TIDM58KM
RNS Number : 4084C
AT & T Inc.
04 March 2011
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
x TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas, 75202
Telephone Number 210-821-4105
Securities registered pursuant to Section 12(b) of the Act: (See
attached Schedule A)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
[X] No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [X]
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant1s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a 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]
Based on the closing price of $24.19 per share on June 30, 2010,
the aggregate market value of our voting and non-voting common
stock held by non-affiliates was $142.9 billion.
At January 31, 2011, common shares outstanding were
5,911,433,420.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of AT&T Inc.'s Annual Report to Stockholders
for the fiscal year ended December 31, 2010 (Parts
I and II).
(2) Portions of AT&T Inc.'s Notice of 2011 Annual Meeting
and Proxy Statement dated on or about March 11, 2011
to be filed within the period permitted under General
Instruction G(3) (Parts III and IV).
SCHEDULE A
Securities Registered Pursuant To Section 12(b) Of The Act:
Name of each exchange
Title of each class on which registered
Common Shares (Par Value $1.00 Per Share) New York Stock Exchange
6.125% AT&T Inc. New York Stock Exchange
Global Notes due April 2, 2015
5.875% AT&T Inc. New York Stock Exchange
Global Notes due April 28, 2017
7.00% AT&T Inc. New York Stock Exchange
Global Notes due April 30, 2040
6.375% AT&T Inc. New York Stock Exchange
Senior Notes due February 15, 2056
TABLE OF CONTENTS
Item Page
PART I
1. Business 1
1A. Risk Factors 8
2. Properties 9
3. Legal Proceedings 9
4. [Removed and Reserved.] 9
Executive Officers of the Registrant 10
PART II
Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
5. Securities 11
6. Selected Financial Data 11
Management's Discussion and Analysis of Financial
Condition
7. and Results of Operations 11
Quantitative and Qualitative Disclosures about Market
7A. Risk 11
8. Financial Statements and Supplementary Data 11
Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure 11
9A. Controls and Procedures 11
9B. Other Information 12
PART III
10. Directors, Executive Officers and Corporate Governance 13
11. Executive Compensation 13
Security Ownership of Certain Beneficial Owners and
12. Management and Related Stockholder Matters 14
Certain Relationships and Related Transactions, and
13. Director Independence 14
14. Principal Accountant Fees and Services 14
PART IV
15. Exhibits and Financial Statement Schedules 14
AT&T Inc.
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PART I
ITEM 1. BUSINESS
GENERAL
AT&T Inc. ("AT&T, " "we" or the "Company") is a holding
company incorporated under the laws of the State of Delaware in
1983 and has its principal executive offices at 208 S. Akard St.,
Dallas, Texas, 75202 (telephone number 210-821-4105). We maintain
an Internet website at www.att.com. (This website address is for
information only and is not intended to be an active link or to
incorporate any website information into this document.) We make
available, free of charge, on our website our annual report on Form
10-K, our quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments to those reports as soon as reasonably
practicable after such reports are electronically filed with, or
furnished to, the Securities and Exchange Commission (SEC). We also
make available on that website, and in print, if any stockholder or
other person so requests, our code of business conduct and ethics
entitled "Code of Ethics" applicable to all employees and
Directors, our "Corporate Governance Guidelines, " and the charters
for all committees of our Board of Directors, including Audit,
Human Resources and Corporate Governance and Nominating. Any
changes to our Code of Ethics or waiver of our Code of Ethics for
senior financial officers, executive officers or Directors will be
posted on that website.
History
AT&T, formerly known as SBC Communications Inc. (SBC), was
formed as one of several regional holding companies created to hold
AT&T Corp.'s (ATTC) local telephone companies. On January 1,
1984, we were spun-off from ATTC pursuant to an anti-trust consent
decree, becoming an independent publicly traded telecommunications
services provider. At formation, we primarily operated in five
southwestern states. Our subsidiaries merged with Pacific Telesis
Group in 1997, Southern New England Telecommunications Corporation
in 1998 and Ameritech Corporation in 1999, thereby expanding our
wireline operations as the incumbent local exchange carrier (ILEC)
into a total of 13 states. In November 2005, one of our
subsidiaries merged with ATTC, creating one of the world's leading
telecommunications providers. In connection with the merger, we
changed the name of our company from "SBC Communications Inc. " to
"AT&T Inc. " In December 2006, one of our subsidiaries merged
with BellSouth Corporation (BellSouth) making us the ILEC in an
additional nine states. With the BellSouth acquisition, we thereby
acquired BellSouth's 40% economic interest in AT&T Mobility LLC
(AT&T Mobility), formerly Cingular Wireless LLC, and
BellSouth's 34% economic interest in YELLOWPAGES.COM (YPC),
resulting in 100% ownership of AT&T Mobility and YPC. Our
services and products are marketed under the AT&T brand name,
including alliances such as AT&T Yahoo! and AT&T | DIRECT
TV.
Scope
We are a leading providers of telecommunications services in the
United States and the world. We offer our services and products to
consumers in the U.S. and services and products to businesses and
other providers of telecommunications services worldwide.
The services and products that we offer vary by market, and
include: wireless communications, local exchange services,
long-distance services, data/broadband and Internet services, video
services, telecommunications equipment, managed networking,
wholesale services and directory advertising and publishing. We
group our operating subsidiaries as follows, corresponding to our
operating segments for financial reporting purposes:
-- wireless subsidiaries provide both wireless voice
and data communications services across the U.S. and,
through roaming agreements, in a substantial number
of foreign countries.
-- wireline subsidiaries provide primarily landline
voice and data communication services, AT&T U-VerseSM
TV, high-speed broadband and voice services (U-Verse)
and managed networking to business customers.
-- advertising solutions subsidiaries publish Yellow
and White Pages directories and sell directory advertising
and Internet-based advertising and local search.
-- other subsidiaries provide results from customer
information services and all corporate and other operations.
Our local exchange subsidiaries operate as the ILEC in 22
states: Alabama, Arkansas, California, Connecticut, Illinois,
Indiana, Florida, Georgia, Kentucky, Louisiana, Kansas, Michigan,
Mississippi, Missouri, Nevada, North Carolina, Ohio, Oklahoma,
South Carolina, Tennessee, Texas and Wisconsin (22-state area). Our
local exchange subsidiaries are subject to regulation by each state
in which they operate and by the Federal Communications Commission
(FCC). Wireless service providers are regulated by the FCC.
Additional information relating to regulation is contained under
the heading "Government Regulation" and in the Annual Report under
the heading "Operating Environment and Trends of the Business, "
and is incorporated herein by reference pursuant to General
Instruction G(2).
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AT&T Inc.
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With the expansion of our company through acquisitions and the
resulting ownership consolidation of AT&T Mobility, and with
continuing advances in technology, our services offerings now
combine our traditional wireline and wireless services. We make our
customer's lives more convenient and productive and foster
competition and further innovation in the communications and
entertainment industry. In 2011, we plan to focus on the areas
discussed below.
Wireless
AT&T Mobility began operations in October 2000 as a joint
venture between us and BellSouth and, in 2004, acquired AT&T
Wireless Services, Inc. Upon our acquisition of BellSouth in 2006,
AT&T Mobility became a wholly-owned subsidiary.
We cover most major metropolitan areas of the U.S. with our
Universal Mobile Telecommunications System/ High-Speed Downlink
Packet Access (HSPA) and HSPA+ network technology, with HSPA+
providing 4G speeds when combined with our upgraded backhaul. Our
network provides superior speeds for data and video services, as
well as operating efficiencies, using the same spectrum and
infrastructure for voice and data on an IP-based platform. Our
wireless network also relies on digital transmission technologies
known as Global System for Mobile Communication, General Packet
Radio Services and Enhanced Data Rates for GSM Evolution for data
communications. We have also begun transitioning our network to
more advanced Long-Term Evolution (LTE) technology. We continue to
expand the number of locations, including airports and caf's, where
customers can access broadband Internet connections using wireless
fidelity (local radio frequency commonly referred as Wi-Fi)
wireless technology.
As of December 31, 2010, we served 95.5 million wireless
customers and were a leading provider of mobile wireless voice and
data communications services in the U.S. As the wireless industry
continues to mature, our future wireless growth will increasingly
depend on our ability to offer integrated handsets and other
innovative devices (such as tablets and eReaders) and innovative
services that will encourage existing customers to upgrade their
services and will attract customers from other providers, as well
as on our ability to minimize turnover of our existing customer
base (customer churn). We intend to accomplish these goals by
continuing to expand our network coverage and improve our network
quality and expand our mobile device offerings. Our ability to
maintain and expand network service enhancements and product
launches may not occur as scheduled or at the cost expected due to
many factors, including delays in determining equipment and handset
operating standards, supplier delays, increases in network
equipment and handset component costs, regulatory permitting delays
for tower sites or enhancements, or labor-related delays. The
effective management of customer churn is critical to our ability
to maximize revenue growth and to maintain and improve our
operating margins.
Business Customers
We expect to continue to strengthen the reach and sophistication
of our network facilities and our ability to offer a variety of
communications services, both wireless and wireline, to large
businesses and wholesale customers worldwide. We expect to offer
similar services to small- and medium-businesses and to increase
the attractiveness of our services to governmental customers. We
also expect to extend our wholesale business offerings to other
service products and systems integration services.
Data/Broadband
As the communications industry continues to move toward
Internet-based technologies that are capable of blending
traditional wireline and wireless services, we plan to offer
services that take advantage of these new and more sophisticated
technologies. In particular, we intend to continue to focus on
deploying our AT&T U-verse sm high-speed broadband and video
services and on developing Internet protocol-based services that
allow customers to unite their home or business wireline services
with their wireless service.
U-verse Services We are continuing to expand our deployment of
U-verse High Speed Internet and TV services. As of December 31,
2010, we have passed more than 27.3 million living units
(constructed housing units as well as platted housing lots) and are
marketing the services to almost 77 percent of those units. 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. 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 superior court raising similar allegations under
California law. If courts having jurisdiction where we have
significant deployments of our U-verse services were to decide that
federal, state and/or local cable regulation were applicable to our
U-verse services, or if the FCC, state agencies or the courts were
to rule that 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.
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AT&T Inc.
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Voice over Internet Protocol VoIP is generally used to describe
the transmission of voice using Internet-Protocol-based technology
rather than a traditional wire and switch-based telephone network.
A company using this technology often can provide voice services at
a lower cost because this technology uses bandwidth more
efficiently than a traditional network and because this technology
has not been subject to traditional telephone industry regulation.
While the development of VoIP has resulted in increased competition
for our wireless and wireline voice services, it also presents
growth opportunities for us to develop new products for our
customers.
BUSINESS OPERATIONS
OPERATING SEGMENTS
Our segments are strategic business units that offer different
products and services over various technology platforms and are
managed accordingly. We analyze our various operating segments
based on segment income before income taxes. We make our capital
allocations decisions primarily based on the network (wireless or
wireline) providing services. Actuarial gains and losses from
pension and other postretirement benefits, interest expense and
other income (expense) net, are managed only on a total company
basis and are, accordingly, reflected only in consolidated results.
Therefore, these items are not included in the calculation of each
segment's percentage of our total segment income. We have four
reportable segments: (1) Wireless; (2) Wireline; (3) Advertising
Solutions; and (4) Other.
Additional information about our segments, including financial
information, is included under the heading "Segment Results" on
pages 33 through 40 and in Note 4 of the Annual Report and is
incorporated herein by reference pursuant to General Instruction
G(2).
WIRELESS
Wireless consists of our subsidiary, AT&T Mobility, which
operates as a wireless provider to both business and consumer
customers. Our Wireless segment provided approximately 47% of 2010
total segment operating revenues and 67% of our 2010 total segment
income. At December 31, 2010, we had more than 95 million wireless
subscribers. We classify our customers as either postpaid, prepaid,
connected device or reseller.
Services and Products
We offer a comprehensive range of high-quality nationwide
wireless voice and data communications services in a variety of
pricing plans, including postpaid and prepaid service plans. Our
offerings are tailored to meet the communications needs of targeted
customer segments, including youth, family, active professionals,
small businesses, government and major national corporate
accounts.
Service Our voice service is generally offered on a contract
basis for one- or two-year periods, referred to as postpaid. Under
the terms of these contracts, service is billed and provided on a
monthly basis according to the applicable rate plan chosen. Our
wireless services include basic local wireless communications
service, long-distance service and roaming services. Roaming
services enable our subscribers to utilize other carriers networks
when they are roaming outside our network footprint. We also charge
fees to other carriers for providing roaming services to their
customers when their customers utilize our network. We offer
prepaid voice service to meet the demands of distinct consumer
segments, such as the youth market, families and small business
customers, who prefer to control usage or pay in advance.
Wireless data revenues continue to be a growing area of our
business, representing an increasing share of our overall
subscriber revenue. We are experiencing solid growth from both
consumer and enterprise wireless data services, as an increasing
number of our subscribers have upgraded their handsets to more
advanced integrated devices. We are also seeing rapid growth in
demand for new data-centric devices such as notebooks, tablets,
eReaders, direction and navigation aids and monitoring devices.
Customers in our connected device category (e.g., users of eReaders
and navigation aids) purchase those devices from third-party
suppliers which buy data access supported by our network. Other
data-centric device users are classified as either postpaid
customers (primarily netbook and notebook users) or prepaid
customers (primarily tablet users) since they purchase service
directly from us. We continue to upgrade our network and coordinate
with equipment manufacturers and applications developers in order
to further capitalize on the continued growth in the demand for
wireless data services. As of December 31, 2010, we were a leading
provider of wireless data in the U.S. wireless industry based on
subscribers.
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AT&T Inc.
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Equipment We sell a wide variety of handsets, wirelessly enabled
computers (i.e., notebooks and tablets) and personal computer
wireless data cards manufactured by various suppliers for use with
our voice and data services. We sell through our own company-owned
stores or through agents or third-party retail stores. We also sell
accessories, such as carrying cases, hands-free devices, batteries,
battery chargers and other items, to consumers, as well as to
agents and other third-party distributors for resale. Like other
wireless service providers, we often provide postpaid contract
subscribers substantial equipment subsidies to initiate or upgrade
service.
Additional information on our Wireless segment is contained in
the Annual Report in the "Operating Environment Overview" section
under the heading "Expected Growth Areas," "Wireless" beginning on
page 42 and is incorporated herein by reference pursuant to General
Instruction G(2).
WIRELINE
Our Wireline subsidiaries provide both retail and wholesale
communication services domestically and internationally. Our
Wireline segment provided approximately 49% of 2010 segment
operating revenues and 34% of our 2010 total segment income. We
divide our wireline services into three product-based categories:
voice, data and other. Revenues from our traditional voice services
have been declining as customers have been switching to wireless,
cable and other Internet-based providers. In addition, the
continuing weak economy has caused wireline customers to terminate
their residential or business phone service as individuals have
lost jobs or otherwise combined households and businesses have
closed or reduced operations. We have responded by offering
packages of combined voice and data services, including broadband
and video, and intend to continue this strategy during 2011.
Services and Products
Voice Voice includes traditional local and long-distance service
provided to retail customers and wholesale access to our network
and individual network elements provided to competitors. At
December 31, 2010, our wireline subsidiaries served approximately
23 million retail consumer access lines, 19 million retail business
access lines and 2 million wholesale access lines. We also have a
number of integrated voice and data services, such as integrated
network connections, that provide customers the ability to
integrate access for their voice and data services, the data
component of which is included in the data category. Additionally,
voice revenues do not include any of our VoIP revenues, which are
included in data revenues.
Long distance consists of traditional long distance and
international long distance for customers that select us as their
primary long-distance carrier. Long distance also includes services
provided by calling card, 1-800 services and conference calling.
These services are used in a wide variety of business applications,
including sales, reservation centers or customer service centers.
We also provide wholesale switched access service to other service
providers.
Voice also includes calling features, fees to maintain wire
located inside customer premises and other miscellaneous voice
products. Calling features are enhanced telephone services
available to retail customers such as Caller ID, Call Waiting and
voice mail. These calling features services are generally more
profitable than basic local phone service.
Data We provide data services that rely on IP-based technology
and data services that rely on older, circuit-based technology.
Approximately 70 percent of our data customers have transitioned
from using our circuit-based services to using our IP-based
services and we expect that trend to continue. We provide
businesses voice applications over IP-based networks (i.e.,
Enhanced Virtual Private Networks or "EVPN"). Over the past several
years, we have built out our new multi-protocol label
switching/asynchronous transfer mode, or MPLS/ATM network, to
supplement, and eventually replace, our other extensive global
networks. These products allow us to provide highly complex global
data networks. Additional IP-based services include Internet access
and network integration, dedicated Internet and enterprise
networking services, U-verse services and related data equipment
sales.
Our circuit-based, traditional data products include switched
and dedicated transport that allow business customers to transport
data at high speeds, as well as DSL and dial-up Internet access.
Our private line offering uses high-capacity digital circuits to
transmit from point-to-point in multiple configurations and allows
customers to create internal data networks and to access external
data networks. Switched Transport services transmit data using
switching equipment to transfer the data between multiple lines
before reaching its destination. Dedicated Transport services use a
single direct line to transmit data between destinations. DSL is a
digital modem technology that converts existing twisted-pair
telephone lines into access paths for multimedia and high-speed
data communications to the Internet or private networks. DSL allows
customers to simultaneously make a phone call and access
information via the Internet or an office local area network.
Digital Services use dedicated digital circuits to transmit digital
data at various high rates of speed.
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Network integration services include installation of business
data systems, local area networking and other data networking
offerings. Internet access services include a wide range of
products for residences and businesses including basic dial-up
access service, dedicated access, web hosting, managed services,
e-mail and high-speed access services. Our managed web-hosting
services for businesses provide network, server and security
infrastructure as well as built-in data storage and include
application performance management, database management, hardware
and operating system management. Our hosting services also provide
customers with secure access to detailed reporting information
about their infrastructure and applications.
Packet services consist of data networks using packet switching
and transmission technologies, including traditional circuit-based,
and IP connectivity services. Packet services enable customers to
transmit large volumes of data economically and securely and are
used for local area network interconnection, remote site, point of
sale and branch office communications. High-speed packet services
are used extensively by enterprise (large business) customers.
Enterprise networking services provide comprehensive support
from network design, implementation and installation to ongoing
network operations and management for networks of varying scales,
including local area networks, wide area networks, and virtual
private networks. These services include applications such as
e-mail, order entry systems, employee directories, human resource
transactions and other database applications.
We also offer Wi-Fi services (local radio frequency commonly
known as wireless fidelity).
We provide local, interstate and international wholesale
networking capacity to other service providers. We offer a
combination of high-volume transmission capacity and conventional
dedicated line services on a regional, national and international
basis to wireless carriers, interexchange carriers, Internet
service providers (ISPs) and facility-based and switchless
resellers. Our wholesale customers are primarily large ISPs,
wireless carriers, competitive local exchange carriers (CLECs),
regional phone companies, interexchange carriers, cable companies
and systems integrators. We also have sold dedicated network
capacity through indefeasible rights-of-use agreements under which
capacity is furnished for contract terms as long as 25 years.
Other Other includes application management, security service,
integration services, customer premises equipment, outsourcing,
government-related services, and satellite video services. Security
services include business continuity and disaster recovery services
as well as premise and network based security products.
Customer premises equipment and other equipment sales range from
single-line and cordless telephones to sophisticated digital PBX
systems. PBX is a private telephone switching system, typically
used by businesses and usually located on a customer's premises,
which provides intra-premise telephone services as well as access
to our network.
ADVERTISING SOLUTIONS
Advertising Solutions includes our directory operations, which
publish Yellow and White Pages directories and sell directory
advertising and Internet-based advertising and local search. The
Advertising Solutions segment provided approximately 3% of total
segment operating revenues and 4% of our 2010 total segment income.
This segment sells advertising services throughout the United
States, with our print directory operations primarily covering our
22-state area.
OTHER
Our Other segment includes customer information services (i.e.,
operator services) and corporate and other operations, as well as
impacts from corporate-wide decisions for which the individual
operating segments are not being evaluated, including interest cost
and expected return on pension and postretirement benefits. The
Other segment provided approximately 1% of total segment operating
revenues. In 2010, segment operating expense exceeded revenues. We
also include in this segment the equity income (loss) from our
investments in Telmex and America Movil. In August 2010, we sold
Sterling Commerce Inc. (Sterling). The Other segment results for
all periods shown have been adjusted to exclude the results of
Sterling, which are now reflected in discontinued operations.
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MAJOR CLASSES OF SERVICE
The following table sets forth the percentage of total
consolidated reported operating revenues by any class of service
that accounted for 10% or more of our consolidated total operating
revenues in any of the last three fiscal years:
Percentage of Total
Consolidated Operating Revenues
------------------------------------------------
2010 2009 2008
-------------------- ------------- ---- ------- ---- ------- ---
Wireless Segment
Wireless service 43% 40% 36%
Wireline Segment
Voice 23% 26% 30%
Data 22% 21% 20%
==================== ============= === ======= === =======
GOVERNMENT 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. Wireless licenses are issued for a fixed time period,
typically ten years, and we must seek renewal of these licenses.
While the FCC has generally renewed licenses given to operating
companies such as us, the FCC has authority to both revoke a
license for cause and to deny a license renewal if a renewal is not
in the public interest. Additionally, while wireless communications
providers' prices and service offerings are generally not subject
to regulation, the federal government and an increasing number of
states are considering new regulations and legislation relating to
various aspects of wireless services.
Our wireline subsidiaries are subject to regulation by state
commissions which have the power to regulate intrastate rates and
services, including local, long-distance and network access
services. These subsidiaries are also subject to the jurisdiction
of the FCC with respect to interstate and international rates and
services, including interstate access charges. Access charges are
designed to compensate our wireline subsidiaries for the use of
their networks by other carriers.
Our subsidiaries operating outside the U.S. are subject to the
jurisdiction of national and supranational regulatory authorities
in the market where service is provided. Regulation is generally
limited to operational licensing authority for the provision of
enterprise services.
Additional information relating to regulation of our
subsidiaries is contained in the Annual Report under the heading
"Operating Environment Overview" beginning on page 41 and is
incorporated herein by reference pursuant to General Instruction
G(2).
