1.9 |
|
Selling,
general and administrative
|
|
|
7,672 |
|
|
|
7,724 |
|
|
|
(0.7 |
) |
|
|
23,225 |
|
|
|
23,034 |
|
|
|
0.8 |
|
Depreciation
and amortization
|
|
|
4,910 |
|
|
|
4,978 |
|
|
|
(1.4 |
) |
|
|
14,699 |
|
|
|
14,839 |
|
|
|
(0.9 |
) |
Total
Operating Expenses
|
|
|
25,467 |
|
|
|
25,724 |
|
|
|
(1.0 |
) |
|
|
75,529 |
|
|
|
74,787 |
|
|
|
1.0 |
|
Operating
income
|
|
|
5,388 |
|
|
|
5,618 |
|
|
|
(4.1 |
) |
|
|
16,631 |
|
|
|
18,165 |
|
|
|
(8.4 |
) |
Income
before income taxes
|
|
|
4,743 |
|
|
|
4,994 |
|
|
|
(5.0 |
) |
|
|
14,642 |
|
|
|
16,397 |
|
|
|
(10.7 |
) |
Net
Income Attributable to AT&T
|
|
$ |
3,192 |
|
|
$ |
3,230 |
|
|
|
(1.2 |
)% |
|
$ |
9,516 |
|
|
$ |
10,463 |
|
|
|
(9.1 |
)% |
Overview
Operating
income Our operating income decreased $230, or 4.1%, in the
third quarter and $1,534, or 8.4%, for the first nine months of 2009, primarily
due to the decline in voice revenues along with an increase in pension and other
postemployment benefits (OPEB) expense, partially offset by continued growth in
wireless service revenue and wireline data revenue and decreases in wireline
expenses. Operating income also decreased in part due to higher cost of
equipment sales in our wireless segment mainly attributed to the continued
success of the Apple iPhone. These factors were the primary causes of our
operating income margin decreasing from 17.9% to 17.5% in the third quarter and
from 19.5% to 18.0% for the first nine months of 2009.
Operating
revenues Our operating revenues decreased $487, or 1.6%, in
the third quarter and $792, or 0.9%, for the first nine months primarily due to
the continuing decline in voice revenues and a decline in directory revenue
driven by lower print revenue. These declines were partially offset by continued
growth in wireless service revenue due to an increase in average customers of
9.1%, driven in part by the continued success of the Apple iPhone, and an
increase in wireline data revenue largely due to Internet Protocol (IP) data
growth, including U-verse and broadband growth. Consistent with our quarterly
and year to date results, we expect our 2009 revenues to be slightly lower than
our 2008 revenues.
The
declines in our voice and advertising revenues reflect continuing economic
pressures on our customers as well as increasing competition. Total retail
consumer voice connections decreased 11.8%. Business customers also disconnected
switched access lines, reduced usage-based services and reduced print
advertising. 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 the 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 sales expenses
decreased $137, or 1.1%, in the third quarter and increased $691, or 1.9%, for
the first nine months. The decrease in the third quarter was primarily due to
reductions in wireline expenses partially offset by increases in pension/OPEB
expenses as well as higher upgrade equipment costs driven by higher Apple iPhone
sales. The increase in the first nine months was primarily due to higher upgrade
costs and higher equipment costs related to the continued success of the Apple
iPhone and other smartphones along with an increase in pension/OPEB expenses.
Pension/OPEB expense increased due to lower expected return on assets and an
increase in amortization of actuarial losses, both primarily from investment
losses in 2008. Partially offsetting these nine-month increases were decreases
in wireline expenses primarily driven by employee-related costs (excluding
pension/OPEB) due to workforce reductions.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Selling, general and administrative
expenses decreased $52, or 0.7%, in the third quarter and increased $191,
or 0.8%, for the first nine months. The decrease in the third quarter was
primarily due to lower advertising & promotions and indirect commissions
expenses along with a decrease in employee-related costs due to workforce
reductions. These decreases were partially offset by an increase in pension/OPEB
expense and severance. The increase in the first nine months was primarily due
to higher commissions expenses associated with the Apple iPhone and traditional
upgrade sales and an increase in pension/OPEB expense. Selling, general and
administrative expenses also increased due to higher customer service costs
resulting from wireless subscriber growth along with increased support for data
services and integrated devices. These increases were partially offset by
decreases in employee-related costs (excluding pension/OPEB) due to workforce
reductions along with decreases in advertising & promotions
expense.
Depreciation and amortization
expenses decreased $68, or 1.4%, in the third quarter and $140, or 0.9%,
for the first nine months. Depreciation and amortization remained relatively
stable in the third quarter, and for the first nine months, as the declining
amortization of identifiable intangible assets, primarily customer
relationships, was offset by increased depreciation resulting from capital
additions.
Interest expense decreased $5,
or 0.6%, in the third quarter and increased $4, or 0.2%, for the first nine
months of 2009. Interest expense remained relatively stable in the third
quarter, and for the first nine months. During the third quarter, interest
expense decreased slightly due to a decrease in our average debt balance mostly
offset by an increase in our weighted average interest rate, related to a change
in our mix of debt, along with lower interest charged during construction. For
the nine months, interest expense increased slightly due to an increase in our
average debt balance mostly offset by higher interest charged during
construction. Interest during construction is primarily related to preparing
wireless spectrum for advanced services and is higher in 2009 due to acquisition
of significant amounts of spectrum for advanced services late in the first
quarter of 2008.
Equity in net income of
affiliates decreased $76, or 29.6%, in the third quarter and decreased
$163, or 22.9%, for the first nine months of 2009. The declines were primarily
due to decreased operating results at Telefonos de Mexico, S.A. de C.V. (Telmex)
and foreign currency translation losses at América Móvil S.A. de C.V. (América
Móvil) and Telmex Internacional, S.A.B. de C.V. (Telmex Internacional) partially
offset by increased operating results at América Móvil.
Other income (expense) –
net We had other income of $27 in the third quarter and $43
for the first nine months of 2009, compared to other expense of $23 in the third
quarter and income of $97 for the first nine months of 2008. Results in the
third quarter of 2009 included a $20 gain on spectrum sale, and $23 of interest
and leveraged lease income partially offset by a $17 reserve for net investments
losses. Results in the third quarter of 2008 included $46 loss on the sale of
administrative buildings and other non-strategic assets and $44 related to asset
impairments, partially offset by $54 of interest and dividend
income.
Results
for the first nine months of 2009 included $86 of interest, dividend and
leveraged lease income, $42 of gains on the sales of securities and a
professional services business, and a $16 gain on the sale of investments
partially offset by $102 related to asset impairment. Results for the first nine
months of 2008 primarily included $177 of interest, dividend and leveraged lease
income and a $79 gain on sale of investments, partially offset by $89 loss on
the sale of land and other non-strategic assets and $75 related to asset
impairment.
Income taxes decreased $237,
or 13.9%, in the third quarter and $856, or 14.9%, for the first nine months of
2009. The decrease in income taxes in the third quarter was primarily due to a
reduction in income before income taxes and to a benefit related to the
resolution of federal and state audit issues. The decrease in income taxes for
the first nine months was primarily due to lower income before income taxes. The
resolution of tax issues also had a positive impact on our effective tax rates,
which were 31.0% in the third quarter of 2009 compared to 34.1% in the third
quarter of 2008, and 33.4% for the first nine months of 2009 compared to 35.0%
for the first nine months of 2008. In July 2009, in the case regarding the tax
treatment of Universal Service Fund receipts on our 1998 and 1999 tax returns,
the U.S. District Court granted the Government’s motion for summary judgment and
entered final judgment for the Government. We appealed the final judgment to the
United States Court of Appeals for the Fifth Circuit.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Selected
Financial and Operating Data
|
|
September
30,
|
|
|
2009
|
|
|
2008
|
|
Wireless
customers (000)
|
|
|
81,596 |
|
|
|
74,871 |
|
Postpaid
wireless customers (000)
|
|
|
63,434 |
|
|
|
58,735 |
|
Consumer
revenue connections (000) 1,2
|
|
|
45,659 |
|
|
|
47,547 |
|
Network
access lines in service (000) 2
|
|
|
50,833 |
|
|
|
57,191 |
|
Broadband
connections (000) 2,3,7
|
|
|
17,083 |
|
|
|
15,965 |
|
Video
connections (000) 4
|
|
|
4,012 |
|
|
|
2,963 |
|
Debt
ratio 5,7,8
|
|
|
42.1 |
% |
|
|
40.5 |
% |
Ratio
of earnings to fixed charges
6
|
|
|
4.55 |
|
|
|
5.20 |
|
Number
of AT&T employees
|
|
|
284,970 |
|
|
|
303,530 |
|
1 |
Consumer
revenue connections includes retail access lines, U-verse voice over IP
connections, broadband and video.
|
2 |
Represents
services by AT&T’s local exchange companies (ILECs) and
affiliates.
|
3 |
Broadband connections include DSL, U-verse High-Speed Internet
access, satellite broadband and 3G LaptopConnect
cards
|
4 |
Video
connections include customers that have satellite service under our agency
arrangements and U-verse video connections (of 1,817 in 2009 and 781
in 2008).
|
5 |
See
our “Liquidity and Capital Resources” section for
discussion.
|
6 |
See
Exhibit 12.
|
7 |
Prior
year amounts restated to conform to current period reporting
methodology.
|
8 |
Debt
ratios are calculated by dividing total debt (debt maturing within one
year plus long-term debt) by total capital (total debt plus total
stockholders’ equity) and does not consider cash on hand available to pay
down debt. Cash on hand was $6,167 as of September 30, 2009, and
$1,792 as of December 31,
2008.
|
Segment
Results
Our
segments represent strategic business units that offer different products and
services over various technology platforms and are managed accordingly. Our
operating segment results presented in Note 4 and discussed below for each
segment follow our internal management reporting. We analyze our various
operating segments based on segment income before income taxes, reviewing
operating revenues, expenses (depreciation and non-depreciation) and equity
income for each segment. We make our capital allocations decisions primarily
based on the network (wireless or wireline) providing services. Interest expense
and other income (expense) – net are managed only on a total company basis and
are, accordingly, reflected only in consolidated results. We have four
reportable segments: (1) wireless, (2) wireline, (3) advertising
solutions and (4) other.
The
wireless segment uses our nationwide network to provide consumer and business
customers with wireless voice and advanced data communications
services.
The
wireline segment uses our regional, national and global network to provide
consumer and business customers with landline voice and data communications
services, AT&T U-verseSM TV,
high-speed broadband and voice services (U-verse) and managed networking to
business customers. Additionally, we offer satellite television services through
our agency arrangements.
The
advertising solutions segment publishes Yellow and White Pages directories and
sells advertising in various media, including directory and Internet-based
advertising, and local search.
The other
segment includes results from Sterling Commerce Inc. (Sterling), customer
information services and all corporate and other operations. The other segment
includes our portion of the results from our international equity investments.
Also included in the other segment are impacts of management decisions affecting
the company for which management does not evaluate the individual operating
segments.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
The
following tables show components of results of operations by segment.
Significant segment results are discussed following each table. Capital
expenditures are discussed in “Liquidity and Capital Resources.”
Wireless
Segment
Results
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Segment
operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$ |
12,399 |
|
|
$ |
11,273 |
|
|
|
10.0 |
% |
|
$ |
36,050 |
|
|
$ |
32,869 |
|
|
|
9.7 |
% |
Equipment
|
|
|
1,255 |
|
|
|
1,345 |
|
|
|
(6.7 |
) |
|
|
3,709 |
|
|
|
3,607 |
|
|
|
2.8 |
|
Total
Segment Operating Revenues
|
|
|
13,654 |
|
|
|
12,618 |
|
|
|
8.2 |
|
|
|
39,759 |
|
|
|
36,476 |
|
|
|
9.0 |
|
Segment
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
and support
|
|
|
8,877 |
|
|
|
8,838 |
|
|
|
0.4 |
|
|
|
25,620 |
|
|
|
23,750 |
|
|
|
7.9 |
|
Depreciation
and amortization
|
|
|
1,418 |
|
|
|
1,401 |
|
|
|
1.2 |
|
|
|
4,288 |
|
|
|
4,327 |
|
|
|
(0.9 |
) |
Total
Segment Operating Expenses
|
|
|
10,295 |
|
|
|
10,239 |
|
|
|
0.5 |
|
|
|
29,908 |
|
|
|
28,077 |
|
|
|
6.5 |
|
Segment
Operating Income
|
|
|
3,359 |
|
|
|
2,379 |
|
|
|
41.2 |
|
|
|
9,851 |
|
|
|
8,399 |
|
|
|
17.3 |
|
Equity
in Net Income of Affiliates
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
Segment
Income
|
|
$ |
3,359 |
|
|
$ |
2,379 |
|
|
|
41.2 |
% |
|
$ |
9,851 |
|
|
$ |
8,404 |
|
|
|
17.2 |
% |
Operating
Income and Margin Trends
Our
wireless segment operating income increased $980, or 41.2%, in the third quarter
and $1,452, or 17.3%, for the first nine months of 2009, reflecting an increase
in our customer base. Our wireless segment operating income margin was 24.6% in
the third quarter of 2009 and 24.8% for the first nine months of 2009, compared
to margins of 18.9% in the third quarter of 2008 and 23.0% for the first nine
months of 2008. The higher margins in 2009 were primarily due to service revenue
growth of $1,126, or 10.0%, in the third quarter and $3,181, or 9.7%, for the
first nine months of 2009, as well as benefits from churn improvements and
further growth in the company’s base of integrated device and Apple iPhone
subscribers. These factors offset increased acquisition costs associated with
Apple iPhone activations.
The
majority of the improvement in our revenue results was due to the increase in
our customer base of 6.7 million since September 30, 2008. As of September 30,
2009, we served 81.6 million wireless customers. Contributing to our customer
base increase was improvement in the postpaid and overall customer turnover
(churn) rate for the third quarter of 2009 as well as strong Apple iPhone sales.
Our total churn rate improved in the third quarter of 2009 to 1.43% from 1.69%
in the third quarter of 2008. Our postpaid churn rate improved to 1.17% compared
to 1.22% in the third quarter of 2008.