IMPORTANCE, DURATION AND EFFECT OF LICENSES
Certain of our subsidiaries own or have licenses to various
patents, copyrights, trademarks and other intellectual property
necessary to conduct business. Many of our subsidiaries also hold
government-issued licenses or franchises to provide wireline or
wireless services and regulation affecting those rights is
contained in the Annual Report under the heading "Operating
Environment Overview" beginning on page 41 and is incorporated
herein by reference pursuant to General Instruction G(2). We
actively pursue patents, trademarks and service marks to protect
our intellectual property within the U.S. and abroad. We maintain a
significant global portfolio of patents, trademarks and service
mark registrations. We have also entered into agreements that
permit other companies, in exchange for fees and subject to
appropriate safeguards and restrictions, to utilize certain of our
trademarks and service marks. We periodically receive offers from
third parties to obtain licenses for patent and other intellectual
rights in exchange for royalties or other payments. We also receive
notices asserting that our products or services infringe on their
patents and other intellectual property rights. These claims,
whether against us directly or against third-party suppliers of
products or services that we, in turn, sell to our customers, such
as wireless handsets, could require us to pay damages, royalties,
stop offering the relevant products or services and/or cease other
activities. While the outcome of any litigation is uncertain, we do
not believe that the resolution of any of these infringement claims
or the expiration or non-renewal of any of our intellectual
property rights would have a material adverse effect on our results
of operations.
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MAJOR CUSTOMER
No customer accounted for 10% or more of our consolidated
revenues in 2010, 2009 or 2008.
COMPETITION
Information relating to competition in each of our operating
segments is contained in the Annual Report under the heading
"Competition" beginning on page 43, and is incorporated herein by
reference pursuant to General Instruction G(2).
RESEARCH AND DEVELOPMENT
AT&T Labs' scientists and engineers conduct research in a
variety of areas, including IP; advanced network design and
architecture; network operations support systems; data mining
technologies and advanced speech technologies. The majority of the
development activities are performed by AT&T Services. The
developers within AT&T Services work with our business units
and AT&T Labs to create new services and invent tools and
systems to manage secure and reliable networks for us and our
customers. We also have a research agreement with Telcordia
Technologies, formerly Bell Communications Research, Inc. Research
and development expenses were $1,345 in 2010, $986 in 2009 and $832
million in 2008.
EMPLOYEES
As of January 31, 2011, we employed approximately 265,410
persons. Approximately 58 percent of our employees are represented
by the Communications Workers of America (CWA), the International
Brotherhood of Electrical Workers (IBEW) or other unions.
In February 2010, the Company and the Communications Workers of
America (CWA) announced a tentative agreement covering
approximately 30,000 core wireline employees in the nine-state
former BellSouth region, subject to ratification by those covered
employees. This agreement was ratified in March 2010. In September
2010, approximately 4,000 core wireline employees in the Company's
east region also ratified a tentative agreement previously
announced by the Company and the CWA. All core wireline employees
are now covered by agreements reached since prior labor agreements
expired during 2009.
At December 31, 2010, we had approximately 340,000 retirees who,
along with their dependents, were eligible to receive retiree
benefits.
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ITEM 1A. RISK FACTORS
Information required by this Item is included in the Annual
Report under the heading "Risk Factors" on pages 55 through 57
which is incorporated herein by reference pursuant to General
Instruction G(2).
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
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 and unfavorable healthcare legislation
and regulations.
-- The final outcome of Federal Communications Commission
and other federal agency proceedings and reopenings
of such proceedings and judicial review, if any, of
such proceedings, including issues relating to access
charges, broadband deployment, E911 services, competition,
net neutrality, unbundled loop and transport elements,
wireless license awards and renewals and wireless
services.
-- The final outcome of regulatory proceedings in
the states in which we operate and reopenings of such
proceedings and judicial review, if any, of such proceedings,
including proceedings relating to Interconnection
terms, access charges, universal service, unbundled
network elements and resale and wholesale rates, broadband
deployment including our U-verse services, net neutrality,
performance measurement plans, service standards and
traffic compensation.
-- Enactment of additional state, federal and/or foreign
regulatory and tax laws and regulations pertaining
to our subsidiaries and foreign investments, including
laws and regulations that reduce our incentive to
invest in our networks, resulting in lower revenue
growth and/or higher operating costs.
-- Our ability to absorb revenue losses caused by
increasing competition, including offerings that use
alternative technologies (e.g., cable, wireless and
VoIP) and our ability to maintain capital expenditures.
-- The extent of competition and the resulting pressure
on customer and access line totals and wireline and
wireless operating margins.
-- Our ability to develop attractive and profitable
product/service offerings to offset increasing competition
in our wireless and wireline markets.
-- The ability of our competitors to offer product/service
offerings at lower prices due to lower cost structures
and regulatory and legislative actions adverse to
us, including state regulatory proceedings relating
to unbundled network elements and nonregulation of
comparable alternative technologies (e.g., VoIP).
-- The timing, extent and cost of deployment of our
U-verse services; the development of attractive and
profitable service offerings; the extent to which
regulatory, franchise fees and build-out requirements
apply to this initiative; and the availability, cost
and/or reliability of the various technologies and/or
content required to provide such offerings.
-- Our continued ability to attract and offer a diverse
portfolio of devices, some on an exclusive basis.
-- The availability and cost of additional wireless
spectrum and regulations relating to licensing and
technical standards and deployment and usage, including
network management rules.
-- Our ability to manage growth in wireless data services,
including network quality.
-- The outcome of pending or threatened litigation,
including patent and product safety claims by or against
third parties.
-- The impact on our networks and business from major
equipment failures, our inability to obtain handsets,
equipment/software or have handsets, equipment/software
serviced in a timely and cost-effective manner from
suppliers, severe weather conditions, natural disasters,
pandemics, energy shortages, wars or terrorist attacks.
-- The issuance by the Financial Accounting Standards
Board or other accounting oversight bodies of new
accounting standards or changes to existing standards.
-- The issuance by the Internal Revenue Service and/or
state tax authorities of new tax regulations or changes
to existing standards and actions by federal, state
or local tax agencies and judicial authorities with
respect to applying applicable tax laws and regulations
and the resolution of disputes with any taxing jurisdictions.
-- Our ability to adequately fund our wireless operations,
including payment for additional spectrum; network
upgrades and technological advancements.
-- -- Changes in our corporate strategies, such as
changing network requirements or acquisitions and
dispositions, which may require significant
amounts of cash or stock, to respond to
competition and regulatory, legislative and
technological developments.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
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ITEM 2. PROPERTIES
Our properties do not lend themselves to description by
character and location of principal units. At December 31, 2010,
approximately 83% of our property, plant and equipment was owned by
our wireline subsidiaries and approximately 17% was owned by our
wireless subsidiaries. Central office equipment represented 33%;
network access lines represented approximately 31% of our telephone
plant; other equipment, comprised principally of furniture and
office equipment and vehicles and other work equipment, represented
19%; land, building and communications towers represented 11%; and
other miscellaneous property represented 6%.
Substantially all of the installations of central office
equipment are located in buildings and on land we own. Many
garages, administrative and business offices, and telephone centers
and retail stores are in leased quarters.
ITEM 3. LEGAL PROCEEDINGS
We are a party to numerous lawsuits, regulatory proceedings and
other matters arising in the ordinary course of business.
Additional information regarding litigation is included in the
Annual Report under the headings "Retiree Phone Concession
Litigation", "NSA Litigation" and "Universal Service Fees
Litigation" on pages 47 through 48, which is incorporated herein by
reference pursuant to General Instruction G(2). As of the date of
this report, we do not believe any pending legal proceedings to
which we or our subsidiaries are subject are required to be
disclosed as material legal proceedings pursuant to this item.
We are subject from time to time to judicial and administrative
proceedings brought by various governmental authorities under
federal, state or local environmental laws. We are required to
discuss one of these proceedings in our Forms 10-Q and 10-K, this
proceeding is listed below because each could result in monetary
sanctions (exclusive of interest and costs) of one hundred thousand
dollars or more. However, we do not believe that any of them
currently pending will have a material adverse effect on our
results of operations.
(a) The U.S. Environmental Protection Agency (EPA) is seeking
civil penalties from AT&T Mobility in connection with alleged
violations of federal environmental statutes in connection with
management of back-up power systems at AT&T Mobility
facilities. The EPA1s allegations include noncompliance with
requirements to obtain air emission permits for generators and to
prepare spill prevention plans for fuel storage tanks. We expect to
settle those allegations on terms that would include civil
penalties in the range of $1 to $3 million dollars.
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EXECUTIVE OFFICERS OF THE REGISTRANT
(As of January 18 , 2011)
Held
Name Age Position Since
Randall L. Chairman of the Board, Chief Executive
Stephenson 50 Officer and President 6/2007
William A. 55 Senior Executive Vice President Human 6/2007
Blase Jr. Resources
James W. 58 Senior Executive Vice President External and 11/2008
Cicconi Legislative Affairs, AT&T Services, Inc.
Catherine M. 53 Senior Executive Vice President and Global 6/2007
Coughlin Marketing Officer
Ralph de la 59 President and Chief Executive Officer, AT&T 10/2008
Vega Mobility and Consumer Markets
Richard G. 56 Senior Executive Vice President and Chief 5/2004
Lindner Financial Officer
Forrest E. 58 Group President Corporate Strategy and 6/2007
Miller Development
John T. 48 President and Chief Executive Officer, AT&T 9/2010
Stankey Business Solutions
Wayne Watts 57 Senior Executive Vice President and General 6/2007
Counsel
Rayford 59 Chief Executive Officer AT&T Diversified 10/2008
Wilkins, Businesses
Jr.
All of the above executive officers have held high-level
managerial positions with AT&T or its subsidiaries for more
than the past five years. Executive officers are not appointed to a
fixed term of office.
10
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock is listed on the New York Stock Exchange. The
number of stockholders of record as of December 31, 2010 and 2009
was 1,372,019 and 1,454,030. The number of stockholders of record
as of February 18, 2011, was 1,363,473. We declared dividends, on a
quarterly basis, totaling $1.69 per share in 2010 and $1.65 per
share in 2009.
Other information required by this Item is included in the
Annual Report under the headings "Quarterly Financial Information"
on page 95, "Selected Financial and Operating Data" on page 30, and
"Stock Trading Information" on the back cover, which are
incorporated herein by reference pursuant to General Instruction
G(2).
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item is included in the Annual
Report under the heading "Selected Financial and Operating Data" on
page 30, which is incorporated herein by reference pursuant to
General Instruction G(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Information required by this Item is included in the Annual
Report on pages 31 through 58, which is incorporated herein by
reference pursuant to General Instruction G(2).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Information required by this Item is included in the Annual
Report under the heading "Market Risk" on pages 52 through 53,
which is incorporated herein by reference pursuant to General
Instruction G(2).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is included in the Annual
Report on pages 59 through 95, which is incorporated herein by
reference pursuant to General Instruction G(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
During our two most recent fiscal years, there has been no
change in the independent accountant engaged as the principal
accountant to audit our financial statements and the independent
accountant has not expressed reliance on other independent
accountants in its reports during such time period.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure 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 SEC'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 December 31, 2010. 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 December 31, 2010.
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Internal Control Over Financial Reporting
(a) Management's Annual Report on Internal Control over
Financial Reporting
The management of AT&T is responsible for establishing and
maintaining adequate internal control over financial reporting.
AT&T's internal control system was designed to provide
reasonable assurance as to the integrity and reliability of the
published financial statements. AT&T management assessed the
effectiveness of the company's internal control over financial
reporting as of December 31, 2010. In making this assessment, it
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on its assessment, AT&T management
believes that, as of December 31, 2010, the Company's internal
control over financial reporting is effective based on those
criteria.
(b) Attestation Report of the Registered Public Accounting
Firm
The registered public accounting firm that audited the financial
statements included in the Annual Report containing the disclosure
required by this Item, Ernst & Young LLP, has issued an
attestation report on the Company's internal control over financial
reporting. The attestation report issued by Ernst & Young LLP
is included in the Annual Report on page 98, which is incorporated
herein by reference pursuant to General Instruction G(2).
ITEM 9B. OTHER INFORMATION
There is no information that was required to be disclosed in a
report on Form 8-K during the fourth quarter of 2010 but was not
reported.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information regarding executive officers required by Item 401 of
Regulation S-K is furnished in a separate disclosure at the end of
Part I of this report since the registrant did not furnish such
information in its definitive proxy statement prepared in
accordance with Schedule 14A. Information regarding directors
required by Item 401 of Regulation S-K is incorporated herein by
reference pursuant to General Instruction G(3) from the
registrant's definitive proxy statement, dated on or about March
11, 2011 (Proxy Statement) under the heading "Election of
Directors."
Information required by Item 405 of Regulation S-K is
incorporated herein by reference pursuant to General Instruction
G(3) from the registrant1s Proxy Statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance."
The registrant has a separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934. The members of the committee are
Messrs. Chico, Kelly and Madonna and Ms. Tyson. The additional
information required by Item 407(d)(5) of Regulation S-K is
incorporated herein by reference pursuant to General Instruction
G(3) from the registrant's Proxy Statement under the heading "Audit
Committee."
The registrant has adopted a code of ethics entitled "Code of
Ethics" that applies to the registrant's principal executive
officer, principal financial officer, principal accounting officer,
or controller or persons performing similar functions. The
additional information required by Item 406 of Regulation S-K is
provided in this report under the heading "General" under Part I,
Item 1. Business.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 402(k) of Regulation S-K is
incorporated herein by reference pursuant to General Instruction
G(3) from the registrant's Proxy Statement under the heading
"Compensation of Directors." Information regarding officers is
included in the registrant's Proxy Statement on the pages beginning
with the heading "Compensation Discussion and Analysis" and ending
with, and including, the pages under the heading "Potential
Payments upon Termination or Change in Control" which are
incorporated herein by reference pursuant to General Instruction
G(3). Information required by Item 407(e)(5) of Regulation S-K is
included in the registrant's Proxy Statement under the heading
"Compensation Committee Report" and is incorporated herein by
reference pursuant to General Instruction G(3) and shall be deemed
furnished in this Annual Report on Form 10-K and will not be deemed
incorporated by reference into any filing under the Securities Act
of 1933 or the Securities Exchange Act of 1934.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by Item 403 of Regulation S-K is included
in the registrant's Proxy Statement under the heading "Common Stock
Ownership," which is incorporated herein by reference pursuant to
General Instruction G(3).
Information required by Item 201(d) of Regulation S-K is
incorporated herein by reference pursuant to General Instruction
G(3) from the registrant's Proxy Statement under the heading
"Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Information required by Item 404 of Regulation S-K is included
in the registrant1s Proxy Statement under the heading "Related
Person Transactions," which is incorporated herein by reference
pursuant to General Instruction G(3). Information required by Item
407(a) of Regulation S-K is included in the registrant's Proxy
Statement under the heading "Independence of Directors," which is
incorporated herein by reference pursuant to General Instruction
G(3).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item is included in the
registrant's Proxy Statement under the heading "Principal
Accountant Fees and Services," which is incorporated herein by
reference pursuant to General Instruction G(3).
Part IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as a part of the report:
Page
(1) Report of Independent Registered Public Accounting *
Firm
Financial Statements covered by Report of Independent
Registered Public Accounting Firm:
Consolidated Statements of Income *
Consolidated Balance Sheets *
Consolidated Statements of Cash Flows *
Consolidated Statements of Changes in Stockholders' *
Equity
Notes to Consolidated Financial Statements *
* Incorporated herein by reference to the appropriate
portions of the registrant's Annual Report to Stockholders
for the fiscal year ended December 31, 2010. (See
Part II.)
Page
(2) Financial Statement Schedules:
II - Valuation and Qualifying Accounts 20
Financial statement schedules other than those listed above have been omitted
because the required information is contained in the financial statements and
notes thereto, or because such schedules are not required or applicable.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto. Unless otherwise
indicated, all exhibits so incorporated are from File No. 1-8610.
Exhibit
Number
3-a Restated Certificate of Incorporation, filed with
the Secretary of State of Delaware on May 1, 2009.
(Exhibit 3 to Form 10-Q filed for June 30, 2009.)
3-b Bylaws amended December 18, 2009. (Exhibit 3 to Form
8-K dated December 18, 2009.)
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4-a Certificate of Designations for Perpetual Cumulative
Preferred Stock of SBC Communications Inc., filed
with the Secretary of State of the State of Delaware
on November 18, 2005. (Contained in Restated Certificate
of Incorporation filed as Exhibit 3-a.)
4-b No instrument which defines the rights of holders
of long-term debt of the registrant and all of its
consolidated subsidiaries is filed herewith pursuant
to Regulation S-K, Item 601b)(4)(iii)(A), except for
the instruments referred to in 4-c, 4-d, 4-e, 4-f,
4-g, 4-h and 4-i below. Pursuant to this regulation,
the registrant hereby agrees to furnish a copy of
any such instrument not filed herewith to the SEC
upon request.
4-c Guaranty of certain obligations of Pacific Bell Telephone
Co. and SBC Communications Inc. (Exhibit 4-c to Form
10-K for 2007.)
4-d Guaranty of certain obligations of Ameritech Capital
Funding Corp., Illinois Bell Telephone Co., Indiana
Bell Telephone Co. Inc., Michigan Bell Telephone Co.,
The Ohio Bell Telephone Co., Pacific Bell Telephone
Co., Southern New England Telecommunications Corp.,
The Southern New England Telephone Co., Southwestern
Bell Telephone Co., Wisconsin Bell, Inc. (Exhibit
4-c to Form 10-Q for September 30, 2005.)
4-e Guarantee of certain obligations of AT&T Corp. (Exhibit
4-e to Form 8-K dated December 16, 2005.)
4-f Guarantee of certain obligations of BellSouth. (Exhibit
4.3 to Form 8-K dated December 29, 2006.)
4-g Cingular Third Supplemental Indenture. (Exhibit 4.1
to Form 8-K dated December 29, 2006.)
4-h Indenture dated as of November 1, 1994 between SBC
Communications Inc. and The Bank of New York, as Trustee.
(Exhibit 4-h to Form 10-K for 2008.)
4-i Registration Rights Agreement. (Exhibit 4.3 to Form
8-K dated September 2, 2010.)
10-a Short Term Incentive Plan, dated November 18, 2005.
(Exhibit 10-a to Form 10-K for 2008.)
10-b Supplemental Life Insurance Plan, amended and restated
effective January 1, 2010. (Exhibit 10-d to Form 10-Q
filed for June 30, 2009.)
10-c Supplemental Retirement Income Plan, amended and restated
December 31, 2008. (Exhibit 10-c to Form 10-K for
2008.)
10-d Senior Management Deferred Compensation Plan (effective
for Units of Participation Having a Unit Start Date
Prior to January 1, 1988). (Exhibit 10-d to Form 10-K
for 2008.)
10-e Senior Management Deferred Compensation Program of
1988 (effective for Units of Participation Having
a Unit Start Date of January 1, 1988 or later). (Exhibit
10-e to Form 10-K for 2008.)
10-f Officer Disability Plan, amended and restated effective
January 1, 2010. (Exhibit 10-i to Form 10-Q filed
for June 30, 2009.)
10-g Salary and Incentive Award Deferral Plan, dated December
31, 2004. (Exhibit 10-g to Form 10-K for 2006.)
10-h AT&T Inc. Health Plan, amended and restated effective
January 1, 2011.
10-i Retirement Plan for Non-Employee Directors. (Exhibit
10-i to Form 10-K for 2007.)
10-j Form of Indemnity Agreement, effective July 1, 1986,
between SBC (now AT&T Inc.) and its directors and
officers. (Exhibit 10-j to Form 10-K for 2007.)
10-k Administrative Plan, amended and restated effective
January 1, 2011.
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AT&T Inc.
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10-l Stock Savings Plan, dated December 31, 2004. (Exhibit
10-l to Form 10-K for 2006.)
10-m Pacific Telesis Group Supplemental Cash Balance Plan,
amended as of July 1, 1996. (Exhibit 10-lll to Form
10-K for 2007.)
10-n 1996 Stock and Incentive Plan, dated November 2, 2002.
(Exhibit 10-n to Form 10-K for 2008.)
10-o Non-Employee Director Stock and Deferral Plan, amended
and restated June 26, 2008. (Exhibit 10-f to Form
10-Q filed for June 30, 2008.)
10-p Pacific Telesis Group Deferred Compensation Plan for
Nonemployee Directors. (Exhibit 10-p to Form 10-K
for 2007.)
10-p(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit
10-p(i) to Form10-K for 2007.)
10-q Pacific Telesis Group Outside Directors' Deferred
Stock Unit Plan. (Exhibit 10-q to Form 10-K for 2007.)
10-r Pacific Telesis Group 1996 Directors' Deferred Compensation
Plan. (Exhibit 10-r to Form 10-K for 2007.)
10-r(i) Resolutions amending the Plan, effective November 21, 1997. (Exhibit
10-r(i) to Form 10-K for 2007.)
10-s Transition Agreement by and between BellSouth Corporation
and Rafael de la Vega, dated December 29, 2003. (Exhibit
10-s to Form 10-K for 2007.)
10-t 2001 Incentive Plan, dated November 18, 2005. (Exhibit
10-t to Form 10-K for 2008.)
10-u Pacific Telesis Group 1996 Executive Deferred Compensation
Plan, amended November 20, 2008. (Exhibit 10-u to
Form 10-K for 2008.)
10-v AT&T Inc. Change in Control Severance Plan, amended
and restated effective January 1, 2011.
10-w 1995 Management Stock Option Plan, dated November
16, 2001. (Exhibit 10-w to Form 10-K for 2008.)
10-x Non-Employee Director Stock Purchase Plan, effective
June 27, 2008. (Exhibit 10-e to Form 10-Q filed for
June 30, 2008.)
10-y Communications Concession Program for Directors, amended
and restated November 2009. (Exhibit 10-y to Form
10-K for 2009.)
10-z Pacific Telesis Group Executive Deferral Plan, amended
November 20, 2008. (Exhibit 10-z to Form 10-K for
2008.)
10-aa Four Year Credit Agreement dated December 20, 2010.
(Exhibit 10-a to Form 8-K dated December 20, 2010.)
10-bb Stock Purchase and Deferral Plan, amended and restated
June 24, 2010. (Exhibit 10-b to Form 10-Q filed for
June 30, 2010.)
10-cc Cash Deferral Plan, amended and restated June 24,
2010. (Exhibit 10-a to Form 10-Q filed for June 30,
2010.)
10-dd Master Trust Agreement for AT&T Inc. Deferred Compensation
Plans and Other Executive Benefit Plans and subsequent
amendments dated August 1, 1995 and November 1, 1999.
(Exhibit 10-dd to Form 10-K for 2009.)
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10-ee 2005 Supplemental Employee Retirement Plan, amended
and restated September 24, 2010. (Exhibit 10-a to
Form 10-Q filed for September 30, 2010.)
10-ff AT&T Corp. 1997 Long Term Incentive Program, dated
March 14, 2000. (Exhibit 10-gg to Form 10-K for 2005.)
10-gg AT&T Corp. 2004 Long Term Incentive Program. (Exhibit
10-hh to Form 10-K for 2005.)
10-hh AT&T Corp. Executive Deferred Compensation Plan (formerly
known as AT&T Corp. Senior Management Incentive Award
Deferral Plan), amended and restated January 1, 2008.
(Exhibit 10-hh to Form 10-K for 2008.)
10-ii 2006 Incentive Plan, amended and restated effective
through January 28, 2010. (Exhibit 10-c to Form 10-Q
filed for June 30, 2010.)
10-jj Pension Benefit Makeup Plan #1, amended and restated
December 31, 2010 08.
10-kk BellSouth Corporation Executive Incentive Award Deferral
Plan, as amended and restated effective January 1,
2008. (Exhibit 10-kk to Form 10-K for 2007.)
10-ll BellSouth Corporation Nonqualified Deferred Compensation
Plan, dated January 1, 2005. (Exhibit 10-ll to Form
10-K for 2006.)
10-mm BellSouth Officer Compensation Deferral Plan, amended
January 1, 2005. (Exhibit 10-mm to Form 10-K for 2009.)
10-nn BellSouth Corporation Deferred Compensation Plan for
Non-Employee Directors, dated March 9, 1984. (Exhibit
10-nn to Form 10-K for 2006.)
10-oo BellSouth Corporation Director's Compensation Deferral
Plan, as amended and restated effective as of January
1, 2005. (Exhibit 10-a to Form 10-Q for September
30, 2007.)
10-pp BellSouth Corporation Stock Plan, dated April 24,
1995. (Exhibit 10-pp to Form 10-K for 2006.)
10-qq BellSouth Corporation Stock and Incentive Compensation
Plan, as amended June 28, 2004. (Exhibit 10-qq for
Form 10-K for 2009.)
10-qq(i) First Amendment to the BellSouth Corporation Stock and Incentive
Compensation Plan, dated September 26, 2005. (Exhibit 10ii to Form
10-Q for September 30, 2005 of BellSouth Corporation (File No.
1-8607).)
10-qq(ii) Second Amendment to BellSouth Corporation Stock and Incentive
Compensation Plan, effective June 26, 2008. (Exhibit 10-qq(ii) to
Form 10-K for 2008.)
10-rr Cingular Wireless Long Term Compensation Plan, amended and restated
effective November 1, 2007. (Exhibit 10-rr to Form 10-K for 2007.)
10-ss Master Trust Agreement for AT&T Corp. Deferred Compensation Plans and
Other Executive Benefit Plans, effective January 13, 1994. (Exhibit
10-ss to Form 10-K for 2006.)
10-ss(i) First Amendment to Master Trust Agreement, effective December 23,
1997. (Exhibit 10-ss(i) to Form 10-K for 2006.)
10-tt BellSouth Corporation Non-Employee Director Non-Qualified
Stock Option Terms and Conditions (for options granted
under the BellSouth Corporation Stock and Incentive
Compensation Plan). (Exhibit 10-tt to Form 10-K for
2009.)
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AT&T Inc.
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10-uu BellSouth Corporation Amended And Restated Trust Under
Board Of Directors Benefit Plan(s), effective October
11, 2006. (Exhibit 10-u to Form 10-K for 2006.)
10-vv BellSouth Non-Employee Directors Charitable Contribution
Program, effective February 29, 1992. (Exhibit 10-vv
to Form 10-K for 2006.)
10-vv(i) First Amendment to the Non-Employee Directors Charitable
Contribution Program, effective January 27, 1997. (Exhibit 10-vv(i)
to Form 10-K for 2006.)
10-vv(ii) Second Amendment to the Non-Employee Directors Charitable
Contribution Program, effective February 25, 2002. (Exhibit
10-vv(ii) to Form 10-K for 2006.)
10-ww AT&T Management Relocation Plan. (Exhibit 10-b to
Form 10-Q for June 30, 2007.)
10-ww(i) Amendment to AT&T Management Relocation Plan,
dated November 20, 2008. (Exhibit 10-ww to Form 10-Q
filed for March 31, 2009.)
10-xx AT&T Corp, Senior Management Long Term Disability
and Survivor Protection Plan, amended December 31,
2008. (Exhibit 10-xx to Form 10-K for 2008.)
10-yy Cingular Wireless Cash Deferral Plan, effective November
1, 2001. (Exhibit 10-yy to Form 10-K for 2007.)
10-zz BellSouth Corporation Supplemental Executive Retirement
Plan, amended and restated effective January 1, 2010.
(Exhibit10-gto Form 10-Q filed for June 30, 2009.)
10-aaa BellSouth Supplemental Life Insurance Plan, amended
and restated November 1, 2009. (Exhibit 10-aaa to
Form 10-K for 2009.)
10-bbb BellSouth Compensation Deferral Plan, as amended and
restated effective January 1, 2005. (Exhibit 10-bbb
to Form 10-K for 2007.)
10-ccc Cingular Wireless BLS Executive Transition Benefit
Plan. (Exhibit 10-ccc to Form 10-K for 2007.)
10-ddd Cingular Wireless SBC Executive Transition Benefit
Plan. (Exhibit 10-ddd to Form 10-K for 2007.)
10-eee BellSouth Nonqualified Deferred Income Plan, as amended
and restated effective January 1, 2005. (Exhibit 10-eee
to Form 10-K for 2008.)
10-fff AT&T Mobility 2005 Cash Deferral Plan. (Exhibit 10-fff
to Form 10-K for 2007.)
10-ggg AT&T Corp. Non-Qualified Pension Plan, as amended
and restated effective December 31, 2008. (Exhibit
10-ggg to Form 10-K for 2008.)
10-hhh AT&T Corp. Excess Benefit and Compensation Plan, as
amended and restated effective December 31, 2008.
(Exhibit 10-hhh to Form 10-K for 2008.)
10-iii BellSouth Split-Dollar Life Insurance Plan, as amended
December 31, 2008, and restated effective January
1, 2005. (Exhibit 10-iii to Form 10-K for 2008.)
10-jjj Form of Non-Disclosure and Non-Solicitation Agreement.
(Exhibit 10-jjj to Form 10-K for 2009.)
10-kkk 2011 Incentive Plan.
10-lll 364 Day Credit Agreement dated December 20, 2010.
(Exhibit 10-b to Form 8-K dated December 20, 2010.)
12 Computation of Ratios of Earnings to Fixed Charges.
18
AT&T Inc.
---------
13 Portions of AT&T's Annual Report to Stockholders for
the fiscal year ended December 31, 2010. Only the
information incorporated by reference into this Form
10-K is included in the exhibit.
18 Letter regarding change in accounting principles.
21 Subsidiaries of AT&T Inc.
23 Consent of Ernst & Young LLP, independent registered
public accounting firm for AT&T.
24 Powers of Attorney.
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 Certification
99 Supplemental Interim Financial Information.
101 XBRL Instance Document
We will furnish to stockholders upon request, and without
charge, a copy of the Annual Report to Stockholders and the Proxy
Statement, portions of which are incorporated by reference in the
Form 10-K. We will furnish any other exhibit at cost.
19
Schedule II - Sheet 1
AT&T INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Dollars in Millions
COL. A COL. B COL. C COL. D COL. E
------------------ ----------- ------------------------------------- ---------- ---------
Additions
-------------------------------------
(1) (2) (3)
Charged
to Costs Charged to
Balance at and Other Balance
Beginning of Expenses Accounts Deductions at End of
Period (a) (b) Acquisitions (c) Period
------------------ ------------ -------- ---------- -------------- ---------- ---------
Year 2010 $ 1,202 1,334 (28) - 1,551 $ 957
Year 2009 $ 1,268 1,762 29 2 1,859 $ 1,202
Year 2008 $ 1,360 1,795 921 - 2,808 $ 1,268
------------------- ------- -------- ---------- -------------- ---------- -----
______________________
(a) Excludes direct charges and credits to expense on
the consolidated statements of income and reinvested
earnings related to interexchange carrier receivables.
(b) Includes amounts previously written off which were
credited directly to this account when recovered and
amounts related to long-distance carrier receivables
which were billed by AT&T.
(c) Amounts written off as uncollectible.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 28th day of February, 2011.
AT&T INC.
/s/ Richard G. Lindner
Richard G. Lindner
Senior Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
Principal Executive Officer:
Randall Stephenson*
Chairman of the Board, Chief Executive Officer
and President
Principal Financial and Accounting Officer:
Richard G. Lindner
Senior Executive Vice President
and Chief Financial Officer
/s/ Richard G. Lindner
Richard G. Lindner, as attorney-in-fact
and on his own behalf as Principal
Financial Officer and Principal
Accounting Officer
February 28, 2011
Directors:
---------------------- ---------------------
Randall L. Stephenson* Lynn M. Martin*
Gilbert F. Amelio* John B. McCoy*
Reuben V. Anderson* Joyce M. Roch*
James H. Blanchard* Matthew K. Rose*
Jaime Chico Pardo* Laura D'Andrea Tyson*
James P. Kelly* Patricia P. Upton*
Jon C. Madonna*
* by power of attorney
21
Selected Financial and Operating Data
Dollars in millions except per share amounts
At December 31 or
for the year
ended: 2010 20091 20081 20071 2006 1,2
------------------ -------- ------- ------- ------- ------- ---
As Adjusted
-------------------------------------------------------
Financial Data
------------------ -------- ------- ------- ------- ------- ---
Operating revenues $124,280 $122,513 $123,443 $118,322 $ 62,518
------------------ ------- ------- ------- ------- ------- ---
Operating expenses $104,707 $101,513 $125,133 $ 89,181 $ 44,521
------------------ ------- ------- ------- ------- ------- ---
Operating income
(loss) $ 19,573 $ 21,000 $ (1,690) $ 29,141 $ 17,997
------------------ ------- ------- ------- ------- ------- ---
Interest expense $ 2,994 $ 3,368 $ 3,369 $ 3,460 $ 1,800
------------------ ------- ------- ------- ------- ------- ---
Equity in net
income of
affiliates $ 762 $ 734 $ 819 $ 692 $ 2,043
------------------ ------- ------- ------- ------- ------- ---
Other income
(expense) - net $ 897 $ 152 $ (332) $ 814 $ 398
------------------ ------- ------- ------- ------- ------- ---
Income tax expense
(benefit) $ (1,162) $ 6,091 $ (2,210) $ 9,917 $ 6,088
------------------ ------- ------- ------- ------- ------- ---
Net Income (Loss) $ 20,179 $ 12,447 $ (2,364) $ 17,228 $ 12,547
------------------ ------- ------- ------- ------- ------- ---
Less: Net
Income
Attributable
to
Noncontrolling
Interest $ (315) $ (309) $ (261) $ (196) $ (5)
------------------ ------- ------- ------- ------- -------
Net Income (Loss)
Attributable to
AT&T $ 19,864 $ 12,138 $ (2,625) $ 17,032 $ 12,542
================== ======= ======= ======= ======= ======= ===
Earnings (Loss)
Per Common
Share:
Net Income (Loss)
Attributable to
AT&T $ 3.36 $ 2.06 $ (0.44) $ 2.78 $ 3.23
================== ======= ======= ======= ======= ======= ===
Earnings (Loss)
Per Common Share
- Assuming
Dilution:
Net Income (Loss)
Attributable to
AT&T $ 3.35 $ 2.05 $ (0.44) $ 2.76 $ 3.22
================== ======= ======= ======= ======= ======= ===
Total assets $268,488 $268,312 $264,700 $274,951 $270,118
------------------ ------- ------- ------- ------- ------- ---
Long-term debt $ 58,971 $ 64,720 $ 60,872 $ 57,253 $ 50,062
------------------ ------- ------- ------- ------- ------- ---
Total debt $ 66,167 $ 72,081 $ 74,990 $ 64,112 $ 59,795
------------------ ------- ------- ------- ------- ------- ---
Construction and
capital
expenditures $ 20,302 $ 17,294 $ 20,290 $ 17,831 $ 8,337
------------------ ------- ------- ------- ------- ------- ---
Dividends declared
per common share $ 1.69 $ 1.65 $ 1.61 $ 1.47 $ 1.35
------------------ ------- ------- ------- ------- ------- ---
Book value per
common share $ 18.94 $ 17.28 $ 16.35 $ 19.07 $ 18.52
------------------ ------- ------- ------- ------- ------- ---
Ratio of earnings
to fixed
charges6 4.52 4.42 - 6.95 8.67
------------------ ------- ------- ------- ------- ------- ---
Debt ratio 37.1% 41.4% 43.8% 35.7% 34.1%
------------------ ------- ------- ------- ------- -------
Weighted average
common shares
outstanding
(000,000) 5,913 5,900 5,927 6,127 3,882
------------------ ------- ------- ------- ------- ------- ---
Weighted average
common shares
outstanding with
dilution
(000,000) 5,938 5,924 5,958 6,170 3,902
------------------ ------- ------- ------- ------- ------- ---
End of period
common shares
outstanding
(000,000) 5,911 5,902 5,893 6,044 6,239
================== ======= ======= ======= ======= ======= ===
Operating Data
------------------ ------- ------- ------- ------- ------- ---
Wireless
connections
(000)3 95,536 85,120 77,009 70,052 60,962
------------------ ------- ------- ------- ------- ------- ---
In-region network
access lines in
service (000) 43,678 49,392 55,610 61,582 66,469
------------------ ------- ------- ------- ------- ------- ---
Broadband
connections
(000)4,5 17,755 17,254 16,265 14,802 12,170
------------------ ------- ------- ------- ------- ------- ---
Number of
employees 266,590 282,720 302,660 309,050 304,180
================== ======= ======= ======= ======= ======= ===
1 Financial data for 2006 - 2009 has been adjusted to
reflect our voluntary change in accounting for pension
and postretirement benefits. See Note 1 to consolidated
financial statements.
2 Our 2006 income statement amounts reflect results
from BellSouth Corporation (BellSouth) and AT&T Mobility
LLC (AT&T Mobility), formerly Cingular Wireless LLC,
for the two days following the December 29, 2006 acquisition.
Our 2006 balance sheet and end-of-year metrics include
100% of BellSouth and AT&T Mobility. Prior to the
December 29, 2006 BellSouth acquisition, AT&T Mobility
was a joint venture in which we owned 60% and was
accounted for under the equity method.
3 The number presented represents 100% of AT&T Mobility
cellular/PCS customers.
4 Broadband connections include in-region DSL lines,
in-region U-verse High Speed Internet access, satellite
broadband and 3G LaptopConnect cards.
5 Prior-period amounts restated to conform to current
period reporting methodology.
6 Earnings were not sufficient to cover fixed charges
in 2008. The deficit was $943.
1
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollars in millions except per share amounts
For ease of reading, AT&T Inc. is referred to as "we," "us,"
"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 both in the United States and internationally,
providing wireless and wireline telecommunications services and
equipment as well as directory advertising and publishing services.
You should read this discussion in conjunction with the
consolidated financial statements and accompanying notes. A
reference to a "Note" in this section refers to the accompanying
Notes to Consolidated Financial Statements. In the tables
throughout this section, percentage increases and decreases that
equal or exceed 100% are not considered meaningful and are denoted
with a dash.
RESULTS OF OPERATIONS
Consolidated Results Our financial results are summarized in the
table below. We then discuss factors affecting our overall results
for the past three years. These factors are discussed in more
detail in our "Segment Results" section. We also discuss our
expected revenue and expense trends for 2011 in the "Operating
Environment and Trends of the Business" section.
Percent Change
------------------
2010 2009
vs. vs.
2010 2009 2008 2009 2008
------------------ ---------------------------------------------------------------------------------------------------------- -------- -------- ----- -------
Operating Revenues $ 124,280 $122,513 $123,443 1.4% (0.8)%
------------------ ----------------- --------------------------------------------------------------------------------------- ------- -------
Operating expenses
Cost of
services and
sales 52,263 50,571 56,688 3.3 (10.8)
Selling,
general and
administrative 33,065 31,427 48,772 5.2 (35.6)
Depreciation
and
amortization 19,379 19,515 19,673 (0.7) (0.8)
------------------ ----------------- --------------------------------------------------------------------------------------- ------- -------
Total Operating
Expenses 104,707 101,513 125,133 3.1 (18.9)
------------------ ----------------- --------------------------------------------------------------------------------------- ------- -------
Operating Income
(Loss) 19,573 21,000 (1,690) (6.8) -
------------------ ----------------- --------------------------------------------------------------------------------------- ------- -------
Interest expense 2,994 3,368 3,369 (11.1) -
Equity in net
income of
affiliates 762 734 819 3.8 (10.4)
Other income
(expense) - net 897 152 (332) - -
------------------ ----------------- --------------------------------------------------------------------------------------- ------- -------
Income (loss)
from
continuing
operations
before income
taxes 18,238 18,518 (4,572) (1.5) -
Income (loss)
from
continuing
operations 19,400 12,427 (2,362) 56.1 -
Net Income
(Loss)
Attributable
to AT&T $ 19,864 $ 12,138 $ (2,625) 63.7% -
================== ================= ======================================================================================= ======= ======= ===== =======
Overview
Operating income decreased $1,427, or 6.8%, in 2010 and
increased $22,690 in 2009. Our operating income margin was 15.7% in
2010, down from 17.1% in 2009 and up from (1.4)% in 2008. Operating
income includes actuarial losses related to pension and
postretirement benefit plans, which were non-cash losses of $2,521
in 2010, $215 in 2009 and $25,150 in 2008 (see Note 11). Excluding
the impacts of these actuarial losses, operating income in 2010
reflected growth in wireless service revenue, driven mostly by our
subscriber growth and growth in wireless data revenue, along with
an increase in wireline data revenue resulting from growth in
Internet Protocol (IP) data revenue, partially offset by the
continuing decline in voice and print directory advertising
revenue. Excluding the variance in actuarial losses in 2009 as
compared to 2008, operating income in 2009 decreased primarily due
to the decline in voice revenues and directory print advertising
and the higher cost of equipment sales.
In January 2011, we announced a change in our method of
recognizing actuarial gains and losses for pension and other
postretirement benefits for all benefit plans. As part of this
change, we have elected to immediately recognize the non-cash
actuarial gains and losses in our operating results in the year in
which the gains and losses occur. The most significant factors
contributing to actuarial gains and losses are actual returns on
plan assets, the interest rate used to discount our benefit
obligations and actual healthcare cost experience. We have applied
this change retrospectively, adjusting all prior periods. See
"Significant Accounting Policies and Estimates" and Note 1 for
further discussion of the change and the impact to our operating
results.
2
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Operating revenues increased $1,767, or 1.4%, in 2010 and
decreased $930, or 0.8%, in 2009. Revenues in 2010 reflect the
continued growth in wireless service revenue, driven mostly by our
increase in average subscribers along with a significant increase
in wireless data revenue, stemming from higher integrated device
sales and customer usage. Adding to the increase, we had higher
wireline data revenue largely due to growth in IP-related services,
driven by AT&T U-verseSM (U-verse) subscriber growth. These
increases were partially offset by the continuing decline in voice
revenues, due to decreasing access lines, and a decline in print
directory advertising revenue. The decline in 2009 reflects
decreases in voice and directory revenue, partially offset by
growth in wireless service revenue along with an increase in
wireline data revenue.
The declines in our voice and advertising revenues reflect
continuing economic pressures on our customers as well as
increasing competition. Total switched access lines decreased 11.6%
in 2010 and 11.2% in 2009. Customers disconnecting access lines
switched to wireless, Voice over Internet Protocol (VoIP) and cable
offerings or terminated service permanently as businesses closed or
consumers left residences. While we lose wireline voice revenues,
we have the opportunity to increase wireless service or wireline
data revenues should these customers choose us as their wireless or
VoIP provider. We also continue to expand our VoIP service for
customers who have access to our U-verse video service.
Cost of services and sales expenses increased $1,692, or 3.3%,
in 2010 and decreased $6,117, or 10.8%, in 2009. Excluding the
increase of more than $700 in expense related to the previously
discussed actuarial loss, expenses increased in 2010 primarily due
to higher wireless integrated device costs, higher interconnect and
network system costs, and higher Universal Service Fund (USF)
costs. Partially offsetting these increases were lower service- and
financing-related costs associated with our pension and
postretirement benefits (referred to as "pension/OPEB expenses"), a
decrease in other employee-related costs and lower traffic
compensation. Excluding the decrease of almost $8,000 in expense
related to the actuarial loss, expense increases in 2009 were
primarily due to higher equipment costs related to advanced
integrated devices and increased pension/OPEB expenses.
Selling, general and administrative expenses increased $1,638,
or 5.2%, in 2010 and decreased $17,345, or 35.6%, in 2009.
Excluding an increase of almost $1,600 in expense related to the
actuarial loss, expenses were higher in 2010 primarily due to
increases in advertising and various support expenses. These
increases were mostly offset by lower bad debt expense along with
lower pension/OPEB expenses and other employee-related costs.
Excluding the decrease of almost $17,000 in expense related to the
actuarial loss, the decrease in 2009 was primarily due to declines
in employee-related costs resulting from workforce reductions,
decreases in materials and supplies expense along with wireless
advertising and promotional expenses. These decreases were
partially offset by increased pension/OPEB expenses, and higher
commissions, customer service costs and IT/interconnect costs
resulting from wireless subscriber growth along with increased
support for data services and integrated devices.
Depreciation and amortization expenses decreased $136, or 0.7%,
in 2010 and $158, or 0.8%, in 2009. The decreases in 2010 and 2009
were primarily due to lower amortization of intangibles related to
customer relationships associated with acquisitions, partially
offset by higher depreciation related to capital spending for
network upgrades and expansion.
Interest expense decreased $374, or 11.1%, in 2010 and $1 in
2009. The decline in interest expense for 2010 was primarily due to
a decrease in our average debt balances, along with a decrease in
our weighted average interest rate.
Equity in net income of affiliates increased $28, or 3.8%, in
2010 and decreased $85, or 10.4%, in 2009. The 2010 increase was
primarily due to improved results at America Movil, S.A. de C.V.
(America Movil). The 2009 decrease was primarily due to foreign
currency translation losses at America Movil, Telefonos de Mexico,
S.A. de C.V. (Telmex), and Telmex Internacional, S.A.B. de C.V.
(TI), partially offset by improved results at America Movil.
Other income (expense) - net We had other income of $897 in 2010
and $152 in 2009, and other expense of $332 in 2008. Results for
2010 included a $658 gain on the exchange of TI shares for America
Movil shares, $197 gain on the sale of investments and $110 of
interest and leveraged lease income, partially offset by $98 of
investment impairments.
Other income for 2009 included a $112 gain on the sale of
investments, $100 of interest and leveraged lease income, and $42
of gains on the sale of a professional services business, partially
offset by $102 of investment impairments. Other expense for 2008
included losses of $467 related to investment impairments,
partially offset by $156 of interest and leveraged lease
income.