Average
service revenue per user (ARPU) in the third quarter of 2009 grew to $51.21 from
$50.80 in the third quarter of 2008. Data services ARPU grew 22.4% in the third
quarter of 2009, partially offset by a decline in voice and other service ARPU
of 6.1%. We expect continued growth from data services as more customers
purchase advanced integrated handsets including the Apple iPhone, broadband
laptop cards and as our third-generation network continues to expand. Voice
service ARPU declined due to lower postpaid overage charges, access charges,
roaming revenues and long-distance usage. Voice service ARPU decline was also
driven by increases in our reseller customer base, which have lower ARPU than
traditional postpaid customers. We expect continued pressure on voice service
ARPU.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Operating
Results
Service revenues are comprised
of voice, data and other revenue. Service revenues increased $1,126, or 10.0%,
in the third quarter of 2009 and $3,181, or 9.7%, for the first nine months of
2009. The increase in service revenues primarily consisted of:
·
|
Data
revenue increases of $916, or 33.6%, in the third quarter of 2009 and
$2,734, or 36.3%, for the first nine months primarily due to the increased
number of data users and an increase in data ARPU of 22.4% in the third
quarter of 2009 and 24.6% for the first nine months of 2009. Data revenue
growth was primarily driven by strong increases in wireless internet
access, messaging and data access revenues. This primarily resulted from
increased use of more advanced integrated devices, including the Apple
iPhone, which can provide for the data services previously mentioned. Data
service revenues represented 29.4% of wireless service revenues in the
third quarter of 2009 and 28.5% for the first nine months of 2009, up from
24.2% in the third quarter of 2008 and 22.9% for the first nine months of
2008.
|
·
|
Voice
and other revenue increases of $210, or 2.5%, in the third quarter of 2009
and $447, or 1.8%, for the first nine months of 2009, primarily due to an
increase in the average number of wireless customers of 9.1% and 9.4% for
the three and nine-month periods, respectively. The subscriber growth
impacts on voice and other revenue were partially offset by a decline in
voice and other service ARPU of 6.1% and 6.9% for the third quarter and
the first nine months of 2009,
respectively.
|
Equipment revenues decreased
$90, or 6.7%, in the third quarter of 2009 and increased $102, or 2.8%, for the
first nine months of 2009. The quarterly decrease was due to lower traditional
handset sales, partially offset for the quarter and more than offset for the
first nine months, by sales of more advanced integrated devices, such as the
Apple iPhone, than in prior periods.
Operations and support
expenses increased $39, or 0.4%, in the
third quarter and $1,870, or 7.9%, for the first nine months of 2009. The
quarterly increase was primarily due to Interconnect, USF and reseller expense
increases of $140, equipment cost increases of $104, reflecting in part Apple
iPhone sales, customer service cost increases of $58, and other administrative
cost increases of $73. These increases were substantially offset by
selling-related expense decreases of $210, network system cost decreases of $86,
and roaming expense decreases of $42.
The
nine-month increase was primarily due to equipment cost increases of $1,054,
reflecting the higher acquisition cost of more advanced, integrated devices,
such as the Apple iPhone, compared to prior periods, customer service cost
increases of $652, Interconnect, USF and reseller expense increases of $321, and
other administrative cost increases of $144. These increases were partially
offset by selling related expense decreases of $120, roaming expense decreases
of $119, and network system cost decreases of $29. Total equipment costs
continue to be higher than equipment revenues due to the sale of discounted
handsets to customers.
Depreciation and amortization
expenses increased $17, or 1.2%, in the third quarter of 2009 and decreased $39,
or 0.9%, for the first nine months of 2009. Amortization expense decreased $111,
or 22.3%, in the third quarter of 2009 and $348, or 21.8%, for the first nine
months primarily due to lower amortization of intangibles related to our
acquisition of BellSouth’s 40% ownership interest in AT&T Mobility. We apply
accelerated amortization methods, which result in lower expense each year as the
remaining useful life of the asset decreases.
Depreciation
expense increased $129, or 14.2%, in the third quarter of 2009 and $309, or
11.3%, for the first nine months of 2009 primarily due to increased expense
related to ongoing capital spending for network upgrades and expansion,
partially offset by certain network assets becoming fully
depreciated.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Wireless
Supplementary Operating and Financial Data
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Wireless
Customers (000)
|
|
|
|
|
|
|
|
|
|
|
|
81,596 |
|
|
|
74,871 |
|
|
|
9.0 |
% |
Net
Customer Additions (000)
|
|
|
2,026 |
|
|
|
1,976 |
|
|
|
2.5 |
% |
|
|
4,617 |
|
|
|
4,604 |
|
|
|
0.3 |
% |
Total
Churn
|
|
|
1.43 |
% |
|
|
1.69 |
% |
|
-26
BP
|
|
|
1.49 |
% |
|
|
1.69 |
% |
|
-20
BP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postpaid
Customers (000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,434 |
|
|
|
58,735 |
|
|
|
8.0 |
% |
Net
Postpaid Customer Additions (000)
|
|
|
1,385 |
|
|
|
1,693 |
|
|
|
(18.2 |
)% |
|
|
3,413 |
|
|
|
3,292 |
|
|
|
3.7 |
% |
Postpaid
Churn
|
|
|
1.17 |
% |
|
|
1.22 |
% |
|
-5
BP
|
|
|
1.15 |
% |
|
|
1.19 |
% |
|
-4
BP
|
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Wireline
Segment
Results
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Segment
operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
8,132 |
|
|
$ |
9,515 |
|
|
|
(14.5 |
)% |
|
$ |
25,289 |
|
|
$ |
29,191 |
|
|
|
(13.4 |
)% |
Data
|
|
|
6,747 |
|
|
|
6,401 |
|
|
|
5.4 |
|
|
|
19,900 |
|
|
|
18,893 |
|
|
|
5.3 |
|
Other
|
|
|
1,425 |
|
|
|
1,634 |
|
|
|
(12.8 |
) |
|
|
4,319 |
|
|
|
4,698 |
|
|
|
(8.1 |
) |
Total
Segment Operating Revenues
|
|
|
16,304 |
|
|
|
17,550 |
|
|
|
(7.1 |
) |
|
|
49,508 |
|
|
|
52,782 |
|
|
|
(6.2 |
) |
Segment
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
and support
|
|
|
11,097 |
|
|
|
11,456 |
|
|
|
(3.1 |
) |
|
|
33,659 |
|
|
|
34,141 |
|
|
|
(1.4 |
) |
Depreciation
and amortization
|
|
|
3,289 |
|
|
|
3,352 |
|
|
|
(1.9 |
) |
|
|
9,787 |
|
|
|
9,814 |
|
|
|
(0.3 |
) |
Total
Segment Operating Expenses
|
|
|
14,386 |
|
|
|
14,808 |
|
|
|
(2.8 |
) |
|
|
43,446 |
|
|
|
43,955 |
|
|
|
(1.2 |
) |
Segment
Operating Income
|
|
|
1,918 |
|
|
|
2,742 |
|
|
|
(30.1 |
) |
|
|
6,062 |
|
|
|
8,827 |
|
|
|
(31.3 |
) |
Equity
in Net Income of Affiliates
|
|
|
9 |
|
|
|
9 |
|
|
|
- |
|
|
|
17 |
|
|
|
18 |
|
|
|
(5.6 |
) |
Segment
Income
|
|
$ |
1,927 |
|
|
$ |
2,751 |
|
|
|
(30.0 |
)% |
|
$ |
6,079 |
|
|
$ |
8,845 |
|
|
|
(31.3 |
)% |
Operating
Income and Margin Trends
Our
wireline segment operating income decreased $824, or 30.1%, in the third quarter
of 2009 and $2,765, or 31.3%, for the first nine months of 2009. For the third
quarter of 2009 and 2008, our wireline segment operating income margin decreased
from 15.6% to 11.8%, and for the first nine months decreased from 16.7% in 2008
to 12.2% in 2009. Operating income continued to be pressured by access line
declines due to economic pressures on our consumer and business wireline
customers and increased competition, as 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 revenues from customer connections for data, including
video, broadband and VoIP. Additionally, we have the opportunity to increase
wireless segment revenues if customers choose AT&T Mobility as an
alternative provider. The decline in segment voice revenue was partially offset
by continued growth in data revenue. Also contributing to pressure on our
operating margins was increased pension/OPEB expense in 2009.