3
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Income tax expense decreased $7,253 in 2010 and increased $8,301
in 2009. The decrease in income tax in 2010 resulted primarily from
a settlement with the Internal Revenue Service (IRS) related to a
2008 restructuring of our wireless operations, which decreased our
income taxes by $8,300. This income tax benefit was partially
offset by a $995 charge recorded during the first quarter of 2010
to reflect the deferred tax impact of enacted U.S. healthcare
legislation (see Note 10). Our 2009 income tax expense increased as
a result of an increase in our Income from Continuing Operations
Before Income Taxes, primarily due to a decrease in actuarial
losses on our pension and postretirement benefit plans. This
increase was partially offset by the recognition of income tax
benefits related to audit issues and judicial developments. Our
effective tax rate (benefit) in 2010 was (6.4)%, compared to 32.9%
in 2009 and 48.3% in 2008.
Income (loss) from discontinued operations, net of tax increased
$759 in 2010 and $22 in 2009. The increase in 2010 was primarily
attributable to the gain of $769 on our third-quarter 2010 sale of
our subsidiary Sterling Commerce Inc. (Sterling).
Segment Results
Our segments are strategic business units that offer different
products and services over various technology platforms and are
managed accordingly. Our operating segment results presented in
Note 4 and discussed below for each segment follow our internal
management reporting. We analyze our various operating segments
based on segment income before income taxes. We make our capital
allocations decisions primarily based on the network (wireless or
wireline) providing services. Actuarial gains and losses from
pension and other postretirement benefits, interest expense and
other income (expense) - net, are managed only on a total company
basis and are, accordingly, reflected only in consolidated results.
Each segment's percentage of total segment operating revenue and
income calculations is derived from our segment results table in
Note 4. We have four reportable segments: (1) Wireless, (2)
Wireline, (3) Advertising Solutions and (4) Other.
The Wireless segment accounted for approximately 47% of our 2010
total segment operating revenues as compared to 44% in 2009 and 67%
of our 2010 total segment income as compared to 63% in 2009. This
segment uses our nationwide network to provide consumer and
business customers with wireless voice and advanced data
communications services.
The Wireline segment accounted for approximately 49% of our 2010
total segment operating revenues as compared to 52% in 2009 and 34%
of our 2010 total segment income as compared to 38% in 2009. This
segment uses our regional, national and global network to provide
consumer and business customers with landline voice and data
communications services, AT&T U-verse TV, high-speed broadband
and voice services and managed networking to business customers.
Additionally, we receive commissions on sales of satellite
television services offered through our agency arrangements.
The Advertising Solutions segment accounted for approximately 3%
of our 2010 total segment operating revenues as compared to 4% in
2009 and 4% of our 2010 total segment income as compared to 6% in
2009. This segment includes our directory operations, which publish
Yellow and White Pages directories and sell directory advertising,
Internet-based advertising and local search.
The Other segment accounted for approximately 1% of our 2010 and
2009 total segment operating revenues. Since segment operating
expenses exceeded revenue in both years, a segment loss was
incurred in both 2010 and 2009. This segment includes results from
customer information services, our portion of the results from our
international equity investments and all corporate and other
operations. Also included in the Other segment are impacts of
corporate-wide decisions for which the individual operating
segments are not being evaluated, including interest cost and
expected return on pension and postretirement benefits assets. In
May 2010, we announced the sale of Sterling, which we closed in
August 2010. The Other segment results for all periods shown have
been restated to exclude the results of Sterling, which are now
reflected in discontinued operations (see Note 2).
In January 2011, we announced a change in our method of
recognizing actuarial gains and losses for pension and other
postretirement benefits as well as the attribution of those benefit
costs to our segments (see Note 1). Historically, the total benefit
costs were attributed to each segment. As part of the benefit
accounting change, the service cost and the amortization of prior
service costs, which represent the benefits earned by active
employees during the period, will continue to be attributed to the
segment in which the employee is employed, while interest cost and
expected return on assets will now be recorded in the Other segment
as those financing activities are managed on a corporate level.
Actuarial gains and losses resulting from the remeasurement of our
pension and postretirement benefit plans, which generally only
occurs in the fourth quarter, will be reflected in AT&T's
consolidated results only. We have adjusted prior-period segment
information to conform to the current period's presentation.
4
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Historically, intersegment activity had been reported as revenue
in the billing segment and operating expense in the purchasing
segment. Upon consolidation, the intersegment revenue and expense
were eliminated with the consolidated results reflecting the cash
operating and depreciation expense of providing the intersegment
service. As part of AT&T's ongoing initiatives to manage its
business from an external customer perspective, we no longer report
intersegment revenue and report the cash operating and depreciation
expense related to intersegment activity in the purchasing segment,
which provided services to the external customer. While this change
did not affect AT&T's total consolidated results, the impact to
each operating segment varied. In particular, the Wireless segment,
as a purchaser of network, IT and other services from the Wireline
segment, experienced a reduction in cash operating expense
partially offset by increased depreciation expense, with the net
result being increased operating margins. This change was effective
with the reporting of operating results for the quarter ended March
31, 2010. We have applied this change retrospectively, adjusting
prior-period segment information.
The following sections discuss our operating results by segment.
We discuss capital expenditures for each segment in "Liquidity and
Capital Resources."
Wireless
Segment Results
Percent Change
---------------------
2010
vs. 2009 vs.
2010 2009 2008 2009 2008
---------------- ---------------------------------------------------------------------------------------------------------- ------- ------- ------- --------
Segment
operating
revenues
Service $ 53,510 $48,563 $44,249 10.2% 9.7%
Equipment 4,990 4,941 4,925 1.0 0.3
---------------- ------------------ -------------------------------------------------------------------------------------- ------ ------
Total Segment
Operating
Revenues 58,500 53,504 49,174 9.3 8.8
---------------- ------------------ -------------------------------------------------------------------------------------- ------ ------
Segment
operating
expenses
Operations
and support 36,746 33,631 31,530 9.3 6.7
Depreciation
and
amortization 6,497 6,043 6,025 7.5 0.3
---------------- ------------------ -------------------------------------------------------------------------------------- ------ ------
Total Segment
Operating
Expenses 43,243 39,674 37,555 9.0 5.6
---------------- ------------------ -------------------------------------------------------------------------------------- ------ ------
Segment
Operating
Income 15,257 13,830 11,619 10.3 19.0
Equity in Net
Income of
Affiliates 9 9 6 - 50.0
---------------- ------------------ -------------------------------------------------------------------------------------- ------ ------
Segment Income $ 15,266 $13,839 $11,625 10.3% 19.0%
================ ================== ====================================================================================== ====== ====== ======= ====
5
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
The following table highlights other key measures of performance
for the Wireless segment:
2009
2010 vs. 2009 vs.
2010 2009 2008 2008
---------------- --------------------------------------------------------------------------------------------------------- ---------------------------- ------- ---------------------------------------------------------------------------------------------------------- ----------
Wireless
Customers (000) 95,536 85,120 77,009 12.2% 10.5%
Net Customer
Additions
(000)1 8,853 7,278 6,699 21.6% 8.6%
Total Churn 1.31% 1.47% 1.70% (16) BP (23) BP
Postpaid
Customers (000) 68,041 64,627 59,653 5.3% 8.3%
Net Postpaid
Customer
Additions
(000)1 2,153 4,199 4,523 (48.7)% (7.2)%
Postpaid Churn 1.09% 1.13% 1.18% (4) BP (5) BP
Prepaid Customers
(000) 6,524 5,350 6,106 21.9% (12.4)%
Net Prepaid
Customer
Additions
(000)1 952 (801) 71 - -
Reseller
Customers (000) 11,645 10,439 8,589 11.6% 21.5%
Net Reseller
Customer
Additions
(000)1 1,140 1,803 1,102 (36.8)% 63.3%
Connected Device
Customers (000) 9,326 4,704 2,661 98.3% 76.8%
Net
Connected
Device
Customer
Additions
(000) 4,608 2,077 1,003 - -
================= ======================================================================================================== ============================ ======= =========================================== ============================================================= ===== ===
1 Excludes merger and acquisition-related additions during the
period.
Wireless Metrics
Customer Additions As of December 31, 2010, we served 95.5
million wireless customers. Higher net customer additions (net
additions) in 2010 and 2009 were primarily attributable to higher
net connected devices additions and additions in our reseller
customer business. Connected devices, such as eReaders, security
systems, fleet management and global positioning systems, as well
as tablets (predominantly reflected in our prepaid customer
category) are data-centric devices, with customers typically on
lower-priced data-only plans compared with customers on our
postpaid plans. During 2010, we also continued to see an increase
in gross and net additions related to the sale of integrated
devices (handsets which allow Internet access as well as voice).
Lower net postpaid additions in 2010 and 2009 reflected slowing
growth in the industry subscriber base and lower postpaid churn
throughout the industry. We expect revenue growth to continue to
shift from voice toward data revenues with increasing penetration
rates for integrated devices and additional sales of data-centric
devices.
Average service revenue per user (ARPU)declined 1.8% in 2010,
reflecting strong growth in connected devices and tablet
subscribers, who typically have a lower ARPU compared to ARPU
generated by our other customers. ARPU growth was flat in 2009, due
to increased data services ARPU growth offsetting declining voice
and other service ARPU. Data services ARPU increased 14.7% in 2010
and 22.0% in 2009. We expect continued revenue growth from data
services, as more customers purchase integrated devices and
data-centric devices, and as we continue to expand our network.
Voice and other service ARPU declined 8.6% and 6.5% in 2010 and
2009.
ARPU from postpaid customers increased 2.9% in 2010 and 2.8% in
2009, reflecting usage of more advanced integrated devices by these
customers, evidenced by an increase in postpaid data services ARPU
of 19.3% in 2010 and 23.7% in 2009. Of our total postpaid
customers, 61.0% now use integrated devices, up from 46.8% a year
earlier. The growth in postpaid data services ARPU in 2010 and 2009
was partially offset by a 4.1% decrease in 2010 and a 4.0% decrease
in 2009 in postpaid voice and other service ARPU. Postpaid voice
and other service ARPU declined due to lower access and airtime
charges, roaming revenues, and long-distance usage. Continued
growth in our family plans (FamilyTalk(R) Plans) customer base,
which has lower ARPU than traditional postpaid customers, has also
contributed to these declines. We expect continued pressure on
voice and other service ARPU.
Churn The effective management of customer churn (churn rate) is
critical to our ability to maximize revenue growth and to maintain
and improve margins. Churn rate is calculated by dividing the
aggregate number of wireless customers who cancel service during a
period by the total number of wireless customers at the beginning
of that period. The churn rate for an annual period is equal to the
average of the churn rate for each month of that period. Ongoing
improvement in our total and postpaid churn rates contributed to
our net additions in 2010 and 2009. These churn rate declines
reflect network enhancements and broader coverage, more affordable
rate plans and exclusive devices, continued growth in FamilyTalk(R)
Plans, and free mobile-to-mobile calling among our wireless
customers. Data-centric device customers, who generally have the
lowest churn rate among our wireless customers, also contributed to
overall churn improvement due to their increased share of net
additions for 2010 and 2009.
6
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Wireless Customer Relationships
The wireless industry continues to mature. Accordingly, we
believe that future wireless growth will increasingly depend on our
ability to offer innovative services and devices. To attract and
retain customers, we offer a wide variety of service plans in
addition to offering a broad handset line. Our postpaid customers
typically sign a two-year contract, which includes discounted
handsets and early termination fees. We also offer data plans at
different price levels, beginning as low as fifteen dollars per
month, to attract a wide variety of customers and to differentiate
us from our competitors. Many of our customers are on FamilyTalk(R)
Plans or business plans, which provide for service on multiple
handsets at discounted rates, and such subscribers tend to have
higher retention and lower churn rates. As of December 31, 2010,
more than 80% of our postpaid subscribers are on FamilyTalk(R)
Plans or business discount plans. Such offerings are intended to
encourage existing customers to upgrade their current services
and/or add connected devices, attract customers from other
providers, and minimize customer churn. In fact, for 2010, over 65%
of our smartphone handsets were purchased by existing AT&T
customers.
We offer a large variety of handsets, including at least 18
smartphones (including Apple iPhones, our most popular models) with
advanced operating systems from eight manufacturers. As technology
evolves, rapid changes are occurring in the handset and device
industry, with the continual introduction of new models or
significant revisions of existing models. We believe offering a
wide variety of handsets reduces dependence on any single product
as these products evolve. From time to time, we offer and have
offered attractive handsets on an exclusive basis. As these
exclusivity arrangements end, we expect to continue to offer such
handsets (based on historical industry practice), and we believe
our service plan offerings will help to retain our customers by
providing incentives not to move to a new carrier. As noted above,
more than 80% of our postpaid subscribers are on FamilyTalk(R)
Plans or business discount plans that would involve moving the
whole group to a new carrier. Moreover, the vast majority of
postpaid subscribers (including FamilyTalk(R) Plan users) are
allowed to accumulate unused minutes (known as rollover minutes), a
feature that is currently not offered by other major postpaid
carriers in the United States, and users would lose these minutes
if they switched carriers. As is common in the industry, most of
our phones are designed to work only with our wireless technology,
requiring customers who desire to move to a new carrier with a
different technology to purchase a new device. In addition, many of
our handsets would not work or would lose some functionality if
they were used on another carrier's network that also used Global
System for Mobile Communications (GSM) technology, requiring the
customer to acquire another handset. Although exclusivity
arrangements are important to us, such arrangements may not provide
a competitive advantage over time, as the industry continues to
introduce new devices and services. Also, while the expiration of
any of our current exclusivity arrangements could increase churn
and reduce postpaid customer additions, we do not expect any such
termination to have a material impact on our Wireless segment
income, consolidated operating margin or our cash from
operations.
Wireless Operating Results
Our Wireless segment operating income margin was 26.1% in 2010,
compared to 25.8% in 2009 after increasing from 23.6% in 2008. The
margin growth in 2010 and 2009 was primarily due to higher data
revenues generated by our customers during those years, partially
offset by the higher selling costs associated with integrated
device activations. The rate of margin growth flattened in 2010 due
to a significant number of customers upgrading their handsets
during the second half of the year. While we subsidize the sales
prices of various integrated devices, we expect to recover that
cost over time from increased usage of the devices (especially data
usage by the customer).
Service revenues are comprised of local voice and data services,
roaming, long-distance and other revenue. Service revenues
increased $4,947, or 10.2%, in 2010 and $4,314, or 9.7%, in 2009.
The increases for these periods consisted of the following:
-- Data service revenues increased $4,052, or 28.7%,
in 2010 and $3,539, or 33.4%, in 2009. The increases
were primarily due to the increased number of subscribers
and heavier text and multimedia messaging and Internet
access by subscribers using integrated devices and
other data-centric devices, such as eReaders, tablets,
and mobile navigation devices. Data service revenues
represented 34.0% of our Wireless segment service
revenues in 2010, an increase from 29.1% in 2009,
and 23.9% in 2008.
-- Voice and other service revenues increased $895, or
2.6%, in 2010 and $775, or 2.3%, in 2009. The increases
were due to an 11.1% increase in the average number
of wireless customers in 2010 and a 9.4% increase
in 2009, partially offset by declining ARPU for these
services in both periods.
7
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Equipment revenues increased $49, or 1.0%, in 2010 and $16, or
0.3%, in 2009. In both periods, higher sales and upgrades of
postpaid integrated devices exceeded lower traditional handset
devices in connection with promotions.
Operations and support expenses increased $3,115, or 9.3%, in
2010 and $2,101, or 6.7%, in 2009. The increase in 2010 was
primarily due to the following:
-- Equipment costs increased $1,340 and commission expenses
increased $132 driven by record integrated device
sales and upgrades.
-- Interconnect, USF and network system costs increased
$1,103 due to higher network traffic, network enhancement
efforts, revenue growth and a USF rate increase.
-- Selling expenses (other than commissions) increased
$554, primarily due to increased advertising.
-- Administrative expenses increased $432 due in part
to higher leasing, legal, and benefits costs.
These increases were partially offset by bad debt expense and
customer service cost decreases, totaling $353, and reseller
service costs and long-distance cost decreases, totaling $93, due
to lower usage.
The increase in 2009 was primarily due to the following:
-- Equipment costs increased $1,246 and commission expenses
increased $112 driven by the higher cost of acquiring
and selling more advanced integrated devices compared
to prior years.
-- Interconnect, USF and network system costs increased
$435 due to higher network traffic, network enhancement
efforts, revenue growth, and a USF rate increase.
-- Administrative expenses increased $291 due in part
to higher information technology and finance costs.
-- Bad debt expense and customer service costs increased
$274 due to customer growth.
These increases were partially offset by selling expense (other
than commissions) decreases totaling $139, attributable to lower
traditional handset sales exceeding the impact of the sale of
advanced integrated devices, and long-distance and reseller
services cost decreases totaling $134 due to usage and rate
declines.
Depreciation and amortization increased $454, or 7.5%, in 2010
and $18, or 0.3%, in 2009. Depreciation expense increased $751, or
17.0%, in 2010 primarily due to increased capital spending for
network upgrades and expansion and depreciation for assets acquired
with our acquisition of Centennial Communications Corp.
(Centennial), partially offset by certain network assets becoming
fully depreciated. Amortization expense decreased $297, or 18.4%,
in 2010 primarily due to lower amortization of intangibles for
customer lists related to acquisitions, partially offset by an
increase in customer lists amortization related to the Centennial
acquisition.
Depreciation expense increased $468, or 11.8%, in 2009 due to
ongoing capital spending for network upgrades and expansion,
partially offset by certain network assets becoming fully
depreciated. Amortization expense decreased $450, or 21.8%, in 2009
due to lower amortization of intangibles attributable to our
acquisition of BellSouth Corporation (BellSouth), partially offset
by amortization of intangible assets attributable to subscribers
added in the November 2009 acquisition of Centennial and the 2007
acquisition of Dobson Communications Corporation.
8
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Wireline
Segment Results
Percent Change
-----------------------
2010 2009
vs. vs.
2010 2009 2008 2009 2008
---------------- ------- ------- ------- ------- ----------
Segment
operating
revenues
Voice $28,315 $32,324 $37,322 (12.4)% (13.4)%
Data 27,479 25,561 24,416 7.5 4.7
Other 5,408 5,629 6,152 (3.9) (8.5)
---------------- ------ ------ ------
Total Segment
Operating
Revenues 61,202 63,514 67,890 (3.6) (6.4)
---------------- ------ ------ ------
Segment
operating
expenses
Operations
and support 41,008 42,352 44,817 (3.2) (5.5)
Depreciation
and
amortization 12,371 12,743 12,786 (2.9) (0.3)
---------------- ------ ------ ------
Total Segment
Operating
Expenses 53,379 55,095 57,603 (3.1) (4.4)
---------------- ------ ------ ------
Segment
Operating
Income 7,823 8,419 10,287 (7.1) (18.2)
Equity in Net
Income of
Affiliates 11 17 19 (35.3) (10.5)
---------------- ------ ------ ------
Segment Income $ 7,834 $ 8,436 $10,306 (7.1)% (18.1)%
================ ====== ====== ====== ======= ==========
Operating Margin Trends
Our Wireline segment operating income margin was 12.8% in 2010,
compared to 13.3% in 2009 and 15.2% in 2008. Results for 2010 and
2009 reflect revenue declines that exceeded expense declines. Our
Wireline segment operating income decreased $596, or 7.1%, in 2010
and decreased $1,868, or 18.2%, in 2009. Our 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
non-access-line-related revenues from customer connections for
data, video and voice. Additionally, we have the opportunity to
increase Wireless segment revenues if customers choose AT&T
Mobility as an alternative provider. The wireline operating margins
are declining primarily due to reduced voice revenue, partially
offset by continued growth in data revenue.
Decreases in wireline operating expenses reflect reduced
pension/OPEB and other employee-related costs and savings from our
continuing cost-control initiatives and workforce reductions.
Voice revenues decreased $4,009, or 12.4%, in 2010 and $4,998,
or 13.4%, in 2009 primarily due to economic pressures and declining
demand for traditional voice services by our consumer and business
customers. Included in voice revenues are revenues from local
voice, long-distance (including international) and local wholesale
services. Voice revenues do not include VoIP revenues, which are
included in data revenues.
-- Local voice revenues decreased $2,280, or 11.5%, in
2010 and $2,737, or 12.2%, in 2009. The decrease in
2010 was driven primarily by an 11.6% decline in switched
access lines and a decrease in average local voice
revenue per user. The decrease in 2009 was driven
primarily by an 11.2% decline in switched access lines
and a decrease in average local voice revenue per
user. We expect our local voice revenue to continue
to be negatively affected by increased competition
from alternative technologies, the disconnection of
additional lines and economic pressures.
-- Long-distance revenues decreased $1,562, or 13.9%,
in 2010 and $2,036, or 15.3%, in 2009 primarily due
to a net decrease in demand for long-distance service,
due to slower demand from business and consumer customers,
which decreased revenues $1,239 in 2010 and $1,491
in 2009. Additionally, expected declines in the number
of national mass-market customers decreased revenues
$331 in 2010 and $546 in 2009.
9
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Data revenues increased $1,918, or 7.5%, in 2010 and $1,145, or
4.7%, in 2009. Data revenues accounted for approximately 45% of
wireline operating revenues in 2010, 40% in 2009 and 36% in 2008.
Data revenues include transport, IP and packet-switched data
services.
-- IP data revenues increased $2,494, or 19.1%, in 2010
and $1,986, or 17.9%, in 2009 primarily driven by
AT&T U-verse expansion, broadband additions and growth
in IP-based strategic business services, which include
Ethernet and application services. U-verse video revenues
increased $1,227 in 2010 and $1,039 in 2009, strategic
business services increased $648 in 2010 and $582
in 2009 and broadband high-speed Internet access revenue
increased $446 in 2010 and $311 in 2009. The increase
in IP data revenues in 2010 and 2009 reflects continued
growth in the customer base and migration from other
traditional circuit-based services.
-- Traditional packet-switched data services, which include
frame relay and asynchronous transfer mode services,
decreased $431, or 21.6%, in 2010 and $521, or 20.7%,
in 2009. This decrease is primarily due to lower demand
as customers continue to shift to IP-based technology
such as Virtual Private Networks (VPN), DSL and managed
Internet services, and the continuing weak economic
conditions. We expect these traditional, circuit-based
services to continue to decline as a percentage of
our overall data revenues.
Other operating revenues decreased $221, or 3.9%, in 2010 and
$523, or 8.5%, in 2009. Major items included in other operating
revenues are integration services and customer premises equipment,
government-related services and outsourcing, which account for more
than 60% of total other revenue for all periods.
Operations and support expenses decreased $1,344, or 3.2%, in
2010 and $2,465, or 5.5%, in 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, information
technology and property taxes. Operations and support expenses also
include bad debt expense; advertising costs; sales and marketing
functions, including customer service centers; real estate costs,
including maintenance and utilities on all buildings; credit and
collection functions; and corporate support costs, such as finance,
legal, human resources and external affairs. Pension/OPEB expenses,
net of amounts capitalized as part of construction labor, are also
included to the extent that they are associated with these
employees.
The 2010 decrease was primarily due to the following:
-- Pension/OPEB service cost and other employee-related
expense of $734. This decrease was primarily related
to reduction in workforce and changes in future retiree
benefits.
-- Traffic compensation of $452.
-- Contract services of $314.
-- Bad debt expense of $178 due to lower business revenue
and improvements in cash collections.
The decreases were partially offset by increased cost of sales,
primarily related to U-verse related expenses of $369.
The 2009 decrease was primarily due to the following:
-- Employee-related costs of $1,182, primarily related
to workforce reductions.
-- Traffic compensation, including portal fees, of $655.
-- Nonemployee-related expenses, such as bad debt expense,
materials and supplies costs of $441.
-- Contract services of $134.
Depreciation and amortization expenses decreased $372, or 2.9%,
in 2010 and $43, or 0.3%, in 2009. Both decreases were primarily
related to lower amortization of intangibles for customer lists
associated with acquisitions.
10
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 December 31, 2010, 2009
and 2008, are shown below and trends are addressed throughout this
segment discussion.
Percent Change
--------------------------
2010 vs. 2009 vs.
(in 000s) 2010 2009 2008 2009 2008
--------------- ------- ------ ------ -------- --------
Switched Access
Lines1
Retail consumer 22,515 26,378 30,614 (14.6)% (13.8)%
Retail business2 18,733 20,247 21,954 (7.5) (7.8)
---------------- ------ ------ ------
Retail Subtotal2 41,248 46,625 52,568 (11.5) (11.3)
---------------- ------ ------ ------
Wholesale
Subtotal2 2,367 2,685 2,924 (11.8) (8.2)
---------------- ------ ------ ------
Total Switched
Access
Lines3,7 43,678 49,392 55,610 (11.6) (11.2)
================ ====== ====== ======
Total Retail
Consumer Voice
Connections6 24,195 27,332 30,838 (11.5) (11.4)
================ ====== ====== ======
Total Wireline
Broadband
Connections4 16,310 15,789 15,077 3.3 4.7
================ ====== ====== ======
Satellite
service5 1,930 2,174 2,190 (11.2) (0.7)
U-verse video 2,987 2,065 1,045 44.6 97.6
---------------- ------ ------ ------
Video
Connections 4,917 4,239 3,235 16.0% 31.0%
================ ====== ====== ====== ======== ========
1 Represents access lines served by AT&T's Incumbent
Local Exchange Carriers (ILECs) and affiliates.
2 Prior-period amounts restated to conform to current
period reporting methodology.
3 Total switched access lines includes payphone access
lines of 63 at December 31, 2010, 82 at December 31,
2009 and 118 at December 31, 2008.
4 Total wireline broadband connections include DSL,
U-verse High Speed Internet and satellite broadband.
5 Satellite service includes connections under our agency
and resale agreements.
6 Includes consumer U-verse VoIP connections of 1,680
at December 31, 2010, 954 at December 31, 2009 and
224 at December 31, 2008.
7 Total switched access lines that are used solely by
AT&T or our subsidiaries include 1,699 retail business
and 95 wholesale lines at December 31, 2010, 1,750
retail business and 106 wholesale lines at December
31, 2009, and 1,879 retail business and 125 wholesale
lines at December 31, 2008.
11
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Advertising Solutions
Segment Results
Percent Change
-----------------------
2010 2009
vs. vs.
2010 2009 2008 2009 2008
---------------- ------ ------ ------ ------- ----------
Total Segment
Operating
Revenues $3,935 $4,724 $5,416 (16.7)% (12.8)%
---------------- ----- ----- -----
Segment
operating
expenses
Operations
and support 2,583 2,743 2,900 (5.8) (5.4)
Depreciation
and
amortization 497 650 789 (23.5) (17.6)
---------------- ----- ----- -----
Total Segment
Operating
Expenses 3,080 3,393 3,689 (9.2) (8.0)
---------------- ----- ----- -----
Segment Income $ 855 $1,331 $1,727 (35.8)% (22.9)%
================ ===== ===== ===== ======= ==========
Operating Results
Our Advertising Solutions segment operating income margin was
21.7% in 2010, 28.2% in 2009 and 31.9% in 2008. The decrease in the
segment operating income margin in both 2010 and 2009 was primarily
the result of decreased operating revenues.
Operating revenues decreased $789, or 16.7%, in 2010 and $692,
or 12.8%, in 2009. The decrease in 2010 was largely driven by
continuing declines in print revenue of $858, as customers reduced
or eliminated print ad purchases due to the slow economy, partially
offset by increased interactive revenue of $77, as customers
purchased more electronic advertising. The decrease in 2009 was
primarily due to declines in print revenue of $774 and lower sales
agency revenues of $34, partially offset by interactive advertising
revenue growth of $132. The current weak economy has reduced demand
for advertising, and customers have continued to shift to
Internet-based search services.
Operating expenses decreased $313, or 9.2%, in 2010 and $296, or
8.0%, in 2009. The 2010 decrease was largely driven by decreases in
depreciation and amortization expense of $136 resulting from use of
an accelerated method of amortization for customer lists,
employee-related costs of $99, and bad debt expense of $34. The
2009 decrease was due to decreased depreciation and amortization
expenses of $139, product-related costs of $92, advertising costs
of $44 and professional contracted expenses of $17.
Other
Segment Results
Percent Change
------------------------
2010 2009
vs. vs.
2010 2009 2008 2009 2008
-------------------- ------- ------ ------- -------
Total
Segment
Operating
Revenues $ 643 $ 771 $ 963 (16.6)% (19.9)%
------------ ------ ------ -----
Total
Segment
Operating
Expenses 2,484 3,136 1,136 (20.8) -
------------ ------ ------ -----
Segment
Operating
Loss (1,841) (2,365) (173) 22.2 -
------------ ------ ------ -----
Equity in
Net Income
of
Affiliates 742 708 794 4.8 (10.7)
------------ ------ ------ -----
Segment
Income
(Loss) $(1,099) $(1,657) $ 621 33.7% -
============ ====== ====== ===== ======= =======
The Other segment includes results from customer information
services, our portion of the results from our international equity
investments and all corporate and other operations. Also included
in the Other segment are impacts of corporate-wide decisions for
which the individual operating segments are not being evaluated,
including the interest cost and expected return on pension and
other postretirement benefit plan assets.
Operating revenues decreased $128, or 16.6%, in 2010 and $192,
or 19.9%, in 2009. The decrease in 2010 and 2009 is primarily due
to reduced revenues from our operator services.
Operating expenses decreased $652, or 20.8%, in 2010 and
increased $2,000 in 2009. The 2010 change was primarily due to
lower interest costs on our pension and postretirement benefit
obligation and a decrease in operator services operating expense.
The increase in 2009 expense was primarily due to higher pension
and postretirement benefit plan cost of approximately $2,600 due to
a lower-than-expected return on plan assets caused by investment
losses in 2008, partially offset by workforce reductions in
2008.
12
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
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 equity in net income of affiliates
by major investment is listed below:
2010 2009 2008
-------------------------- ---- ---- ----
America Movil $560 $505 $469
Telmex 150 133 252
Telmex Internacional1 34 72 72
Other (2) (2) 1
-------------------------- --- --- ---
Other Segment Equity in
Net Income of Affiliates $742 $708 $794
========================== === === ===
1 Acquired by America Movil in 2010.
Equity in net income of affiliates increased $34 in 2010,
primarily due to improved results at America Movil. Equity in net
income of affiliates decreased $86 in 2009, primarily due to
foreign currency translation losses at America Movil, Telmex, and
TI, partially offset by improved results at America Movil. In June
2010, as part of a tender offer from America Movil, we exchanged
all our shares in TI for America Movil L shares at the offered
exchange rate of 0.373. The exchange was accounted for at fair
value. In addition, we paid $202 to purchase additional shares of
America Movil L stock to maintain our ownership percentage at a
pretransaction level.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
2011 Revenue Trends We expect our operating environment in 2011
to remain challenging as weak economic conditions continue and
competition remains strong. Despite these challenges, we expect our
operating revenues in 2011 to grow, reflecting continuing growth in
our wireless data and IP-related wireline data services including
U-verse and business services. We expect our primary driver of
growth to be wireless, especially in sales of and increases in data
usage on advanced handsets and emerging devices (such as tablets,
eReaders and mobile navigation devices). We expect that all our
major customer categories will continue to increase their use of
Internet-based broadband/data services. We expect continuing
declines in traditional access lines and in print directory
advertising. Where available, our U-verse services have proved
effective in stemming access line losses, and we expect to continue
to expand our U-verse service offerings in 2011.
2011 Expense Trends We will continue to focus sharply on
cost-control measures, including areas such as simplifying product
offerings. We will continue our ongoing initiatives to improve
customer service and billing so we can realize our strategy of
bundling services and providing a simple customer experience. We
expect our 2011 operating income margin to improve, as our revenues
improve. Expenses related to growth areas of our business,
especially in the wireless, U-verse and strategic business services
areas, will apply some pressure to our operating income margin. In
addition, as we complete readying our Long-Term Evolution (LTE)
technology for its intended use, we will no longer capitalize
interest on this spectrum.
Market Conditions During 2010, the securities and fixed income
markets and the banking system in general continued to stabilize,
although bank lending and the housing industry remained weak. The
ongoing weakness in the general economy has also affected our
customer and supplier bases. We saw lower demand from our
residential customers as well as our business customers at all
organizational sizes. Some of our suppliers continue to experience
increased financial and operating costs. These negative economic
trends were offset by continued growth in our wireless data and
IP-related services. While the economy appears to have stabilized,
we do not expect a quick return to growth during 2011. Should the
economy instead deteriorate further, we likely will experience
further pressure on pricing and margins as we compete for both
wireline and wireless customers who have less discretionary income.
We also may experience difficulty purchasing equipment in a timely
manner or maintaining and replacing warranteed equipment from our
suppliers.
Included on our consolidated balance sheets are assets held by
benefit plans for the payment of future benefits. We are not
required to make significant funding contributions to our pension
plans in 2011. However, because our pension plans are subject to
funding requirements of the Employee Retirement Income Security Act
of 1974, as amended (ERISA), a continued weakness in the equity,
fixed income and real asset markets could require us to make
contributions to the pension plans in order to maintain minimum
funding requirements as established by ERISA in future periods.
Investment returns on these assets depend largely on trends in the
U.S. securities markets and the U.S. economy. In addition, our
policy of recognizing actuarial gains and losses related to our
pension and other postretirement plans in the period in which they
arise, subjects us to earnings volatility caused by changes in
market conditions. Changes in our discount rate, which are tied to
changes in the bond market and in the performance of equity
markets, may have significant impacts on the fair value of pension
and other postretirement plans at the end of 2011 (see "Significant
Accounting Policies and Estimates").
13
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
OPERATING 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.
With the advent of the Obama Administration, the composition of the
FCC has changed, and the new Commission appears to be more open
than the prior Commission to maintaining or expanding regulatory
requirements on entities subject to its jurisdiction. In addition,
Congress, the President and the FCC all have declared a national
policy objective of ensuring that all Americans have access to
broadband technologies and services. To that end, the FCC delivered
a National Broadband Plan to Congress in 2010. The FCC has issued
dozens of notices seeking comment on whether and how it should
modify its rules and policies on a host of issues, which would
affect all segments of the communications industry, to achieve
universal access to broadband. These issues include rules and
policies relating to universal service support, intercarrier
compensation and regulation of special access services, as well as
a variety of others that could have an impact on AT&T's
operations and revenues. However, at this stage, it is too early to
assess what, if any, impact such changes could have on us.
In addition, states representing a majority of our local service
access lines have adopted legislation that enables new video
entrants to acquire a single statewide or state-approved franchise
(as opposed to the need to acquire hundreds or even thousands of
municipal-approved franchises) to offer competitive video services.
We also are supporting efforts to update and improve regulatory
treatment for retail services. Passage of legislation is uncertain
and depends on many factors.
Our wireless operations operate in robust competitive markets
but are likewise subject to substantial governmental regulation.
Wireless communications providers must be licensed by the FCC to
provide communications services at specified spectrum frequencies
within specified geographic areas and must comply with the rules
and policies governing the use of the spectrum as adopted by the
FCC. The FCC has recognized the importance of providing carriers
with access to adequate spectrum to permit continued wireless
growth and has begun investigating how to develop policies to
promote that goal. While wireless communications providers' prices
and service offerings are generally not subject to state
regulation, an increasing number of states are attempting to
regulate or legislate various aspects of wireless services, such as
in the area of consumer protection.
Expected Growth Areas
We expect our wireless services and data wireline products to
remain the most significant portion of our business and have also
discussed trends affecting the segments in which we report results
for these products (see "Wireless Segment Results" and "Wireline
Segment Results"). Over the next few years, we expect an increasing
percentage of our growth to come from: (1) our wireless service and
(2) data/broadband, through existing and new services. We expect
that our previous acquisitions will enable us to strengthen the
reach and sophistication of our network facilities, increase our
large-business customer base and enhance the opportunity to market
wireless services to that customer base. Whether, or the extent to
which, growth in these areas will offset declines in other areas of
our business is not known.
Wireless Wireless is our fastest-growing revenue stream and we
expect to deliver continued revenue growth in the coming years. We
believe that we are in a growth period of wireless data usage and
that there are substantial opportunities available for
next-generation converged services that combine wireless,
broadband, voice and video.
14
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
We cover most major metropolitan areas of the U.S. with our
Universal Mobile Telecommunications System/High-Speed Downlink
Packet Access (HSPA) and HSPA+ network technology, with HSPA+
providing 4G speeds when combined with our upgraded backhaul. Our
network provides superior speeds for data and video services, as
well as operating efficiencies using the same spectrum and
infrastructure for voice and data on an IP-based platform. Our
wireless network also relies on digital transmission technologies
known as GSM, General Packet Radio Services and Enhanced Data Rates
for GSM Evolution for data communications. As of December 31, 2010,
we served 95.5 million customers. We have also begun transitioning
our network to more advanced LTE technology. We continue to expand
the number of locations, including airports and cafes, where
customers can access broadband Internet connections using wireless
fidelity (local radio frequency commonly referred to as Wi-Fi)
wireless technology.
As the wireless industry continues to mature, we believe that
future wireless growth will increasingly depend on our ability to
offer innovative services that will encourage existing customers to
upgrade their services, either by adding new types of services,
such as data enhancements, or through increased use of existing
services, such as through equipment upgrades. These innovative
services should attract customers from other providers, as well as
minimize customer churn. We intend to accomplish these goals by
continuing to expand our network coverage, improve our network
quality and offer a broad array of products and services, including
free mobile-to-mobile calling among our wireless customers.
Minimizing customer churn is critical to our ability to maximize
revenue growth and to maintain and improve our operating
margins.
U-verse Services We are continuing to expand our deployment of
U-verse High Speed Internet and TV services. As of December 31,
2010, we have passed 27.3 million living units (constructed housing
units as well as platted housing lots) and are marketing the
services to 77% of those units. 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. Petitions have been filed at the
FCC alleging that the manner in which we provisions "public,
educational and governmental" (PEG) programming over our U-verse TV
service conflicts with federal law, and a lawsuit has been filed in
a California state superior court raising similar allegations under
California law. If courts having jurisdiction where we have
significant deployments of our U-verse services were to decide that
federal, state and/or local cable regulation were applicable to our
U-verse services, or if the FCC, state agencies or the courts were
to rule that we must deliver PEG
programming in a manner substantially different from the way we
do today or in ways that are inconsistent with our current network
architecture, it could have a material adverse effect on the cost,
timing and extent of our deployment plans.
REGULATORY DEVELOPMENTS
Set forth below is a summary of the most significant
developments in our regulatory environment during 2010. While these
issues may apply only to certain subsidiaries, the words "we,"
"AT&T" and "our" are used to simplify the discussion. The
following discussions are intended as a condensed summary of the
issues rather than as a precise legal description of all of these
specific issues.
International Regulation Our subsidiaries operating outside the
U.S. are subject to the jurisdiction of regulatory authorities in
the market where service is provided. Our licensing, compliance and
advocacy initiatives in foreign countries primarily enable the
provision of enterprise (i.e., large-business) services. AT&T
is engaged in multiple efforts with foreign regulators to open
markets to competition, reduce network costs and increase our scope
of fully authorized network services and products.
Federal Regulation A summary of significant 2010 federal
regulatory developments follows.
Net Neutrality On December 23, 2010, the FCC released an order
adopting "net neutrality" rules. These rules apply to mass-market
retail broadband Internet access services, such as DSL, cable modem
service, mobile wireless broadband Internet access services and
similar retail services that are offered by AT&T and our
competitors. The rules do not apply to "enterprise" broadband
Internet access services sold to large businesses, nor do they
apply to other broadband IP-based services that do not offer
connectivity to all end points on the Internet, such as Internet
Protocol television services like AT&T's U-verse video service;
VoIP; VPNs; smart utility meters, wireless medical monitoring
devices and other similar devices. In addition, the FCC's rules do
not prohibit broadband Internet access providers from adopting
tiered or usage-sensitive pricing for their Internet access
services.
15
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Under the FCC's rules, broadband Internet access providers have
the following duties: (i) transparency - all providers of broadband
Internet access service (fixed and mobile) must disclose
information in plain language about their commercial terms,
performance characteristics, and network management; (ii) no
blocking - providers of fixed broadband Internet access services
may not block lawful content, applications, services or non-harmful
devices, and providers of mobile broadband Internet access services
may not block access to lawful Internet websites or lawful
applications that compete with the provider's voice or video
telephony services; and (iii) no unreasonable discrimination -
providers of fixed broadband Internet access service may not
unreasonably discriminate in the transmission of lawful Internet
traffic over a consumer's wireline broadband Internet access
services. Notwithstanding these duties, a broadband Internet access
provider may engage in reasonable network management in order to
address network congestion, prevent harm to the network or users,
or take other reasonable steps to manage their network.
COMPETITION
Competition continues to increase for telecommunications and
information services. Technological advances have expanded the
types and uses of services and products available. In addition,
lack of or a reduced level of regulation of comparable alternatives
(e.g., cable, wireless and VoIP providers) has lowered costs for
these alternative communications service providers. As a result, we
face heightened competition as well as some new opportunities in
significant portions of our business.
Wireless
We face substantial and increasing competition in all aspects of
our wireless business. Under current FCC rules, six or more PCS
licensees, two cellular licensees and one or more enhanced
specialized mobile radio licensees may operate in each of our
service areas, which results in the potential presence of multiple
competitors. Our competitors are multiple national companies, such
as Verizon Wireless, Sprint Nextel Corp., T-Mobile, Metro PCS and
Cricket, and a larger number of regional providers of cellular, PCS
and other wireless communications services. More than 95% of the
U.S. population lives in areas with three mobile telephone
operators, and more than half the population lives in areas with at
least five competing carriers.
We may experience significant competition from companies that
provide similar services using other communications technologies
and services. While some of these technologies and services are now
operational, others are being developed or may be developed. We
compete for customers based principally on service offerings, call
quality, coverage area, price and customer service.
Wireline
Our wireline subsidiaries expect continued competitive pressure
in 2011 from multiple providers, including wireless, cable and
other VoIP providers, interexchange carriers and resellers. In
addition, economic pressures are forcing customers to terminate
their traditional local wireline service and substitute wireless
and Internet-based services, intensifying a pre-existing trend
toward wireless and Internet use. At this time, we are unable to
quantify the effect of competition on the industry as a whole or
financially on this segment. However, we expect both losses of
revenue share in local service and gains resulting from business
initiatives, especially in the area of bundling of products and
services, including wireless and video, large-business data
services and broadband. In most markets, we compete with large
cable companies, such as Comcast Corporation, Cox Communications
Inc. and Time Warner Cable Inc., for local, high-speed Internet and
video services customers and other smaller telecommunications
companies for both long-distance and local services customers.
Our wireline subsidiaries generally remain subject to regulation
by state regulatory commissions for intrastate services and by the
FCC for interstate services. In contrast, our competitors are often
subject to less or no regulation in providing comparable voice and
data services or the extent of regulation is in dispute. Under the
Telecom Act, companies seeking to interconnect to our wireline
subsidiaries' networks and exchange local calls enter into
interconnection agreements with us. Any unresolved issues in
negotiating those agreements are subject to arbitration before the
appropriate state commission. These agreements (whether fully
agreed-upon or arbitrated) are then subject to review and approval
by the appropriate state commission.
16
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Our wireline subsidiaries (excluding rural carrier affiliates)
operate under state-specific elective alternative forms of
regulation for retail services (also referred to as "alternative
regulation") that was either legislatively enacted or authorized by
the appropriate state regulatory commission. Under alternative
regulation, the state regulatory agency or the legislature may
deregulate the competitive services; impose price caps for some
services where the prices for these services are not tied to the
cost of providing the services or to rate-of-return requirements;
or adopt a regulatory framework that incorporates deregulation and
price caps. Some states may impose minimum customer service
standards with required payments if we fail to meet the
standards.
We continue to lose access lines due to competitors (e.g.,
wireless, cable and VoIP providers) who can provide comparable
services at lower prices because they are not subject to
traditional telephone industry regulation (or the extent of
regulation is in dispute), utilize different technologies, or
promote a different business model (such as advertising based) and
consequently have lower cost structures. In response to these
competitive pressures, for several years we have utilized a
bundling strategy that rewards customers who consolidate their
services (e.g., local and long-distance telephone, high-speed
Internet, wireless and video) with us. We continue to focus on
bundling wireline and wireless services, including combined
packages of minutes and video service through our U-verse service
and our relationships with satellite television providers. We will
continue to develop innovative products that capitalize on our
expanding fiber network.
Additionally, we provide local, domestic intrastate and
interstate, international wholesale networking capacity, and
switched services to other service providers, primarily large
Internet Service Providers using the largest class of nationwide
Internet networks (Internet backbone), wireless carriers,
Competitive Local Exchange Carriers, regional phone ILECs, cable
companies and systems integrators. These services are subject to
additional competitive pressures from the development of new
technologies and the increased availability of domestic and
international transmission capacity. The introduction of new
products and service offerings and increasing satellite, wireless,
fiber-optic and cable transmission capacity for services similar to
those provided by us continues to provide competitive pressures. We
face a number of international competitors, including Orange
Business Service, British Telecom, SingTel and Verizon
Communications Inc., as well as competition from a number of large
systems integrators, such as HP Enterprise Services.