Operating
Results
Voice revenues decreased
$1,383, or 14.5%, in the third quarter and $3,902, or 13.4%, for the first nine
months of 2009 primarily due to the continuing decline in 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 $753, or 13.3%, in the third quarter and $2,097,
or 12.1%, for the first nine months of 2009. The decrease was driven
primarily by an 11% decline in switched access lines and a decrease in
average local voice revenue per user. Additionally, there was a decline in
revenues from our national mass-market customers of approximately $38 in
the third quarter and $119 for the first nine months of 2009. We expect
our local voice revenue to continue to be negatively affected by the
continuing economic recession and increased competition from alternative
technologies.
|
·
|
Long-distance
revenues decreased $577, or 16.5%, in the third quarter and $1,623, or
15.2%, for the first nine months of 2009. The decrease was primarily due
to lower demand for long-distance service from global businesses and
consumer customers, which decreased $442 in the third quarter and $1,200
for the first nine months of 2009, and declines in the number of our
national mass-market customers, which decreased revenues $135 in the third
quarter and $423 for the first nine months of
2009.
|
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Data revenues increased $346,
or 5.4%, in the third quarter and $1,007, or 5.3%, for the first nine months of
2009. Data revenues accounted for approximately 40% of wireline operating
revenues in 2009 and 36% in 2008. Data revenues include transport, IP and
packet-switched data services.
·
|
IP
data revenues increased $526 in the third quarter and $1,420 for the first
nine months of 2009 primarily due to growth in U-verse video, broadband
and virtual private networks (VPN). U-verse increased approximately $415
in the third quarter and $1,077 for the first nine months of 2009. VPN
increased approximately $116 in the third quarter and $344 for the first
nine months of 2009. The increase in IP data revenues reflects continued
growth in the customer base and migration from other traditional
circuit-based services.
|
·
|
Packet
switched data services, which include frame relay and asynchronous
transfer mode services, decreased $150, or 23.2%, in the third quarter and
$396, or 19.9%, for the first nine months of 2009. This decrease is
primarily due to lower demand as customers continue to shift to IP-based
technology such as VPN, DSL and managed Internet services, and the
continuing economic recession. We expect these traditional services to
continue to decline as a percentage of our overall data
revenues.
|
Other operating revenues
decreased $209, or 12.8%, in the third quarter and $379, or 8.1%, for the first
nine months of 2009. Integration services, customer premises equipment (CPE),
government-related services and managed services account for more than 60% of
total other revenue for all periods. Revenue from equipment sales and related
network integration decreased by $179 in the third quarter and $447 for the
first nine months of 2009 primarily related to CPE. Managed services increased
$23 in the third quarter and $163 for the first nine months of 2009 due to
ongoing agreements. Government professional services decreased $41 in the third
quarter and $85 for the first nine months of 2009.
Operations and support expenses
decreased $359, or 3.1%, in the third quarter and $482, or 1.4%, for the
first nine months of 2009. Operations and support expenses consist of costs
incurred to provide our products and services, including costs of operating and
maintaining our networks and personnel costs, such as salary, wage and bonus
accruals. Costs in this category include our repair technicians and repair
services, certain network planning and engineering expenses, operator services,
information technology and property taxes. Operations and support expenses also
include provision for uncollectible accounts; advertising costs; sales and
marketing functions, including customer service centers; real estate costs,
including maintenance and utilities on all buildings; credit and collection
functions; and corporate support costs, such as finance, legal, human resources
and external affairs. Pension and postretirement costs, net of amounts
capitalized as part of construction labor, are also included to the extent that
they are associated with these employees.
The
decrease was primarily due to lower employee related costs (excluding
pension/OPEB) of $325 in the third quarter and $675 for the first nine months of
2009, driven by workforce reductions. Other cost reductions included decreases
in traffic compensation (primarily related to lower international long-distance
revenues, and lower volume of calls from our declining national mass-market
customer base) of $159 in the third quarter and $651 for the first nine months,
and nonemployee-related expenses, such as uncollectibles, materials and supplies
costs, of $159 in the third quarter and $267 for the first nine
months.
Partially
offsetting these decreases was an increase in pension/OPEB expense of $291 in
the third quarter and $1,134 in the first nine months due to lower expected
return on assets and an increase in amortization of actuarial losses, both
primarily from investment losses in 2008. See Note 5 for more information
related to pension/OPEB expense.
Depreciation and amortization
expenses decreased $63, or 1.9%, in the third quarter and $27, or 0.3%, for the
first nine months of 2009. The decrease is primarily related to accelerated
depreciation used for the amortization of intangibles for the customer lists
associated with AT&T Corp., BellSouth and Yahoo.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Supplemental
Information
Telephone,
Wired Broadband and Video Connections Summary
Our
switched access lines and other services provided by our local exchange
telephone subsidiaries at September 30, 2009 and 2008 are shown below and access
line trends are addressed throughout this segment discussion.
(in
000s)
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
%
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Switched
Access Lines 1
|
|
|
|
|
|
|
|
|
|
Retail
Consumer
|
|
|
27,363 |
|
|
|
31,751 |
|
|
|
(13.8 |
)% |
Retail
Business 2
|
|
|
20,534 |
|
|
|
22,139 |
|
|
|
(7.2 |
) |
Retail
Subtotal 2
|
|
|
47,897 |
|
|
|
53,890 |
|
|
|
(11.1 |
) |
Percent
of total switched access lines
|
|
|
94.2 |
% |
|
|
94.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
2
|
|
|
2,844 |
|
|
|
3,162 |
|
|
|
(10.1 |
) |
Percent
of total switched access lines
|
|
|
5.6 |
% |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payphone
(Retail and Wholesale) 3
|
|
|
92 |
|
|
|
139 |
|
|
|
(33.8 |
) |
Percent
of total switched access lines
|
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Switched Access Lines
|
|
|
50,833 |
|
|
|
57,191 |
|
|
|
(11.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Retail Consumer Voice Connections 6
|
|
|
28,098 |
|
|
|
31,855 |
|
|
|
(11.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Wired Broadband Connections 4
|
|
|
15,638 |
|
|
|
14,841 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite
service 5
|
|
|
2,195 |
|
|
|
2,182 |
|
|
|
0.6 |
% |
U-verse
video
|
|
|
1,817 |
|
|
|
781 |
|
|
|
- |
|
Video
Connections
|
|
|
4,012 |
|
|
|
2,963 |
|
|
|
35.4 |
% |
1
|
Represents
access lines served by AT&T’s ILECs and affiliates.
|
2
|
Prior
period amounts restated to conform to current period reporting
methodology.
|
3
|
Revenue
from retail payphone lines is reported in the Other segment. We are in the
process of ending our retail payphone operations.
|
4
|
Total
wired broadband connections include DSL, U-verse high-speed Internet
access and satellite broadband.
|
5
|
Satellite
service includes connections under our agency and resale
agreements.
|
6
|
Includes
consumer U-verse Voice over IP connections.
|
|
|
Advertising
Solutions
Segment
Results
|
|
Third
Quarter
|
|
Nine-Month
Period
|
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Total
Segment Operating Revenues
|
|
$ |
1,180 |
|
|
$ |
1,350 |
|
|
|
(12.6 |
)% |
|
$ |
3,680 |
|
|
$ |
4,174 |
|
|
|
(11.8 |
)% |
Segment
operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
and support
|
|
|
721 |
|
|
|
735 |
|
|
|
(1.9 |
) |
|
|
2,221 |
|
|
|
2,293 |
|
|
|
(3.1 |
) |
Depreciation
and amortization
|
|
|
158 |
|
|
|
194 |
|
|
|
(18.6 |
) |
|
|
500 |
|
|
|
609 |
|
|
|
(17.9 |
) |
Total
Segment Operating Expenses
|
|
|
879 |
|
|
|
929 |
|
|
|
(5.4 |
) |
|
|
2,721 |
|
|
|
2,902 |
|
|
|
(6.2 |
) |
Segment
Income
|
|
$ |
301 |
|
|
$ |
421 |
|
|
|
(28.5 |
)% |
|
$ |
959 |
|
|
$ |
1,272 |
|
|
|
(24.6 |
)% |
Operating
Results
Our
advertising solutions operating income margin was 25.5% in the third quarter of
2009, compared to 31.2% in the third quarter of 2008, and 26.1% for the first
nine months of 2009, compared to 30.5% for the first nine months of
2008.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Operating revenues decreased
$170, or 12.6%, in the third quarter and $494, or 11.8%, for the first nine
months of 2009 largely driven by continued declines in print revenue of $209 in
the third quarter and $555 for the first nine months as customers reduced or
eliminated print ad purchases due to the continuing economic recession and a
shift to Internet-based advertising and local search. Sales agency revenue also
declined $30 for the first nine months due primarily to the sale of a sales
agency business. These decreases were partially offset by increased Internet
revenue of $37 in the third quarter and $106 for the first nine
months.
Operating expenses decreased
$50, or 5.4%, in the third quarter and $181, or 6.2%, for the first nine months
of 2009 largely driven by decreased amortization of $36 in the third quarter and
$107 for the first nine months, resulting from use of an accelerated method of
amortization for the customer list acquired as part of the BellSouth acquisition
and decreases in print product related expenses of $6 in the third quarter and
$52 in the first nine months.
Other
Segment
Results
|
Third
Quarter
|
Nine-Month
Period
|
|
2009
|
|
2008
|
|
Percent
Change
|
2009
|
|
2008
|
|
Percent
Change
|
|
Total
Segment Operating Revenues
|
|
$ |
427 |
|
|
$ |
501 |
|
|
|
(14.8 |
)% |
|
$ |
1,288 |
|
|
$ |
1,557 |
|
|
|
(17.3 |
)% |
Total
Segment Operating Expenses
|
|
|
616 |
|
|
|
425 |
|
|
|
44.9 |
|
|
|
1,528 |
|
|
|
1,890 |
|
|
|
(19.2 |
) |
Segment
Operating Income (Loss)
|
|
|
(189 |
) |
|
|
76 |
|
|
|
- |
|
|
|
(240 |
) |
|
|
(333 |
) |
|
|
27.9 |
|
Equity
in Net Income of Affiliates
|
|
|
172 |
|
|
|
248 |
|
|
|
(30.6 |
) |
|
|
531 |
|
|
|
689 |
|
|
|
(22.9 |
) |
Segment
Income (Loss)
|
|
$ |
(17 |
) |
|
$ |
324 |
|
|
|
- |
|
|
$ |
291 |
|
|
$ |
356 |
|
|
|
(18.3 |
)% |
Our other
segment operating results consist primarily of Sterling, customer information
services (primarily operator services and payphone), corporate and other
operations. Sterling provides business-integration software and
services.
Segment operating revenues
decreased $74, or 14.8%, in the third quarter and $269, or 17.3%, for the first
nine months of 2009 primarily due to reduced revenues from our operator
services, retail payphone operations, and Sterling.
Segment operating expenses
increased $191, or 44.9%, in the third quarter and decreased $362, or 19.2%, for
the first nine months of 2009. The increase in the third quarter 2009 is due to
severance charges. The decrease in the first nine months was primarily due to
the 2008 severance charges as a result of the restructure of our operations from
a collection of regional companies to a single national approach.
Our other
segment also includes our equity investments in international companies, the
income from which we report as equity in net income of affiliates. Our earnings
from foreign affiliates are sensitive to exchange-rate changes in the value of
the respective local currencies. Our foreign investments are recorded under
GAAP, which include adjustments for the purchase method of accounting and
exclude certain adjustments required for local reporting in specific countries.
Our equity in net income of affiliates by major investment is listed
below:
|
|
Third
Quarter
|
|
|
Nine-Month
Period
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
América
Móvil
|
|
$ |
125 |
|
|
$ |
136 |
|
|
$ |
383 |
|
|
$ |
406 |
|
Telmex
|
|
|
34 |
|
|
|
113 |
|
|
|
100 |
|
|
|
283 |
|
Telmex
Internacional
|
|
|
14 |
|
|
|
- |
|
|
|
51 |
|
|
|
- |
|
Other
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
- |
|
Other
Segment Equity in Net Income of Affiliates
|
|
$ |
172 |
|
|
$ |
248 |
|
|
$ |
531 |
|
|
$ |
689 |
|
Equity in net income of
affiliates decreased $76, or 30.6%, in the third quarter and decreased
$158, or 22.9%, for the first nine months of 2009. The declines were primarily
due to decreased operating results at Telmex and foreign currency translation
losses at América Móvil and Telmex Internacional partially offset by increased
operating results at América Móvil.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
OTHER BUSINESS
MATTERS
U-verse Services We
are continuing to expand our deployment of U-verse high-speed broadband and TV
services. As of September 30, 2009, we have passed more than 20 million living
units (constructed housing units as well as platted housing lots) and are
marketing the services to 72 percent of those units. Our deployment strategy is
to enter each new area on a limited basis in order to ensure that all operating
and back-office systems are functioning successfully and then expand within each
as we continue to monitor these systems. Our rate of expansion will be slowed if
we cannot obtain all required local building permits in a timely fashion. We
also continue to work with our vendors on improving, in a timely manner, the
requisite hardware and software technology. Our deployment plans could be
delayed if we do not receive required equipment and software on
schedule.
We
believe that our U-verse TV service is subject to federal oversight as a “video
service” under the Federal Communications Act. However, some cable providers and
municipalities have claimed that certain IP services should be treated as a
traditional cable service and therefore subject to the applicable state and
local cable regulation. Certain municipalities have delayed our request or have
refused us permission to use our existing right-of-ways to deploy or activate
our U-verse-related services and products, resulting in litigation. Pending
negotiations and current or threatened litigation involving municipalities could
delay our deployment plans in those areas. In July 2008, the U.S. District Court
for Connecticut affirmed its October 2007 ruling that AT&T’s U-verse TV
service is a cable service in Connecticut. We have appealed that decision on the
basis that state legislation rendered the case moot. Petitions have been filed
at the FCC alleging that the manner in which AT&T provisions "public,
educational, and governmental" (PEG) programming over its U-verse TV service
conflicts with federal law, and a lawsuit has been filed in a California State
District 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 are applicable to
our U-verse services, or if the FCC, state agencies or the courts were to rule
that AT&T must deliver PEG programming in a manner substantially different
from the way it does today or in ways that are inconsistent with AT&T’s
current network architecture, it could have a material adverse effect on the
cost, timing and extent of our deployment plans.