Advertising Solutions
Our Advertising Solutions subsidiaries face competition from
approximately 100 publishers of printed directories in their
operating areas. Competition also exists from other advertising
media, including newspapers, radio, television and direct-mail
providers, as well as many forms of Internet-based and mobile
advertising. Through our wholly-owned subsidiary, YELLOWPAGES.COM
LLC, we compete with other providers of Internet-based advertising
and local search.
ACCOUNTING POLICIES AND STANDARDS
Critical Accounting Policies and Estimates Because of the size
of the financial statement line items they relate to, some of our
accounting policies and estimates have a more significant impact on
our financial statements than others. The following policies are
presented in the order in which the topics appear in our
consolidated statements of income.
Allowance for Doubtful Accounts We maintain an allowance for
doubtful accounts for estimated losses that result from the failure
of our customers to make required payments. When determining the
allowance, we consider the probability of recoverability based on
past experience, taking into account current collection trends as
well as general economic factors, including bankruptcy rates.
Credit risks are assessed based on historical write-offs, net of
recoveries, and an analysis of the aged accounts receivable
balances with reserves generally increasing as the receivable ages.
Accounts receivable may be fully reserved for when specific
collection issues are known to exist, such as pending bankruptcy or
catastrophes. The analysis of receivables is performed monthly, and
the allowances for doubtful accounts are adjusted accordingly. A
10% change in the amounts estimated to be uncollectible would
result in a change in the provision for uncollectible accounts of
approximately $100.
Pension and Other Postretirement Benefits In January 2011, we
announced a change in our method of recognizing actuarial gains and
losses for pension and other postretirement benefits for all
benefit plans. Historically, we have recognized the actuarial gains
and losses as a component of Stockholders' Equity on our
consolidated balance sheets on an annual basis and have amortized
them into our operating results over the average future service
period of the active employees of these plans, to the extent such
gains and losses were outside of a corridor. We have elected to
immediately recognize actuarial gains and losses in our operating
results, noting that it is generally preferable to accelerate the
recognition of deferred gains and losses into income rather than to
delay such recognition. This change will improve transparency in
our operating results by more quickly recognizing the effects of
economic and interest rate conditions on plan obligations,
investments and assumptions. These gains and losses are generally
only measured annually as of December 31 and accordingly will be
recorded during the fourth quarter. Additionally, for purposes of
calculating the expected return on plan assets, we will no longer
use a permitted averaging technique for the market-related value of
assets but instead will use actual fair value of plan assets. We
have applied this change retrospectively, adjusting all prior
periods. See Note 1 for a presentation of our operating results
before and after the application of this accounting change.
17
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Our actuarial estimates of retiree benefit expense and the
associated significant weighted-average assumptions are discussed
in Note 11. Our assumed discount rate of 5.80% at December 31,
2010, reflects the hypothetical rate at which the projected benefit
obligations could be effectively settled or paid out to
participants. We determined our discount rate based on a range of
factors, including a yield curve comprised of the rates of return
on several hundred high-quality, fixed-income corporate bonds
available at the measurement date and the related expected duration
for the obligations. These bonds were all rated at least Aa3 or AA-
by one of the nationally recognized statistical rating
organizations, denominated in U.S. dollars, and neither convertible
nor index linked. For the year ended December 31, 2010, we
decreased our discount rate by 0.70%, resulting in an increase in
our pension plan benefit obligation of $3,238 and an increase in
our postretirement benefit obligation of $2,817. For the year ended
December 31, 2009, we decreased our discount rate by 0.50%,
resulting in an increase in our pension plan benefit obligation of
$2,065 and an increase in our postretirement benefit obligation of
$1,847.
Our return on assets assumption was 8.5% for the year ended
December 31, 2010. In 2010, we experienced actual returns on
investments somewhat higher than expected; however, in 2011 we will
be decreasing our expected return on assets to 8.25%, based on
expectations on future market and the asset mix of the plans'
investments. If all other factors were to remain unchanged, we
expect that a 1.0% decrease in the actual long-term rate of return
would cause 2011 combined pension and postretirement cost to
increase $575.
Note 11 also discusses the effects of certain changes in
assumptions related to medical trend rates on retiree healthcare
costs. Should actual experience differ from actuarial assumptions,
the projected pension benefit obligation and net pension cost and
accumulated postretirement benefit obligation and postretirement
benefit cost would be affected in future years.
Depreciation Our depreciation of assets, including use of
composite group depreciation and estimates of useful lives, is
described in Notes 1 and 5. We assign useful lives based on
periodic studies of actual asset lives. Changes in those lives with
significant impact on the financial statements must be disclosed,
but no such changes have occurred in the three years ended December
31, 2010. However, if all other factors were to remain unchanged,
we expect that a one-year increase in the useful lives of the
largest categories of our plant in service (which accounts for more
than 75% of our total plant in service) would result in a decrease
of approximately $2,275 in our 2011 depreciation expense and that a
one-year decrease would result in an increase of approximately
$3,341 in our 2011 depreciation expense.
Asset Valuations and Impairments We account for acquisitions
completed after 2008 using the acquisition method. We allocate the
purchase price to the assets acquired and liabilities assumed based
on their estimated fair values. The estimated fair values of
intangible assets acquired are based on the expected discounted
cash flows of the identified customer relationships, patents, trade
names and FCC licenses. In determining the future cash flows, we
consider demand, competition and other economic factors.
Customer relationships, which are finite-lived intangible
assets, are primarily amortized using the sum-of-the-months-digits
method of amortization over the period in which those relationships
are expected to contribute to our future cash flows. The
sum-of-the-months-digits method is a process of allocation, and
reflects our belief that we expect greater revenue generation from
these customer relationships during the earlier years of their
lives. Alternatively, we could have chosen to amortize customer
relationships using the straight-line method, which would allocate
the cost equally over the amortization period. Amortization of
other intangibles, including patents and certain trade names, is
determined using the straight-line method of amortization over the
expected remaining useful lives.
Goodwill and wireless FCC licenses are not amortized but tested
annually for impairment. We conduct our impairment tests as of
October 1. We test goodwill on a reporting unit basis, and our
reporting units coincide with our segments, except for certain
operations in our Other segment. The goodwill impairment test is a
two-step process. The first step involves determining the fair
value of the reporting unit and comparing that measurement to the
book value. If the fair value exceeds the book value, then no
further testing is required. If the fair value is less than the
book value (i.e., an impairment exists), then we perform a second
step.
18
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
In the second step, we determine the fair values of all of the
assets and liabilities of the reporting unit, including those that
may not be currently recorded. The difference between the sum of
all of those fair values and the overall reporting unit's fair
value is a new implied goodwill amount, which we compare to the
recorded goodwill. If implied goodwill is less than the recorded
goodwill, then we record an impairment of the recorded goodwill.
The amount of this impairment may be more or less than the
difference between the overall fair value and book value of the
reporting unit. It may even be zero if the fair values of other
assets are less than their book values. Goodwill is the only asset
that may be impaired when performing the goodwill impairment
test.
As shown in Note 6, more than 99% of our goodwill resides in the
Wireless, Wireline, and Advertising Solutions segments. For each of
those segments, we assess their fair value using a market multiple
approach and a discounted cash flow approach. Our primary valuation
technique is to determine enterprise value as a multiple of a
company's Operating Income Before Depreciation and Amortization
(OIBDA). We determined the multiples of the publicly traded
companies whose services are comparable to those offered by the
segment and then calculate a weighted average of those multiples.
Using those weighted averages, we then calculated fair values for
each of those segments. We also perform a discounted cash flow
analysis as a secondary test of fair value to corroborate our
primary market multiple test. The calculated fair value exceeded
book value in all circumstances and no additional testing was
necessary. In the event of a 10% drop in the fair values of the
reporting units, the fair values would have still exceeded the book
values of the reporting units and additional testing would still
have not been necessary.
Wireless FCC licenses are tested for impairment on an aggregate
basis, consistent with the management of the business on a national
scope. As in prior years, we performed our test of the fair values
of FCC licenses using a discounted cash flow model (the Greenfield
Approach). The Greenfield Approach assumes a company initially owns
only the wireless FCC licenses, and then makes investments required
to build an operation comparable to the one that currently utilizes
the licenses. We utilized a 17-year discrete period to isolate cash
flows attributable to the licenses, including modeling the
hypothetical build-out. The projected cash flows are based on
certain financial factors, including revenue growth rates, OIBDA
margins, and churn rates. We expect wireless revenue growth to
trend down from our 2010 growth rate of 9.3% to a long-term growth
rate that reflects expected long-term inflation trends. We expect
our churn rates to continue to decline from 1.31% in 2010, in line
with expected trends in the industry but at a rate comparable with
industry-leading churn. OIBDA margins should continue to trend
above 40.0%.
This model then incorporates cash flow assumptions regarding
investment in the network, development of distribution channels and
the subscriber base, and other inputs for making the business
operational. We based the assumptions, which underlie the
development of the network, subscriber base and other critical
inputs of the discounted cash flow model on a combination of
average marketplace participant data and our historical results,
trends and business plans. We also used operating metrics such as
capital investment per subscriber, acquisition costs per
subscriber, minutes of use per subscriber, etc., to develop the
projected cash flows. Since we included the cash flows associated
with these other inputs in the annual cash flow projections, the
present value of the unlevered free cash flows of the segment,
after investment in the network, subscribers, etc., is attributable
to the wireless FCC licenses. The terminal value of the segment,
which incorporates an assumed sustainable growth rate, is also
discounted and is likewise attributed to the licenses. We used a
discount rate of 9.0%, based on the optimal long-term capital
structure of a market participant and its associated cost of debt
and equity, to calculate the present value of the projected cash
flows. This discount rate is also consistent with rates we use to
calculate the present value of the projected cash flows of licenses
acquired from third parties.
If either the projected rate of long-term growth of cash flows
or revenues declined by 1%, or if the discount rate increased by
1%, the fair values of the wireless FCC licenses, while less than
currently projected, would still be higher than the book value of
the licenses. The fair value of the licenses exceeded the book
value by more than 25%.
We review customer relationships and other long-lived assets for
impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable over the remaining life of
the asset or asset group. To determine that the asset is
recoverable, we verify that the expected undiscounted future cash
flows directly related to that asset exceed its book value.
19
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
We evaluate our investments to determine whether market declines
are temporary and accordingly reflected in accumulated other
comprehensive income, or other-than-temporary and recorded as an
expense in other income (expense) in the consolidated income
statements. This evaluation is based on the length of time and the
severity of decline in the investment's value. In 2010, we
identified an other-than-temporary decline in the value of one of
our equity method investments and various cost investments. At the
end of the first quarter of 2009 and at the end of 2008, we
concluded the severity of decline had led to an
other-than-temporary decline in the value of assets contained in an
independently managed trust for certain BellSouth employee
benefits.
Income Taxes Our estimates of income taxes and the significant
items giving rise to the deferred assets and liabilities are shown
in Note 10 and reflect our assessment of actual future taxes to be
paid on items reflected in the financial statements, giving
consideration to both timing and probability of these estimates.
Actual income taxes could vary from these estimates due to future
changes in income tax law or the final review of our tax returns by
federal, state or foreign tax authorities.
We use our judgment to determine whether it is more likely than
not that we will sustain positions that we have taken on tax
returns and, if so, the amount of benefit to initially recognize
within our financial statements. We regularly review our uncertain
tax positions and adjust our unrecognized tax benefits (UTBs) in
light of changes in facts and circumstances, such as changes in tax
law, interactions with taxing authorities and developments in case
law. These adjustments to our UBTs may affect our income tax
expense. Settlement of uncertain tax positions may require use of
our cash.
New Accounting Standards
Revenue Arrangements with Multiple Deliverables In October 2009,
the Financial Accounting Standards Board (FASB) issued
"Multiple-Deliverable Revenue Arrangements" (ASU 2009-13), which
addresses how revenues should be allocated among all products and
services included in our bundled sales arrangements. It establishes
a selling price hierarchy for determining the selling price of each
product or service, with vendor-specific objective evidence at the
highest level, third-party evidence at the intermediate level, and
a best estimate at the lowest level. It eliminates the residual
method as an acceptable allocation method, and requires the use of
the relative selling price method as the basis for allocation. It
also significantly expands the disclosure requirements for such
arrangements, including, potentially, certain qualitative
disclosures. We adopted ASU 2009-13 for sales entered into or
materially modified in the year beginning January 1, 2011. ASU
2009-13 had no material effect on our financial statements or
existing revenue recognition policies.
See Note 1 for a discussion of other recently issued or adopted
accounting standards.
OTHER BUSINESS MATTERS
Retiree Phone Concession Litigation In May 2005, we were served
with a purported class action in U.S. District Court, Western
District of Texas (Stoffels v. SBC Communications Inc.), in which
the plaintiffs, who are retirees of Pacific Bell Telephone Company,
Southwestern Bell and Ameritech, contend that the cash
reimbursement formerly paid to retirees living outside their
company's local service area, for telephone service they purchased
from another provider, is a "defined benefit plan" within the
meaning of ERISA. In October 2006, the Court certified two classes.
The issue of whether the concession is an ERISA pension plan was
tried before the judge in November 2007. In May 2008, the court
ruled that the concession was an ERISA pension plan. We asked the
court to certify this ruling for interlocutory appeal, and in
August 2008, the court denied our request. In May 2009, we filed a
motion for reconsideration with the trial court. That motion was
granted on January 14, 2011, and a final judgment has been entered
in our favor. Plaintiffs have appealed the judgment to the Fifth
Circuit Court of Appeals. We believe that an adverse outcome having
a material effect on our financial statements in this case is
unlikely, but we will continue to evaluate the potential impact of
this suit on our financial results as it progresses.
NSA Litigation Twenty-four lawsuits were filed alleging that we
and other telecommunications carriers unlawfully provided
assistance to the National Security Agency in connection with
intelligence activities that were initiated following the events of
September 11, 2001. In the first filed case, Hepting et al v.
AT&T Corp., AT&T Inc. and Does 1-20, a purported class
action filed in U.S. District Court in the Northern District of
California, plaintiffs alleged that the defendants disclosed and
are currently disclosing to the U.S. Government content and call
records concerning communications to which Plaintiffs were a party.
Plaintiffs sought damages, a declaratory judgment and injunctive
relief for violations of the First and Fourth Amendments to the
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 AT&T
Inc. telecommunications companies. The court granted the
Government's motion to dismiss and entered final judgments in July
2009. In addition, a lawsuit seeking to enjoin the immunity
provision's application on grounds that it is unconstitutional was
filed. In March 2009, we and the Government filed motions to
dismiss this lawsuit. The court granted the motion to dismiss and
entered final judgment in July 2009. All cases brought against the
AT&T entities have been dismissed. In August 2009, plaintiffs
in all cases filed an appeal with the Ninth Circuit Court of
Appeals, and this appeal remains pending. Management believes this
appeal is without merit and intends to continue to defend these
matters vigorously.
20
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Universal Service Fees Litigation In October 2010, our wireless
subsidiary was served with a purported class action in Circuit
Court, Cole County, Missouri (MBA Surety Agency, Inc. v. AT&T
Mobility, LLC), in which the plaintiffs contend that we violated
the FCC's rules by collecting universal service fees on certain
services not subject to such fees, including Internet access
service provided over wireless handsets commonly called
"smartphones" and wireless data cards, as well as collecting
certain other state and local fees. Plaintiffs define the class as
all persons who from April 1, 2003, until the present had a
contractual relationship with us for Internet access through a
smartphone or a wireless data card. Plaintiffs seek an unspecified
amount of damages as well as injunctive relief. We believe that an
adverse outcome having a material effect on our financial
statements in this case is unlikely.
National Healthcare Law In 2010, we paid $5,312 for a variety of
health and welfare benefits provided to certain active and retired
employees and their dependents under various plans. Of those
benefits, $4,463 related to medical and prescription drug benefits.
In March 2010, the President signed into law the comprehensive
healthcare reform legislation. The legislation changed the tax
treatment of the Medicare Part D subsidy, provided Medicare payment
reforms, and enacted an excise tax on "Cadillac" plans as well as
mandates for providing coverage and other requirements for delivery
of health care to employees and retirees. We recorded a non-cash
charge of $995 in the first quarter of 2010 to reflect the impact
of this change. In 2011, we received a reimbursement of $92
relating to coverage provided to our early retirees as provided by
the new legislation. We continue to evaluate the effects of the new
law and its related regulations on the level of healthcare benefits
we currently provide to active employees and retirees.
Wireless Transactions In June 2010, we acquired certain wireless
properties, including FCC licenses and network assets from Verizon
Wireless for $2,376 in cash and increased goodwill by $937. The
assets primarily represented former Alltel Wireless assets and
served approximately 1.6 million subscribers in 79 service areas
across 18 states. Since the properties we acquired use a different
network technology than our GSM technology, we expect to incur
additional costs to convert that network and subscriber handsets to
our GSM technology.
As a condition of our acquisition of Centennial, in August 2010,
we sold eight service areas in Louisiana and Mississippi for
$273.
In December 2010, we agreed to purchase spectrum licenses in the
Lower 700 MHz frequency band from Qualcomm Incorporated (Qualcomm)
for approximately $1,925 in cash. The spectrum covers more than 300
million people total nationwide, including 12 MHz of Lower 700 MHz
D and E block spectrum covering more than 70 million people in five
of the top 15 metropolitan areas and 6 MHz of Lower 700 MHz D block
spectrum covering more than 230 million people across the rest of
the U.S. We plan to deploy this spectrum as supplemental downlink
capacity, using carrier aggregation technology once compatible
handsets and network equipment are developed. The transaction is
subject to regulatory approvals and other customary closing
conditions. In February 2011, the waiting period under the
Hart-Scott-Rodino Act expired without the Department of Justice
requesting additional information. AT&T and Qualcomm anticipate
closing the purchase in the second half of 2011.
Labor Contracts In February 2010, the Company and the
Communications Workers of America (CWA) announced a tentative
agreement covering approximately 30,000 core wireline employees in
the nine-state former BellSouth region, subject to ratification by
those covered employees. This agreement was ratified in March 2010.
In September, approximately 4,000 core wireline employees in the
Company's east region also ratified a tentative agreement
previously announced by the Company and the CWA. All core wireline
employees are now covered by agreements reached since prior labor
agreements expired during 2009.
Environmental We are subject from time to time to judicial and
administrative proceedings brought by various governmental
authorities under federal, state or local environmental laws.
Although we are required to reference in our Forms 10-Q and 10-K
any of these proceedings that could result in monetary sanctions
(exclusive of interest and costs) of one hundred thousand dollars
or more, we do not believe that any of them currently pending will
have a material adverse effect on our results of operations.
21
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 $1,437 in cash and cash equivalents available at December
31, 2010. Cash and cash equivalents included cash of $332 and money
market funds and other cash equivalents of $1,105. Cash and cash
equivalents decreased $2,304 since December 31, 2009. During 2010,
cash inflows were primarily provided by cash receipts from
operations, the issuance of debt and the disposition of
non-strategic assets. These inflows were more than 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, repayment of debt, payment of interest
on debt, and acquisitions. We discuss many of these factors in
detail below.
Cash Provided by or Used in Operating Activities
During 2010, cash provided by operating activities was $34,993
compared to $34,405 in 2009. Our higher operating cash flow
reflects decreased tax payments of $933. During 2010, our payments
for current income taxes were lower than 2009 due to lower
audit-related payments net of refunds. The timing of cash payments
for income taxes is governed by the IRS and other taxing
authorities and differs from the timing of recording tax
expense.
In September 2010, we reached a settlement with the IRS on the
calculation of the tax basis of certain assets relating to a
restructuring of our wireless operations. The allowed amortization
deductions on these settlement-related assets are expected to cover
a 15-year period, which began in 2008. As a result of this
settlement, we paid $300 to the IRS during the fourth quarter of
2010, representing the tax effect of disallowed deductions taken on
our federal income tax returns in 2008 and 2009. We also decreased
our net tax liabilities approximately $8,300 and expect to
recognize the cash flow impacts of the settlement over a 15-year
period, which began in 2008. The effect of the change to our net
tax liabilities was recognized through our income statement in the
third quarter of 2010 as a reduction in income tax expense.
During 2009, cash provided by operating activities was $34,405
compared to $33,610 in 2008. Our higher operating cash flow
reflected decreased tax payments of $836, partially offset by
increased interest payments of $157. During 2009, our payments for
income taxes were lower than 2008 due primarily to changes in law
impacting the timing of payments, partially offset by an increase
in audit-related payments net of refunds.
Cash Used in or Provided by Investing Activities
During 2010, cash used in investing activities consisted of:
-- $19,530 in capital expenditures, excluding interest
during construction.
-- $772 in interest during construction.
-- $2,376, net of cash acquired, related to the acquisition
of various assets from Verizon.
-- $265 related to wireless spectrum and licenses acquired.
-- $265 related to other acquisitions.
-- $100 from the purchase of securities, net of investments.
During 2010, cash provided by investing activities consisted
of:
-- $1,830 from dispositions of non-strategic assets.
-- $29 related to other activities.
Our capital expenditures are primarily for our wireless and
wireline subsidiaries' networks, our U-verse services, and support
systems for our communications services. Total capital spending in
2010 was $19,530, which was a $2,976 increase from 2009. Capital
spending in our Wireless segment, excluding interest during
construction, represented 43% of our total spending and increased
over 50% from 2009. Wireless expenditures were used for network
capacity expansion, integration and upgrades to our HSPA network
and the initial deployment of LTE (4G) equipment for trials.
Capital expenditures in our Wireline segment, which represented 56%
of our capital expenditures excluding interest during construction,
decreased 1% for 2010, reflecting decreased spending on U-verse
services, less spending on wireline voice services, and lower DSL
and High Capacity volumes. The Other segment capital expenditures
were less than 1% of total capital expenditures for 2010. We expect
to fund any Advertising Solutions segment capital expenditures
using cash from operations. We expect total 2011 capital investment
to be in the low- to mid-$19,000 range. We anticipate using
approximately $1,925 of cash in 2011 to purchase wireless spectrum
from Qualcomm.
22
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Cash Used in or Provided by Financing Activities
We paid dividends of $9,916 in 2010, $9,670 in 2009, and $9,507
in 2008, reflecting dividend rate increases. In December 2010, our
Board of Directors approved a 2.4% increase in the quarterly
dividend from $0.42 to $0.43 per share. This follows a 2.4%
dividend increase approved by AT&T's Board in December 2009.
Dividends declared by our Board of Directors totaled $1.69 per
share in 2010, $1.65 per share in 2009 and $1.61 per share in 2008.