Retiree Phone Concession
Litigation In May 2005, we were served with a purported class
action in U.S. District Court, Western District of Texas (Stoffels v. SBC
Communications Inc.), in which the plaintiffs, who are retirees of Pacific Bell
Telephone Company, Southwestern Bell and Ameritech, contend that the telephone
concession provided by the company is, in essence, a “defined benefit plan”
within the meaning of the Employee Retirement Income Security Act of 1974, as
amended (ERISA). In October 2006, the Court certified two classes. The issue of
whether the concession is an ERISA pension plan was tried before the judge in
November 2007. In May 2008, the court ruled that the concession was an ERISA
pension plan. We asked the court to certify this ruling for interlocutory appeal
and in August 2008, the court denied our request. In May 2009, we filed a motion
for reconsideration with the trial court. That motion is pending. A trial on the
appropriate remedy has been set for June 1, 2010. We believe that an adverse
outcome having a material effect on our financial statements in this case is
unlikely, but will continue to evaluate the potential impact of this suit on our
financial results as it progresses.
NSA
Litigation Twenty-four lawsuits were filed alleging that we
and other telecommunications carriers unlawfully provided assistance to the
National Security Agency (NSA) 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 United States 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 telecommunications companies. The court granted the
Government's motion to dismiss and entered final judgments in July
2009.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
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 on July 27, 2009 and entered a final judgment on July 29, 2009. All
cases brought against the AT&T entities have been dismissed. In August 2009,
we received notice that the plaintiffs in all cases have filed an appeal with
the Ninth Circuit Court of Appeals.
Management
believes these actions are without merit and intends to continue to defend these
matters vigorously.
Labor
Contracts Contracts covering approximately 80,000
collectively-bargained wireline employees expired in early April 2009. Another
contract covering approximately 11,000 wireline employees expired in late June.
A remaining contract covering approximately 32,000 wireline employees expired on
August 8, 2009. In the absence of an effective contract, the union is entitled
to call a work stoppage. As of September 30, 2009, the Company and employees
representing approximately 50 percent of these collectively-bargained wireline
employees have ratified new labor agreements. These agreements provide for a
three-year term and, for the vast majority of covered employees, a 3 percent
wage increase in years one and two, a wage increase in year three of 2.75
percent, and pension band increases of 2 percent for each year of the agreement.
For both wage and pension band increases, there is a potential cost-of-living
increase based on the consumer price index for the third year. These agreements
also provide for continued health care coverage with reasonable cost
sharing.
On
October 13, 2009, the Company and the Communications Workers of America (CWA)
union reached a tentative four-year agreement covering approximately 26,000
wireline employees in the five Southwestern states where we provide local
service. The agreement is subject to ratification by the covered employees by
November 11, 2009. Ratification would bring the percentage of all
collectively-bargained employees under contract to nearly 80 percent. The
provisions of the tentative agreement are substantially similar to the
provisions of the ratified agreements discussed above, with a wage increase in
year four of 2.75 percent and a potential cost-of-living increase in year four
instead of in year three.
Centennial Communications
Acquisition In November 2008, we agreed to acquire Centennial
Communications Corp., a regional provider of wireless and wired communications
services. On October 13, 2009, the acquisition received clearance from the U.S.
Department of Justice and remains subject to approval from the Federal
Communications Commission. The acquisition is now expected to close early in the
fourth quarter of 2009.
COMPETITIVE AND REGULATORY
ENVIRONMENT
Overview AT&T subsidiaries
operating within the U.S. are subject to federal and state regulatory
authorities. AT&T subsidiaries operating outside the U.S. 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 Federal Communications Commission (FCC) and some state
regulatory commissions have maintained certain regulatory requirements that were
imposed decades ago on our traditional wireline subsidiaries when they operated
as legal monopolies. Where appropriate, we are pursuing additional legislative
and regulatory measures to reduce regulatory burdens that inhibit our ability to
compete more effectively and offer services wanted and needed by our customers.
We are participating in regulatory proceedings that could result in new or
different regulatory requirements, such as in areas relating to the provisions
of broadband and special access services. We also are supporting efforts to
update and improve regulatory treatment for retail services. Passage of
legislation is uncertain and depends on many factors.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
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. While wireless communications providers’ prices and service offerings are
generally not subject to state regulation, an increasing number of states are
attempting to regulate or legislate various aspects of wireless services, such
as in the area of consumer protection.
AT&T
has previously noted that the broadband marketplace is robustly competitive and
that we do not block consumers from accessing the lawful Internet sites of their
choice. We therefore believe that prescriptive “net neutrality” rules are not
only unnecessary but also counterproductive to the extent they would restrict
broadband Internet access providers from developing innovative new services for
consumers and/or content and application providers. Nor do we believe that
wireless providers should be prohibited from entering into exclusive
arrangements with handset manufacturers. It is widely recognized that the
wireless industry in the United States is characterized by innovation,
differentiation, declining prices and extensive competition among handset
manufacturers, service providers and applications. For this reason, additional
broadband regulation and new wholesale requirements are
unwarranted.
Net Neutrality On
October 22, 2009, the FCC adopted a Notice of Proposed Rulemaking (NPRM) seeking
comment on six proposed “net neutrality” rules that are intended to preserve the
“free and open Internet.” The proposed rules apply to providers of
“broadband Internet access service” and state that, subject to “reasonable
network management,” such a provider:
·
|
May
not prevent any of its users from sending or receiving the lawful content
of the user’s choice over the
Internet.
|
·
|
May
not prevent any of its users from running the lawful applications or using
the lawful services of the user’s
choice.
|
·
|
May
not prevent any of its users from connecting to and using on its network
the user’s choice of lawful devices that do not harm the
network.
|
·
|
May
not deprive any of its users of the user’s entitlement to competition
among network providers, application providers, service providers and
content providers.
|
·
|
Must
treat lawful content, applications and services in a nondiscriminatory
manner.
|
·
|
Must
disclose such information concerning network management and other
practices as is reasonably required for users and content, application and
service providers to enjoy the protections specified in this
part.
|
The NPRM
states that the proposed rules would apply to all platforms over which broadband
Internet access services is provided, including mobile wireless broadband, while
recognizing that different platforms involve significantly different
technologies, market structures, patterns of consumer usage and regulatory
history. The comment cycle on the NPRM concludes in the first quarter of 2010.
We are unable to determine the impact of this proceeding on our operating
results and financial condition at this time.
ACCOUNTING POLICIES AND
STANDARDS
Accounting Standards
Codification In June 2009, the FASB issued standards that
established the FASB Accounting Standards Codification (ASC or Codification) as
the source of authoritative GAAP by the FASB for nongovernmental entities. The
ASC supersedes all non-SEC accounting and reporting standards that existed at
the ASC’s effective date. The FASB uses Accounting Standards Updates (ASU) to
amend the ASC. These standards are effective for interim and annual periods
ending after September 15, 2009 (i.e., the quarterly period ended September 30,
2009, for us).
Subsequent
Events In May 2009, the FASB issued a standard that
established general standards of accounting for and disclosing events that occur
after the balance sheet date but before financial statements are issued or are
available for issuance. They were effective for interim and annual periods
ending after June 15, 2009 (i.e., the quarterly period ended June 30, 2009, for
us). In preparing the accompanying unaudited consolidated financial statements,
we have reviewed all known events that have occurred after September 30, 2009,
and through the filing on November 5, 2009, for inclusion in the financial
statements and footnotes.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
Noncontrolling Interests
Reporting In December 2007, the FASB issued a standard that
requires noncontrolling interests held by parties other than the parent in
subsidiaries to be clearly identified, labeled, and presented in the
consolidated statements of financial position within equity, but separate from
the parent’s equity. For us, the new standard became effective January 1, 2009,
with restatement of prior financial statements and had no material impact on our
financial position and results of operations.