Our dividend policy considers both 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 approval by
our Board of Directors.
During 2010, we received net proceeds of $2,235 from the
issuance of $2,250 of 2.50% global notes due in 2015. Debt proceeds
were used for general corporate purposes. We also received proceeds
of $1,620 from the net issuance of commercial paper and other
short-term bank borrowings.
During 2010, debt repayments totaled $9,294 and consisted
of:
-- $5,668 in repayments of long-term debt with a weighted-average
interest rate of 2.86%.
-- $3,000 in the early redemption of the New Cingular
Wireless Services, Inc. 7.875% notes originally due
on March 1, 2011.
-- $594 related to the private exchange we completed
on September 2, 2010, whereby holders exchanged $1,362
of New Cingular Wireless Services, Inc. 8.75% senior
notes due 2031 and $1,537 of AT&T Corp. (ATTC) 8.00%
senior notes due 2031 for $3,500 of new 5.35% AT&T
Inc. global notes due 2040 plus a cash payment.
-- $32 in repayments of capitalized leases.
At December 31, 2010, we had $7,196 of debt maturing within one
year, which included $5,544 of long-term debt maturities, $1,625 of
commercial paper and $27 of other borrowings. Debt maturing within
one year includes $1,000 of annual put reset securities issued by
BellSouth that may be put each April until maturity in 2021.
During 2010, the following other financing activities
occurred:
-- We paid out $278 related to derivative collateral; $197 was our returning
collateral to counterparties, which were funds they had posted to us in
2009 (see Note 9).
-- We paid $266 to minority interest holders.
-- We received proceeds of $50 from the issuance of treasury
shares related to the settlement of share-based awards.
In December 2010, our Board of Directors approved a program to
repurchase up to 300 million shares (approximately 5%) of our
common stock; the program does not have an expiration date.
We plan to fund our 2011 financing activities through a
combination of cash from operations and debt issuances. The timing
and mix of debt issuance will be guided by credit market conditions
and interest rate trends. The emphasis of our financing activities
will be the payment of dividends, subject to approval by our Board
of Directors, the repayment of debt, and potential share
repurchases.
Credit Facilities In December 2010, we replaced our five-year,
$9,465 revolving credit facility with two new revolving credit
facilities with a syndicate of banks - a four-year, $5,000
agreement and a $3,000, 364-day agreement. In the event advances
are made under either agreement, those advances would be used for
general corporate purposes, which could include repayment of
maturing commercial paper. Advances are not conditioned on the
absence of a material adverse change. All advances must be repaid
no later than the date on which lenders are no longer obligated to
make any advances under each agreement. Under each agreement, we
can terminate, in whole or in part, amounts committed by the
lenders in excess of any outstanding advances; however, we cannot
reinstate any such terminated commitments. At December 31, 2010, we
had no advances outstanding under either agreement and were in
compliance with all covenants under each agreement.
The Four-Year Agreement
We can request the lenders to further increase their commitments
(i.e., raise the available credit) up to an additional $2,000
provided no event of default has occurred. The obligations of the
lenders to provide advances will terminate on December 20, 2014,
unless prior to that date either: (i) we reduce to $0 the
commitments of the lenders, or (ii) certain events of default
occur. We and lenders representing more than 50% of the facility
amount may agree to extend their commitments for an additional one
year beyond the December 20, 2014, termination date (with a
potential one-year further renewal), under certain
circumstances.
23
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Advances would bear interest, at our option, either:
-- at an annual rate equal to (1) the highest of (a)
the base (or prime) rate of a designated bank, (b)
0.50% per annum above the Federal funds rate, and
(c) the British Bankers Association Interest Settlement
Rate applicable to Dollars for a period of one month
plus 1.00%, plus (2) a rate based on AT&T's credit
default swap mid-rate spread and subject to a floor
or cap as set forth in the Agreement (Applicable Margin)
minus 1.00% provided such total exceeds zero; or
-- at a rate equal to: (i) the London InterBank Offered
Rate (LIBOR) (adjusted upwards to reflect any bank
reserve costs) for a period of one, two, three or
six months, as applicable, plus (ii) the Applicable
Margin.
If we pledge assets or otherwise have liens on our properties,
then advances will be ratably secured, subject to specified
exceptions. We also must maintain a debt-to-EBITDA (earnings before
interest, income taxes, depreciation and amortization, and other
modifications described in the agreement) ratio of not more than
three-to-one, as of the last day of each fiscal quarter, for the
four quarters then ended.
Defaults under the agreement, which would permit the lenders to
accelerate required repayment and which would increase the
Applicable Margin by 2.00% per annum, include:
-- We fail to pay principal or interest, or other amounts
under the agreement beyond any grace period,
-- We fail to pay when due other debt of $400 or more
that results in acceleration of that debt (commonly
referred to as "cross-acceleration") or a creditor
commences enforcement proceedings within a specified
period after a money judgment of $400 or more has
become final,
-- A person acquires beneficial ownership of more than
50% of AT&T common shares or more than a majority
of AT&T's directors changes in any 24-month period
other than as elected by the remaining directors (commonly
referred to as a "change in control"),
-- Material breaches of representations or warranties
in the agreement,
-- We fail to comply with the negative pledge or debt-to-EBITDA
ratio covenants described above,
-- We fail to comply with other covenants under the Agreement
for a specified period after notice,
-- We fail to make certain minimum funding payments under
ERISA, and
-- Our bankruptcy or insolvency.
364-day Agreement
The obligations of the lenders to provide advances will
terminate on December 19, 2011, unless prior to that date either:
(i) we reduce to $0 the commitments of the lenders, or (ii) certain
events of default occur. We and lenders representing more than 50%
of the facility amount may agree to extend their commitments for an
additional 364-day period beyond the December 19, 2011 termination
date, under certain circumstances. We also can convert all or part
of outstanding advances under the 364-day Agreement into term
loan(s) maturing no later than the first anniversary of the
termination date, under certain circumstances.
Advances would bear interest, at our option, either:
-- at a variable annual rate equal to (1) the highest
of (a) the base (or prime) rate of a designated bank,
(b) 0.50% per annum above the Federal funds rate,
and (c) the British Bankers Association Interest Settlement
Rate applicable to Dollars for a period of one month
plus 1.00%, plus (2) a rate based on AT&T's credit
default swap mid-rate spread and subject to a floor
or cap as set forth in such Agreement (Applicable
Margin) minus 1.00% provided such total exceeds zero;
or
-- at a rate equal to: (i) LIBOR (adjusted upwards to
reflect any bank reserve costs) for a period of one,
two, three or six months, as applicable, plus (ii)
the Applicable Margin.
The 364-day Agreement contains a negative pledge covenant that
is identical to the negative pledge described above. In the event
we elect to convert any outstanding advances to term loan(s), the
debt-to-EBITDA financial ratio covenant described above also would
apply while such term loan(s) were outstanding. The events of
default described above also apply to the 364-day Agreement.
Other
Our total capital consists of debt (long-term debt and debt
maturing within one year) and stockholders' equity. Our capital
structure does not include debt issued by our international equity
investees. Our debt ratio was 37.1%, 41.4% and 43.8% at December
31, 2010, 2009 and 2008. The debt ratio is affected by the same
factors that affect total capital. Total capital increased $4,046
in 2010 compared to an increase of $2,716 in 2009. The 2010 total
capital increase was primarily due to a $9,848 increase in retained
earnings, partially offset by a $5,914 decrease in debt, both
factors which lowered the debt ratio in 2010.
24
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
Current accounting standards require us to disclose our material
obligations and commitments to making future payments under
contracts, such as debt and lease agreements, and under contingent
commitments, such as debt guarantees. We occasionally enter into
third-party debt guarantees, but they are not, nor are they
reasonably likely to become, material. We disclose our contractual
long-term debt repayment obligations in Note 8 and our operating
lease payments in Note 5. Our contractual obligations do not
include expected pension and postretirement payments as we maintain
pension funds and Voluntary Employee Beneficiary Association trusts
to fully or partially fund these benefits (see Note 11). In the
ordinary course of business, we routinely enter into commercial
commitments for various aspects of our operations, such as plant
additions and office supplies. However, we do not believe that the
commitments will have a material effect on our financial condition,
results of operations or cash flows.
Our contractual obligations as of December 31, 2010 are in the
following table. The purchase obligations that follow are those for
which we have guaranteed funds and will be funded with cash
provided by operations or through incremental borrowings. The
minimum commitment for certain obligations is based on termination
penalties that could be paid to exit the contract. Since
termination penalties would not be paid every year, such penalties
are excluded from the table. Other long-term liabilities were
included in the table based on the year of required payment or an
estimate of the year of payment. Such estimate of payment is based
on a review of past trends for these items, as well as a forecast
of future activities. Certain items were excluded from the
following table, as the year of payment is unknown and could not be
reliably estimated since past trends were not deemed to be an
indicator of future payment.
Substantially all of our purchase obligations are in our
Wireline and Wireless segments. The table does not include the fair
value of our interest rate swaps. Our capital lease obligations and
bank borrowings have been excluded from the table due to the
immaterial amounts of such obligations at December 31, 2010. Many
of our other noncurrent liabilities have been excluded from the
following table due to the uncertainty of the timing of payments,
combined with the absence of historical trending to be used as a
predictor of such payments. Additionally, certain other long-term
liabilities have been excluded since settlement of such liabilities
will not require the use of cash. However, we have included in the
following table obligations that primarily relate to benefit
funding and severance due to the certainty of the timing of these
future payments. Our other long-term liabilities are: deferred
income taxes (see Note 10) of $22,361; postemployment benefit
obligations of $28,803; and other noncurrent liabilities of
$12,743, which included deferred lease revenue from our agreement
with American Tower Corp. of $480 (see Note 5).
Payments Due By Period
-------------------------------------------------------------
Contractual Less than 1 1 - 3 More than 5
Obligations Total Year Years 3 - 5 Years Years
------------- -------- ----------- ---------- ----------- -------------
Long-term
debt
obligations1 $ 64,156 $ 5,535 $ 11,277 $ 9,302 $ 38,042
Interest
payments on
long-term
debt 62,693 3,781 6,542 5,476 46,894
Operating
lease
obligations 24,804 2,590 4,711 4,156 13,347
Unrecognized
tax
benefits2 3,141 - - - 3,141
Purchase
obligations3 10,603 3,158 4,904 1,934 607
------------- ------- --- ------ ------ ------- --- --------
Total
Contractual
Obligations $165,397 $ 15,064 $ 27,434 $ 20,868 $ 102,031
============= ======= === ====== ====== ======= === ========
1 Represents principal or payoff amounts of notes and
debentures at maturity or, for putable debt, the next
put opportunity.
2 The noncurrent portion of the unrecognized tax benefits
is included in the "More than 5 Years" column, as
we cannot reasonably estimate the timing or amounts
of additional cash payments, if any, at this time.
See Note 10 for additional information.
3 We calculated the minimum obligation for certain agreements
to purchase goods or services based on termination
fees that can be paid to exit the contract. If we
elect to exit these contracts, termination fees for
all such contracts in the year of termination could
be approximately $863 in 2011, $668 in the aggregate
for 2012 and 2013, $38 in the aggregate for 2014 and
2015, and $5 in the aggregate, thereafter. Certain
termination fees are excluded from the above table,
as the fees would not be paid every year and the timing
of such payments, if any, is uncertain.
MARKET RISK
We are exposed to market risks primarily from changes in
interest rates and foreign currency exchange rates. These risks,
along with other business risks, impact our cost of capital. It is
our policy to manage our debt structure and foreign exchange
exposure in order to manage capital costs, control financial risks
and maintain financial flexibility over the long term. In managing
market risks, we employ derivatives according to documented
policies and procedures, including interest rate swaps, interest
rate locks, foreign currency exchange contracts and combined
interest rate foreign currency contracts (cross-currency swaps). We
do not use derivatives for trading or speculative purposes. We do
not foresee significant changes in the strategies we use to manage
market risk in the near future.
25
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Interest Rate Risk
The majority of our financial instruments are medium- and
long-term fixed-rate notes and debentures. Changes in interest
rates can lead to significant fluctuations in the fair value of
these instruments. The principal amounts by expected maturity,
average interest rate and fair value of our liabilities that are
exposed to interest rate risk are described in Notes 8 and 9. In
managing interest expense, we control our mix of fixed and floating
rate debt, principally through the use of interest rate swaps. We
have established interest rate risk limits that we closely monitor
by measuring interest rate sensitivities in our debt and interest
rate derivatives portfolios.
All our foreign-denominated debt has been swapped from
fixed-rate foreign currencies to fixed-rate U.S. dollars at
issuance through cross-currency swaps, removing interest rate risk
and foreign currency exchange risk associated with the underlying
interest and principal payments. Likewise, periodically we enter
into interest rate locks to partially hedge the risk of increases
in the benchmark interest rate during the period leading up to the
probable issuance of fixed-rate debt. We expect gains or losses in
our cross-currency swaps and interest rate locks to offset the
losses and gains in the financial instruments they hedge.
Following are our interest rate derivatives subject to material
interest rate risk as of December 31, 2010. The interest rates
illustrated below refer to the average rates we expect to pay based
on current and implied forward rates and the average rates we
expect to receive based on derivative contracts. The notional
amount is the principal amount of the debt subject to the interest
rate swap contracts. The fair value asset (liability) represents
the amount we would receive (pay) if we had exited the contracts as
of December 31, 2010.
Maturity
-----------------------------------------------------------------------------------------------
Fair
Value
2011 2012 2013 2014 2015 Thereafter Total 12/31/10
-------------------- ------ ------ ------ ------ ---- ------------ ------- ----------
Interest Rate
Derivatives
Interest Rate Swaps:
Receive Fixed/Pay
Variable
Notional Amount
Maturing $3,000 $3,050 $3,000 $1,000 - $ 1,000 $11,050 $ 537
Weighted-Average
Variable Rate
Payable1 2.8% 3.4% 5.0% 4.8% 5.4% 5.9%
Weighted-Average
Fixed Rate
Receivable 5.7% 5.5% 5.7% 5.6% 5.6% 5.6%
==================== ===== ===== ===== ===== ==== ======== ====== ======
1 Interest payable based on current and implied forward rates for One, Three
or Six Month LIBOR plus a spread ranging between approximately 36 and 576
basis points.
Foreign Exchange Risk
We are exposed to foreign currency exchange risk through our
foreign affiliates and equity investments in foreign companies. We
do not hedge foreign currency translation risk in the net assets
and income we report from these sources. However, we do hedge a
large portion of the exchange risk involved in anticipation of
highly probable foreign currency-denominated transactions and cash
flow streams, such as those related to issuing foreign-denominated
debt, receiving dividends from foreign investments, and other
receipts and disbursements.
Through cross-currency swaps, all our foreign-denominated debt
has been swapped from fixed-rate foreign currencies to fixed-rate
U.S. dollars at issuance, removing interest rate risk and foreign
currency exchange risk associated with the underlying interest and
principal payments. We expect gains or losses in our cross-currency
swaps to offset the losses and gains in the financial instruments
they hedge.
In anticipation of other foreign currency-denominated
transactions, we often enter into foreign exchange forward
contracts to provide currency at a fixed rate. Our policy is to
measure the risk of adverse currency fluctuations by calculating
the potential dollar losses resulting from changes in exchange
rates that have a reasonable probability of occurring. We cover the
exposure that results from changes that exceed acceptable
amounts.
26
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
For the purpose of assessing specific risks, we use a
sensitivity analysis to determine the effects that market risk
exposures may have on the fair value of our financial instruments
and results of operations. To perform the sensitivity analysis, we
assess the risk of loss in fair values from the effect of a
hypothetical 10% depreciation of the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates,
assuming no change in interest rates. For foreign exchange forward
contracts outstanding at December 31, 2010, the change in fair
value was immaterial. Furthermore, because our foreign exchange
contracts are entered into for hedging purposes, we believe that
these losses would be largely offset by gains on the underlying
transactions.
Stock Performance Graph
The comparison above assumes $100 invested on December 31, 2005,
in AT&T common stock, Standard & Poor's 500 Index (S&P
500), and Standard & Poor's 500 Integrated Telecom Index
(S&P 500 Integrated Telecom). Total return equals stock price
appreciation plus reinvestment of dividends.
27
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
RISK FACTORS
In addition to the other information set forth in this document,
including the matters contained under the caption "Cautionary
Language Concerning Forward-Looking Statements," you should
carefully read the matters described below. We believe that each of
these matters could materially affect our business. We recognize
that most of these factors are beyond our ability to control and
therefore we cannot predict an outcome. Accordingly, we have
organized them by first addressing general factors, then industry
factors and, finally, items specifically applicable to us.
A worsening U.S. economy would magnify our customers' and
suppliers' current financial difficulties and could materially
adversely affect our business.
We provide services and products to consumers and large and
small businesses in the United States and to larger businesses
throughout the world. Current economic conditions in the U.S. have
adversely affected our customers' demand for and ability to pay for
existing services, especially local landline service, and their
interest in purchasing new services. Our suppliers are also facing
higher financing and operating costs. Should these current economic
conditions worsen, we likely would experience both a decrease in
revenues and an increase in certain expenses, including expenses
relating to bad debt and equipment and software maintenance. We
also may incur difficulties locating financially stable equipment
and other suppliers, thereby affecting our ability to offer
attractive new services. We are also likely to experience greater
pressure on pricing and margins as we continue to compete for
customers who would have even less discretionary income. While our
largest business customers have been less affected by these adverse
changes in the U.S. economy, if the continued adverse economic
conditions in the U.S., Europe and other foreign markets persist or
worsen, those customers would likely be affected in a similar
manner.
Adverse changes in medical costs and the U.S. securities markets
and interest rates could materially increase our benefit plan
costs.
Our annual pension and postretirement costs are subject to
increases, primarily due to continuing increases in medical and
prescription drug costs, and can be affected by lower returns on
funds held by our pension and other benefit plans, which are
reflected in our financial statements for that year. Investment
returns on these funds depend largely on trends in the U.S.
securities markets and the U.S. economy. It is also unclear how
many provisions of the new national healthcare law will apply to us
since many regulations implementing the law have not been
finalized. In addition, there have been third-party challenges to
the constitutionality of the new national healthcare law that, if
sustained, could have an impact on our accounting for related
costs. In calculating the annual costs included on our financial
statements of providing benefits under our plans, we have made
certain assumptions regarding future investment returns, medical
costs and interest rates. If actual investment returns, medical
costs and interest rates are worse than those previously assumed,
our annual costs will increase.
The FASB requires companies to recognize the funded status of
defined benefit pension and postretirement plans as an asset or
liability in our statement of financial position and to recognize
changes in that funded status in the year in which the changes
occur. We have elected to reflect the annual adjustments to the
funded status in our consolidated statement of income. Therefore,
an increase in our costs or adverse market conditions will have a
negative effect on our operating results.
The ongoing uncertainty in global financial markets could
materially adversely affect our ability and our larger customers'
ability to access capital needed to fund business operations.
The continuing instability in the global financial markets has
resulted in periodic volatility in the credit, currency, equity and
fixed income markets. Volatility has limited, in some cases
severely, companies' access to the credit markets, leading to
higher borrowing costs for companies or, in some cases, the
inability of these companies to fund their ongoing operations. As a
result, our larger customers, who tend to be heavy users of our
data and wireless services, may be forced to delay or reduce or be
unable to finance purchases of our products and services and may
delay payment or default on outstanding bills to us. In addition,
we contract with large financial institutions to support our own
treasury operations, including contracts to hedge our exposure on
interest rates and foreign exchange and the funding of credit lines
and other short-term debt obligations, including commercial paper.
These financial institutions also face new capital-related and
other regulations in the U.S. and Europe, as well as ongoing legal
and financial issues concerning their loan portfolios, which may
hamper their ability to provide credit or raise the cost of
providing such credit. While we have been successful in continuing
to access the credit and fixed income markets when needed, a
financial crisis could render us unable to access these markets,
severely affecting our business operations.
28
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Changes in available technology could increase competition and
our capital costs.
The telecommunications industry has experienced rapid changes in
the last several years. The development of wireless, cable and IP
technologies has significantly increased the commercial viability
of alternatives to traditional wireline telephone service and
enhanced the capabilities of wireless networks. In order to remain
competitive, we are deploying a more sophisticated wireline network
and continue to deploy a more sophisticated wireless network, as
well as research other new technologies. If the new technologies we
have adopted or on which we have focused our research efforts fail
to be cost-effective and accepted by customers, our ability to
remain competitive could be materially adversely affected.
Changes to federal, state and foreign government regulations and
decisions in regulatory proceedings could materially adversely
affect us.
Our wireline subsidiaries are subject to significant federal and
state regulation while many of our competitors are not. In
addition, our subsidiaries and affiliates operating outside the
U.S. are also subject to the jurisdiction of national and
supranational regulatory authorities in the market where service is
provided. Our wireless subsidiaries are regulated to varying
degrees by the FCC and some state and local agencies. Adverse
rulings by the FCC relating to broadband issues could impede our
ability to manage our networks and recover costs and lessen
incentives to invest in our networks. The development of new
technologies, such as IP-based services, also has created or
potentially could create conflicting regulation between the FCC and
various state and local authorities, which may involve lengthy
litigation to resolve and may result in outcomes unfavorable to us.
In addition, increased public focus on potential global climate
changes has led to proposals at state, federal and foreign
government levels to increase regulation on various types of
emissions, including those generated by vehicles and by facilities
consuming large amounts of electricity.
Increasing competition in the wireless industry could adversely
affect our operating results.
We have multiple wireless competitors in each of our service
areas and compete for customers based principally on price,
service/device offerings, call quality, coverage area and customer
service. In addition, we are likely to experience growing
competition from providers offering services using alternative
wireless technologies and IP-based networks as well as traditional
wireline networks. We expect market saturation to continue to cause
the wireless industry's customer growth rate to moderate in
comparison with historical growth rates, leading to increased
competition for customers. We expect that the availability of
additional 700 MHz spectrum could increase competition and the
effectiveness of existing competition. This competition will
continue to put pressure on pricing and margins as companies
compete for potential customers. Our ability to respond will
depend, among other things, on continued improvement in network
quality and customer service and effective marketing of attractive
products and services, and cost management. These efforts will
involve significant expenses and require strategic management
decisions on, and timely implementation of, equipment choices and
deployment, and service offerings.
Increasing competition in our wireline markets could adversely
affect wireline operating margins.