Fair Value Measurement and
Disclosures In April 2009, the FASB issued staff positions
that require enhanced disclosures, including interim disclosures, on financial
instruments, determination of fair value in turbulent markets, and recognition
and presentation of other-than-temporary impairments. These staff positions were
effective for interim and annual reporting periods beginning in our second
quarter of 2009, and they have increased quarterly disclosures but have not had
an impact on our financial position and results of operations (see Note
6).
In August
2009, the FASB issued ASU 2009-5, “Measuring Liabilities at Fair Value” (ASU
2009-5), which amends existing GAAP for fair value measurement guidance by
clarifying the fair value measurement requirements for liabilities that lack a
quoted price in an active market. Per the Codification, a valuation technique
based on a quoted market price for the identical or similar liability when
traded as an asset or another valuation technique (e.g., an income or market
approach) that is consistent with the underlying principles of GAAP for fair
value measurements would be appropriate. ASU 2009-5 was effective August 2009,
the issuance date, and had no material impact on our financial position or
results of operations.
In
September 2009, the FASB issued ASU 2009-12, “Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent)” (ASU 2009-12),
which provides guidance for an investor on using the net asset value per share
provided by an investee to estimate the fair value of an alternative investment
when the fair value for the primary investment is not readily determinable. It
affects certain investments that are required or permitted by GAAP to be
measured or disclosed at fair value on a recurring or nonrecurring basis. It
requires disclosures by major category of investment about certain attributes
(e.g., applicable redemption restrictions, unfunded commitments to the issuer of
the investments, and the investment strategies of that issuer). ASU 2009-12 will
be effective for interim and annual periods ending on or after December 15, 2009
(i.e., the year ending December 31, 2009, for us). Fair value standards apply
not only to the investments we hold but also to investments held by our benefit
plans. We are currently evaluating the impact on our financial position and
results of operations.
Variable Interest
Entities In June 2009, the FASB issued a standard that
requires an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity. This standard is effective for both
interim and annual periods as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009 (i.e., January 1,
2010, for us), and we are currently evaluating its impact on our financial
position and results of operations.
Revenue Arrangements with Multiple
Deliverables In October 2009, the FASB issued ASU 2009-13,
“Multiple-Deliverable Revenue Arrangements” (ASU 2009-13), which addresses how
revenues should be allocated among all products and services included in our
sales arrangements. It establishes a selling price hierarchy for determining the
selling price of each product or service, with vendor-specific objective
evidence (VSOE) at the highest level, third-party evidence of VSOE at the
intermediate level, and a best estimate at the lowest level. It replaces “fair
value” with “selling price” in revenue allocation guidance. It also
significantly expands the disclosure requirements for such arrangements. ASU
2009-13 will be effective prospectively for sales entered into or materially
modified in fiscal years beginning on or after June 15, 2010 (i.e., the year
beginning January 1, 2011, for us). The FASB permits early adoption of ASU
2009-13, applied retrospectively, to the beginning of the year of adoption. We
are currently evaluating the impact on our financial position and results of
operations.
Software In October
2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include
Software Elements” (ASU 2009-14), which clarifies the guidance for allocating
and measuring revenue, including how to identify software that is out of the
scope. ASU 2009-14 amends accounting and reporting guidance for revenue
arrangements involving both tangible products and software that is “more than
incidental to the tangible product as a whole” and the hardware components
will also be outside of the scope of software revenue guidance and may result in
more revenue recognized at the time of the hardware sale. Additional disclosures
will discuss allocation of revenue to products and services and the significant
judgments applied in the revenue allocation method, including impacts on the
timing and amount of revenue recognition. ASU 2009-14 will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 (i.e., the year beginning
January 1, 2011, for us). ASU 2009-14 has the same effective date, including
early adoption provisions, as ASU 2009-13. Companies must adopt ASU 2009-14 and
ASU 2009-13 at the same time. We are currently evaluating the impact on our
financial position and results of operations.
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
LIQUIDITY AND CAPITAL
RESOURCES
We had
$6,167 in cash and cash equivalents available at September 30, 2009. Cash and
cash equivalents included cash of $514 and money market funds and other cash
equivalents of $5,653. In the first nine months of 2009, cash inflows were
primarily provided by cash receipts from operations and the issuance of
long-term debt. These inflows were offset by cash used to meet the needs of the
business including, but not limited to, payment of operating expenses, funding
capital expenditures, dividends to stockholders, the repayment of debt and the
payment of interest on debt. We discuss many of these factors in detail
below.
Cash
Provided by or Used in Operating Activities
In the
first nine months of 2009, cash provided by operating activities was $25,481
compared to $22,773 in the first nine months of 2008. Our operating cash flow
reflects decreased tax payments of $2,682, partially offset by reduced net
income and declines in operating liabilities.
Cash
Used in or Provided by Investing Activities
In the
first nine months of 2009, cash used in investing activities consisted primarily
of $11,067 for capital expenditures and $553 for interest during construction.
Cash provided by investing activities included dispositions of $205 with the
majority due to the disposition of a professional services
business.
Our
capital expenditures are primarily for our wireless and wireline networks, and
support systems for our communications services. Capital spending excluding
interest during construction in our wireless segment decreased 11% in the first nine
months. Expenditures were used for network capacity expansion, integration and
upgrades to our Universal Mobile Telecommunications System/High-Speed Packet
Access network, as well as for IT and other support systems for our wireless
service. Capital expenditures including interest during construction in the
wireline segment, which represented 66% of our capital
expenditures, decreased 27% in the first nine months of 2009, reflecting
decreased spending on U-verse services as the upgrades to our existing network
become more mature. In addition, capital expenditures decreased due to less
spending on wireline voice services, and lower DSL and Hicap
volumes.
We
continue to expect that our 2009 capital expenditures will be in the range of
$17,000 to $18,000. Wireless expenditures will be proportionately higher in the
fourth quarter as expenditures follow year to date preparation work. We continue
to expect to fund 2009 capital expenditures for our wireless and wireline
segments, including international operations, using cash from operations and
incremental borrowings, depending on interest rate levels and overall market
conditions. The amount of capital investment is influenced by demand for
services and products, continued growth and regulatory
considerations.
Cash
Used in or Provided by Financing Activities
We
continue to fund our 2009 financing activities through cash from operations and
long-term borrowings. Our financing activities included the repayment of debt
and payment of dividends.
At
September 30, 2009, we had $6,755 of debt maturing within one year, which
included $6,730 of long-term debt maturities and $25 of other borrowings. We
continue to examine our mix of short- and long-term debt in light of interest
rate trends.
In the
first nine months of 2009, we received net proceeds of $8,161 from the issuance
of long-term debt. Our long-term debt issuances were as follows:
·
|
$1,000
of 4.85% global notes due in 2014.
|
·
|
$2,250
of 5.80% global notes due in 2019.
|
·
|
$2,250
of 6.55% global notes due in 2039.
|
·
|
£750
of 5.875% global notes due in 2017 (equivalent to $1,107 when
issued).
|
·
|
£1,100
of 7.0% global notes due in 2040 (equivalent to $1,621 when
issued).
|
AT&T
INC.
SEPTEMBER
30, 2009
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Continued
Dollars
in millions except per share amounts
In the
first nine months of 2009, we repaid $10,761 of debt, which consisted of $6,170
of repayments of long-term debt and $4,591 in repayments of commercial paper and
other short-term borrowings. Included in the long-term debt repayments were $350
of debt that was called and redeemed in September 2009. We called another $360
of long-term debt in September that was redeemed in October 2009.
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, which were originally issued by our
BellSouth subsidiary, can be put each April until maturity in
2021.
|
·
|
An
accreting zero-coupon note may be redeemed each May, excluding May 2011,
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.
|
On
December 10, 2007, our Board of Directors authorized the repurchase of up to 400
million shares of AT&T common stock; this authorization expires at the end
of 2009. Although we will evaluate additional share repurchases during the
remainder of 2009, our intent is to continue to focus on reducing
debt.
We paid
dividends of $7,252 in the first nine months of 2009 and $7,150 in the first
nine months of 2008, primarily reflecting an increase in the quarterly dividend
approved by our Board of Directors in December 2008. Dividends declared by our
Board of Directors totaled $0.41 per share in the third quarter of 2009 and
$0.40 per share in the third quarter of 2008. 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
September 30, 2009, our debt ratio was 42.1% compared to 40.5% at September 30,
2008 and 43.7% at December 31, 2008. The increased debt ratio from a year ago is
due primarily to a decrease in stockholders’ equity driven by a decrease in
value of our retirement plans’ assets, partially offset by a $4,110 decrease in
debt. Stockholders’ equity at December 31, 2008, and throughout 2009 reflects
required adjustments under standards for employers’ accounting for defined
benefit pension and other postretirement plans.
We have a
five-year credit agreement with a syndicate of investment and commercial banks.
In June 2009, one of the participating banks, Lehman Brothers Bank, Inc., which
had declared bankruptcy, terminated their lending commitment of $535 and
withdrew from the agreement. As a result of this termination, the outstanding
commitments under the agreement have been reduced from a total of $10,000 to
$9,465. We still have the right to increase commitments up to an additional
$2,535 provided no event of default under the credit agreement has occurred. The
current agreement will expire in July 2011. We also have the right to terminate,
in whole or in part, amounts committed by the lenders under this agreement in
excess of any outstanding advances; however, any such terminated commitments may
not be reinstated. Advances under this agreement may be used for general
corporate purposes, including support of commercial paper borrowings and other
short-term borrowings. We must maintain a debt-to-EBITDA (earnings before
interest, income taxes, depreciation and amortization, and other modifications
described in the agreement) financial ratio covenant of not more than
three-to-one as of the last day of each fiscal quarter for the four quarters
then ended. We comply with all covenants under the agreement. At September 30,
2009, we had no borrowings outstanding under this agreement.
AT&T
INC.
Item 3. Quantitative and
Qualitative Disclosures About Market
Risk
At
September 30, 2009, we had interest rate swaps with a notional value of $9,000
and a fair value of $436.
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
$22 at September 30, 2009. We have rate locks with a notional value of $2,800
and a fair value of $(73) and foreign exchange contracts with a notional value
of $139 and a fair value of less than $1 at September 30, 2009.
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 September 30, 2009. 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 September
30, 2009.
AT&T
INC.
CAUTIONARY LANGUAGE
CONCERNING FORWARD-LOOKING STATEMENTS
Information
set forth in this report contains forward-looking statements that are subject to
risks and uncertainties, and actual results could differ materially. Many of
these factors are discussed in more detail in the “Risk Factors” section. We
claim the protection of the safe harbor for forward-looking statements provided
by the Private Securities Litigation Reform Act of 1995.
The
following factors could cause our future results to differ materially from those
expressed in the forward-looking statements:
·
|
Adverse
economic and/or capital access changes in the markets served by us or in
countries in which we have significant investments, including the impact
on customer demand and our ability and our suppliers’ ability to access
financial markets.
|
·
|
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.
|
·
|
The
final outcome of Federal Communications Commission and other Federal
agency proceedings and reopenings of such proceedings and judicial review,
if any, of such proceedings, including issues relating to access charges,
broadband deployment, E911 services, competition, net neutrality,
unbundled loop and transport elements and wireless
services.
|
·
|
The
final outcome of regulatory proceedings in the states in which we operate
and reopenings of such proceedings, and judicial review, if any, of such
proceedings, including proceedings relating to Interconnection terms,
access charges, universal service, unbundled network elements and resale
and wholesale rates, broadband deployment including our U-verse services,
performance measurement plans, service standards and traffic
compensation.
|
·
|
Enactment
of additional state, federal and/or foreign regulatory and tax laws and
regulations pertaining to our subsidiaries and foreign
investments.
|
·
|
Our
ability to absorb revenue losses caused by increasing competition,
including offerings using alternative technologies (e.g., cable, wireless
and VoIP), and our ability to maintain capital
expenditures.
|
·
|
The
extent of competition and the resulting pressure on access line totals and
wireline and wireless operating
margins.
|
·
|
Our
ability to develop attractive and profitable product/service offerings to
offset increasing competition in our wireless and wireline
markets.
|
·
|
The
ability of our competitors to offer product/service offerings at lower
prices due to lower cost structures and regulatory and legislative actions
adverse to us, including state regulatory proceedings relating to
unbundled network elements and nonregulation of comparable alternative
technologies (e.g., VoIP).
|
·
|
The
timing, extent and cost of deployment of our U-verse services; the
development of attractive and profitable service offerings; the extent to
which regulatory, franchise fees and build-out requirements apply to this
initiative; and the availability, cost and/or reliability of the various
technologies and/or content required to provide such
offerings.
|
·
|
The
outcome of pending or threatened litigation including patent and product
safety claims by or against third
parties.
|
·
|
The
impact on our networks and business of major equipment failures, our
inability to obtain equipment/software or have equipment/software serviced
in a timely and cost-effective manner from suppliers, severe weather
conditions, natural disasters, pandemics or terrorist
attacks.
|
·
|
Our
ability to successfully negotiate new collective bargaining contracts and
the terms of those contracts.
|
·
|
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 access to
additional spectrum; network upgrades and technological
advancements.
|
·
|
Changes
in our corporate strategies, such as changing network requirements or
acquisitions and dispositions, 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.
AT&T
INC.
PART
II – OTHER INFORMATION
Dollars
in millions except per share amounts
Item 1A. Risk
Factors
We
discuss in our Annual Report on Form 10-K various risks that may materially
affect our business. We use this section to update this discussion to reflect
material developments since our Form 10-K was filed. For the third quarter 2009,
there were no such material developments.
AT&T
INC.
Item 6.
Exhibits
Exhibits
identified in parentheses below, on file with the Securities and Exchange
Commission, are incorporated by reference as exhibits hereto. Unless otherwise
indicated, all exhibits so incorporated are from File No. 1-8610.
12
|
Computation
of Ratios of Earnings to Fixed Charges
|
31
|
Rule
13a-14(a)/15d-14(a) Certifications
31.1 Certification
of Principal Executive Officer
31.2 Certification
of Principal Financial Officer
|
32
|
Section
1350 Certifications
|
101
|
XBRL
Instance Document
|
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.
November
5,
2009
/s/ Richard G.
Lindner.
Richard G. Lindner
Senior Executive Vice
President
and Chief Financial
Officer
39