We expect competition in the telecommunications industry to
continue to intensify. We expect this competition will continue to
put pressure on pricing, margins and customer retention. A number
of our competitors that rely on alternative technologies (e.g.,
wireless, cable and VoIP) and business models (e.g.,
advertising-supported) are typically subject to less (or no)
regulation than our wireline and ATTC subsidiaries and therefore
are able to operate with lower costs. These competitors also have
cost advantages compared to us, due in part to a nonunionized
workforce, lower employee benefits and fewer retirees (as most of
the competitors are relatively new companies). We believe such
advantages can be offset by continuing to increase the efficiency
of our operating systems and by improving employee training and
productivity; however, there can be no guarantee that our efforts
in these areas will be successful.
Continuing growth in our wireless services will depend on
continuing access to adequate spectrum, deployment of new
technology and offering attractive services to customers.
The wireless industry is undergoing rapid and significant
technological changes and a dramatic increase in usage, in
particular demand for and usage of data and other non-voice
services. We must continually invest in our wireless network in
order to continually improve our wireless service to meet this
increasing demand and remain competitive. Improvements in our
service depend on many factors, including continued access to and
deployment of adequate spectrum. We must maintain and expand our
network capacity and coverage as well as the associated wireline
network needed to transport voice and data between cell sites.
Network service enhancements and product launches may not occur as
scheduled or at the cost expected due to many factors, including
delays in determining equipment and handset operating standards,
supplier delays, increases in network equipment and handset
component costs, regulatory permitting delays for tower sites or
enhancements or labor-related delays. Deployment of new technology
also may adversely affect the performance of the network for
existing services. If the FCC does not allocate sufficient spectrum
to allow the wireless industry in general, and the company in
particular, to increase its capacity or if we cannot deploy the
services customers desire on a timely basis or at adequate cost
while maintaining network quality levels, then our ability to
attract and retain customers, and therefore maintain and improve
our operating margins, could be materially adversely affected.
29
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Equipment failures, natural disasters and terrorist attacks may
materially adversely affect our operations.
Major equipment failures or natural disasters, including severe
weather, terrorist acts or other breaches of network or IT security
that affect our wireline and wireless networks, including telephone
switching offices, microwave links, third-party owned local and
long-distance networks on which we rely, our cell sites or other
equipment, could have a material adverse effect on our operations.
While we have insurance coverage for some of these events, our
inability to operate our wireline or wireless systems, even for a
limited time period, may result in significant expenses, a loss of
customers or impair our ability to attract new customers, which
could have a material adverse effect on our business, results of
operations and financial condition.
The continued success of our U-verse services initiative will
depend on the timing, extent and cost of deployment; 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 and
reliability of the various technologies required to provide such
offerings.
The trend in telecommunications technology is to shift from the
traditional circuit- and wire-based technology to IP-based
technology. IP-based technology can transport voice and data, as
well as video, from both wired and wireless networks. IP-based
networks also potentially cost less to operate than traditional
networks. Our competitors, many of which are newer companies, are
deploying this IP-based technology. In order to continue to offer
attractive and competitively priced services, we are deploying a
new broadband network to offer IP-based voice, data and video
services. Using a new and sophisticated technology on a very large
scale entails risks but also presents opportunities to expand
service offerings to customers. Should deployment of our network be
delayed or costs exceed expected amounts, our margins would be
adversely affected and such effects could be material. Should
regulatory requirements be different than we anticipated, our
deployment could be delayed, perhaps significantly, or limited to
only those geographical areas where regulation is not burdensome.
In addition, should the delivery of services expected to be
deployed on our network be delayed due to technological or
regulatory constraints, performance of suppliers, or other reasons,
or the cost of providing such services becomes higher than
expected, customers may decide to purchase services from our
competitors, which would adversely affect our revenues and margins,
and such effects could be material.
Unfavorable litigation or governmental investigation results
could require us to pay significant amounts or lead to onerous
operating procedures.
We are subject to a number of lawsuits both in the U.S. and in
foreign countries, including, at any particular time, claims
relating to antitrust, patent infringement, wage and hour, personal
injury, and our advertising, sales and billing and collection
practices. We also spend substantial resources complying with
various government standards, which may entail related
investigations. As we deploy newer technologies, especially in the
wireless area, we also face current and potential litigation
relating to alleged adverse health effects on customers or
employees who use such technologies including, for example,
wireless handsets. We may incur significant expenses defending such
suits or government charges and may be required to pay amounts or
otherwise change our operations in ways that could materially
adversely affect our operations or financial results.
30
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 and unfavorable healthcare legislation and
regulations.
-- The final outcome of Federal Communications Commission
and other federal agency proceedings and reopenings
of such proceedings and judicial review, if any, of
such proceedings, including issues relating to access
charges, broadband deployment, E911 services, competition,
net neutrality, unbundled loop and transport elements,
wireless license awards and renewals and wireless
services.
-- The final outcome of regulatory proceedings in the
states in which we operate and reopenings of such
proceedings and judicial review, if any, of such proceedings,
including proceedings relating to Interconnection
terms, access charges, universal service, unbundled
network elements and resale and wholesale rates, broadband
deployment including our U-verse services, net neutrality,
performance measurement plans, service standards and
traffic compensation.
-- Enactment of additional state, federal and/or foreign
regulatory and tax laws and regulations pertaining
to our subsidiaries and foreign investments, including
laws and regulations that reduce our incentive to
invest in our networks, resulting in lower revenue
growth and/or higher operating costs.
-- Our ability to absorb revenue losses caused by increasing
competition, including offerings that use alternative
technologies (e.g., cable, wireless and VoIP) and
our ability to maintain capital expenditures.
-- The extent of competition and the resulting pressure
on customer and access line totals and wireline and
wireless operating margins.
-- Our ability to develop attractive and profitable product/service
offerings to offset increasing competition in our
wireless and wireline markets.
-- The ability of our competitors to offer product/service
offerings at lower prices due to lower cost structures
and regulatory and legislative actions adverse to
us, including state regulatory proceedings relating
to unbundled network elements and nonregulation of
comparable alternative technologies (e.g., VoIP).
-- The timing, extent and cost of deployment of our U-verse
services; the development of attractive and profitable
service offerings; the extent to which regulatory,
franchise fees and build-out requirements apply to
this initiative; and the availability, cost and/or
reliability of the various technologies and/or content
required to provide such offerings.
-- Our continued ability to attract and offer a diverse
portfolio of devices, some on an exclusive basis.
-- The availability and cost of additional wireless spectrum
and regulations relating to licensing and technical
standards and deployment and usage, including network
management rules.
-- Our ability to manage growth in wireless data services,
including network quality.
-- The outcome of pending or threatened litigation, including
patent and product safety claims by or against third
parties.
-- The impact on our networks and business from major
equipment failures, our inability to obtain handsets,
equipment/software or have handsets, equipment/software
serviced in a timely and cost-effective manner from
suppliers, severe weather conditions, natural disasters,
pandemics, energy shortages, wars or terrorist attacks.
-- The issuance by the Financial Accounting Standards
Board or other accounting oversight bodies of new
accounting standards or changes to existing standards.
-- The issuance by the Internal Revenue Service and/or
state tax authorities of new tax regulations or changes
to existing standards and actions by federal, state
or local tax agencies and judicial authorities with
respect to applying applicable tax laws and regulations
and the resolution of disputes with any taxing jurisdictions.
-- Our ability to adequately fund our wireless operations,
including payment for additional spectrum; network
upgrades and technological advancements.
-- Changes in our corporate strategies, such as changing
network requirements or acquisitions and dispositions,
which may require significant amounts of cash or stock,
to respond to competition and regulatory, legislative
and technological developments.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
31
AT&T Inc.
Consolidated Statements of Income
Dollars in millions except per
share amounts
--------------------------------- -------- -------- --------
2010 2009 2008
--------------------------------- -------- -------- --------
Operating Revenues As Adjusted
----------------------
Wireless service $ 53,510 $ 48,563 $ 44,249
Voice 28,315 32,324 37,322
Data 27,479 25,561 24,416
Directory 3,935 4,724 5,416
Other 11,041 11,341 12,040
--------------------------------- ------- ------- -------
Total operating revenues 124,280 122,513 123,443
--------------------------------- ------- ------- -------
Operating Expenses
Cost of services and sales
(exclusive of depreciation
and amortization shown
separately below) 52,263 50,571 56,688
Selling, general and
administrative 33,065 31,427 48,772
Depreciation and amortization 19,379 19,515 19,673
--------------------------------- ------- ------- -------
Total operating expenses 104,707 101,513 125,133
--------------------------------- ------- ------- -------
Operating Income (Loss) 19,573 21,000 (1,690)
--------------------------------- ------- ------- -------
Other Income (Expense)
Interest expense (2,994) (3,368) (3,369)
Equity in net income of
affiliates 762 734 819
Other income (expense) - net 897 152 (332)
--------------------------------- ------- ------- -------
Total other income (expense) (1,335) (2,482) (2,882)
--------------------------------- ------- ------- -------
Income (Loss) from Continuing
Operations Before Income
Taxes 18,238 18,518 (4,572)
Income tax (benefit) expense (1,162) 6,091 (2,210)
--------------------------------- ------- ------- -------
Income (Loss) from Continuing
Operations 19,400 12,427 (2,362)
--------------------------------- ------- ------- -------
Income (Loss) from Discontinued
Operations, net of tax 779 20 (2)
--------------------------------- ------- ------- -------
Net Income (Loss) 20,179 12,447 (2,364)
--------------------------------- ------- ------- -------
Less: Net Income Attributable
to Noncontrolling Interest (315) (309) (261)
--------------------------------- ------- ------- -------
Net Income (Loss) Attributable to
AT&T $ 19,864 $ 12,138 $ (2,625)
================================= ======= ======= =======
Basic Earnings (Loss) Per
Share from Continuing
Operations Attributable to
AT&T $ 3.23 $ 2.06 $ (0.44)
Basic Earnings Per Share from
Discontinued Operations
Attributable to AT&T 0.13 - -
--------------------------------- ------- ------- -------
Basic Earnings (Loss) Per
Share Attributable to AT&T $ 3.36 $ 2.06 $ (0.44)
================================= ======= ======= =======
Diluted Earnings (Loss) Per
Share from Continuing
Operations Attributable to
AT&T $ 3.22 $ 2.05 $ (0.44)
Diluted Earnings Per Share
from Discontinued Operations
Attributable to AT&T 0.13 - -
--------------------------------- ------- ------- -------
Diluted Earnings (Loss) Per Share
Attributable to AT&T $ 3.35 $ 2.05 $ (0.44)
================================= ======= ======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
32
AT&T Inc.
Consolidated Balance Sheets
Dollars in millions except per share amounts
================================================ ======== ========
December 31,
-------------------
Assets 2010 2009
------------------------------------------------ -------- --------
Current Assets
Cash and cash equivalents $ 1,437 $ 3,741
Accounts receivable - net of allowances for
doubtful accounts of $957 and $1,202 13,610 14,845
Prepaid expenses 1,458 1,562
Deferred income taxes 1,170 1,247
Other current assets 2,276 3,792
------------------------------------------------ ------- -------
Total current assets 19,951 25,187
------------------------------------------------ ------- -------
Property, Plant and Equipment - Net 103,196 99,519
Goodwill 73,601 72,782
Licenses 50,372 48,741
Customer Lists and Relationships - Net 4,708 7,393
Other Intangible Assets - Net 5,440 5,494
Investments in Equity Affiliates 4,515 2,921
Other Assets 6,705 6,275
------------------------------------------------ ------- -------
Total Assets $268,488 $268,312
------------------------------------------------ ------- -------
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 7,196 $ 7,361
Accounts payable and accrued liabilities 20,055 21,260
Advanced billing and customer deposits 4,086 4,170
Accrued taxes 72 1,681
Dividends payable 2,542 2,479
------------------------------------------------ ------- -------
Total current liabilities 33,951 36,951
------------------------------------------------ ------- -------
Long-Term Debt 58,971 64,720
------------------------------------------------ ------- -------
Deferred Credits and Other Noncurrent
Liabilities
Deferred income taxes 22,070 23,579
Postemployment benefit obligation 28,803 27,847
Other noncurrent liabilities 12,743 13,226
------------------------------------------------ ------- -------
Total deferred credits and other noncurrent
liabilities 63,616 64,652
------------------------------------------------ ------- -------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000
authorized at December 31, 2010 and 2009:
issued 6,495,231,088 at December 31, 2010 and
2009) 6,495 6,495
Additional paid-in capital 91,731 91,707
Retained earnings 31,792 21,944
Treasury stock (584,144,220 at December 31,
2010, and 593,300,187 at December 31, 2009, at
cost) (21,083) (21,260)
Accumulated other comprehensive income 2,712 2,678
Noncontrolling interest 303 425
------------------------------------------------ ------- -------
Total stockholders' equity 111,950 101,989
------------------------------------------------ ------- -------
Total Liabilities and Stockholders' Equity $268,488 $268,312
================================================ ======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
33
AT&T Inc.
Consolidated Statements of Cash
Flows
Dollars in millions
--------------------------------- -------- -------- --------
2010 2009 2008
--------------------------------- -------- -------- --------
Operating Activities As Adjusted
----------------------
Net income (loss) $ 20,179 $ 12,447 $ (2,364)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and amortization 19,379 19,515 19,673
Undistributed earnings from
investments in equity
affiliates (603) (419) (654)
Provision for uncollectible
accounts 1,334 1,762 1,795
Deferred income tax expense
(benefit) and noncurrent
unrecognized tax benefits (3,280) 1,885 (4,202)
Net (gain) loss from
impairment and sale of
investments (802) - 517
Actuarial loss on pension and
postretirement benefit plans 2,521 215 25,150
(Income) loss from
discontinued operations (779) (20) 2
Changes in operating assets
and liabilities:
Accounts receivable (99) (490) (1,475)
Other current assets 717 (617) 1,854
Accounts payable and
accrued liabilities (2,414) 943 (4,456)
Net income attributable to
noncontrolling interest (315) (309) (261)
Other - net (845) (507) (1,969)
--------------------------------- ------- ------- -------
Total adjustments 14,814 21,958 35,974
--------------------------------- ------- ------- -------
Net Cash Provided by Operating
Activities 34,993 34,405 33,610
--------------------------------- ------- ------- -------
Investing Activities Construction
and capital expenditures:
Capital expenditures (19,530) (16,554) (19,631)
Interest during construction (772) (740) (659)
Acquisitions, net of cash
acquired (2,906) (983) (10,972)
Dispositions 1,830 287 1,615
(Purchases) and sales of
securities, net (100) 55 68
Sale of other investments - - 436
Other 29 52 45
--------------------------------- ------- ------- -------
Net Cash Used in Investing
Activities (21,449) (17,883) (29,098)
--------------------------------- ------- ------- -------
Financing Activities
Net change in short-term
borrowings with original
maturities of three months or
less 1,592 (3,910) 2,017
Issuance of long-term debt 2,235 8,161 12,416
Repayment of long-term debt (9,294) (8,652) (4,009)
Purchase of treasury shares - - (6,077)
Issuance of treasury shares 50 28 319
Dividends paid (9,916) (9,670) (9,507)
Other (515) (465) 151
--------------------------------- ------- ------- -------
Net Cash Used in Financing
Activities (15,848) (14,508) (4,690)
--------------------------------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents (2,304) 2,014 (178)
Cash and cash equivalents
beginning of year 3,741 1,727 1,905
--------------------------------- ------- ------- -------
Cash and Cash Equivalents End of
Year $ 1,437 $ 3,741 $ 1,727
================================= ======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
34
AT&T Inc.
Consolidated Statements of Changes in Stockholders'
Equity
Dollars and shares in millions except per share amounts
------------------------------------------------------------------------------
2010 2009 2008
------------------- ------------------ --------------------
Shares Amount Shares Amount Shares Amount
------------------ ------- -------- ------ -------- ------ --------
As Adjusted
----------------------------------------
Common Stock
Balance at
beginning of year 6,495 $ 6,495 6,495 $ 6,495 6,495 $ 6,495
Issuance of shares - - - - - -
------------------ ------ ------- ------ ------- ------ -------
Balance at end of
year 6,495 $ 6,495 6,495 $ 6,495 6,495 $ 6,495
=================== ====== ======= ====== ======= ====== =======
Additional Paid-In
Capital
Balance at
beginning of year $ 91,707 $ 91,728 $ 91,638
Issuance of
treasury shares 159 29 87
Share-based
payments (130) (50) 3
Change related to
acquisition of
interests held by
noncontrolling
owners (5) - -
------------------- ------ ------- ------ ------- ------ -------
Balance at end of
year $ 91,731 $ 91,707 $ 91,728
=================== ====== ======= ====== ======= ====== =======
Retained Earnings
Balance at
beginning of year $ 21,944 $ 19,566 $ 31,764
Net income
(loss)
attributable to
AT&T ($3.35,
$2.05, and
$(0.44) per
diluted share) 19,864 12,138 (2,625)
Dividends to
stockholders
($1.69, $1.65, and
$1.61 per share) (9,985) (9,733) (9,506)
Other (31) (27) (67)
------------------- ------ ------- ------ ------- ------ -------
Balance at end of
year $ 31,792 $ 21,944 $ 19,566
=================== ====== ======= ====== ======= ====== =======
Treasury Stock
Balance at
beginning of year (593) $(21,260) (602) $(21,410) (451) $(15,683)
Purchase of shares - - - - (164) (6,077)
Issuance of shares 9 177 9 150 13 350
------------------- ------ ------- ------ ------- ------ -------
Balance at end of
year (584) $(21,083) (593) $(21,260) (602) $(21,410)
=================== ====== ======= ====== ======= ====== =======
The accompanying notes are an integral part of
the consolidated financial statements.
35
AT&T Inc.
Consolidated Statements of Changes in Stockholders'
Equity (continued)
Dollars and shares in millions except per share amounts
--------------------------------------------------------------------
2010 2009 2008
-------- -------- -----------
Amount Amount Amount
--------------------------------- -------- -------- -----------
As Adjusted
----------------------
Accumulated Other
Comprehensive Income (Loss)
Attributable to AT&T, net of
tax:
Balance at beginning of year $ 2,678 $ (418) $ 662
Foreign currency translation
adjustments, net of taxes of
$146, $70, and $(239) 271 147 (443)
Net unrealized gains (losses) on
available-for-sale securities:
Unrealized gains (losses), net
of taxes of $(12), $84, and
$(139) (22) 176 (259)
Less reclassification
adjustment realized in net
income (loss), net of
taxes of $7, $23, and
$(9) 14 48 (16)
Net unrealized gains (losses) on
cash flow hedges:
Unrealized gains (losses), net
of taxes of $(182), $329, and
$(148) (334) 610 (274)
Less reclassification
adjustment realized in net
income (loss), net of
taxes of $7, $8, and $9 12 15 17
Defined benefit postretirement
plans (see Notes 1 and 11):
Net prior service benefit
arising during period, net
of taxes of $298, $1,383,
and $20 487 2,257 32
Amortization of net prior
service cost included in
net income (loss), net of
taxes of $(243), $(96),
and $(84) (396) (156) (137)
Other 2 (1) -
--------------------------------- ------- ------- -------
Other comprehensive income (loss)
attributable to AT&T 34 3,096 (1,080)
--------------------------------- ------- ------- -------
Balance at end of year $ 2,712 $ 2,678 $ (418)
================================= ======= ======= =======
Noncontrolling Interest:
Balance at beginning of year $ 425 $ 403 $ 380
Net income attributable to
noncontrolling interest 315 309 261
Distributions (278) (286) (260)
Acquisition of interests held by
noncontrolling owners (162) - -
Translation adjustments
applicable to noncontrolling
interest, net of tax 3 (1) 22
--------------------------------- ------- ------- -------
Balance at end of year $ 303 $ 425 $ 403
================================= ======= ======= =======
Total Stockholders' Equity at
beginning of year $101,989 $ 96,364 $115,256
================================= ======= ======= =======
Total Stockholders' Equity at end
of year $111,950 $101,989 $ 96,364
================================= ======= ======= =======
Total Comprehensive Income
(Loss), net of tax:
Net income (loss) attributable to
AT&T $ 19,864 $ 12,138 $ (2,625)
Other comprehensive income (loss)
attributable to AT&T per above 34 3,096 (1,080)
--------------------------------- ------- ------- -------
Comprehensive income (loss)
attributable to AT&T $ 19,898 $ 15,234 $ (3,705)
================================= ======= ======= =======
Net income attributable to
noncontrolling interest $ 315 $ 309 $ 261
Other comprehensive income
(loss) attributable to
noncontrolling interest per
above 3 (1) 22
--------------------------------- ------- ------- -------
Comprehensive income attributable
to noncontrolling interest $ 318 $ 308 $ 283
================================= ======= ======= =======
Total Comprehensive Income (Loss) $ 20,216 $ 15,542 $ (3,422)
================================= ======= ======= =======
The accompanying notes are an integral part
of the consolidated financial statements.
36
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation Throughout this document, AT&T Inc. is
referred to as "AT&T," "we" or the "Company." 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 year
end (see Note 7).
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. See Note 2 for a discussion of changes in
reporting related to discontinued operations, and Notes 4 and 11
for a discussion of our changes in accounting and reporting for our
pension and other postretirement benefit costs and intersegment
activity.
Pension and Other Postretirement Benefits In January 2011, we
announced a change in our method of recognizing actuarial gains and
losses for pension and other postretirement benefits for all
benefit plans. Historically, we have recognized the actuarial gains
and losses as a component of the Stockholders' Equity on our
consolidated balance sheets on an annual basis and have amortized
them into our operating results over the average future service
period of the active employees of these plans, to the extent such
gains and losses were outside of a corridor. We have elected to
immediately recognize actuarial gains and losses in our operating
results, noting that it is generally preferable to accelerate the
recognition of deferred gains and losses into income rather than to
delay such recognition. This change will improve transparency in
our operating results by more quickly recognizing the effects of
economic and interest rate conditions on plan obligations,
investments and assumptions. These gains and losses are generally
only measured annually as of December 31 and accordingly will be
recorded during the fourth quarter. Additionally, for purposes of
calculating the expected return on plan assets, we will no longer
use a permitted averaging technique for the market-related value of
plan assets but instead will use actual fair value of plan assets.
We have applied these changes retrospectively, adjusting all prior
periods. The cumulative effect of the change on retained earnings
as of January 1, 2008, was a reduction of $1,533, with an offset to
accumulated other comprehensive income (OCI). The annual
recognition of actuarial gains and losses, which is reported as
"Actuarial loss on pension and postretirement benefit plans" on our
consolidated statement of cash flows total $2,521 in 2010, $215 in
2009 and $25,150 in 2008. This change did not have a material
impact on cash provided by or used in operations for any period
presented.
37
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The following table presents our results under our historical
method and as adjusted to reflect the accounting change:
Historical
Accounting
Method As Adjusted Effect of Change
----------------- ----------------- ------------- ----------------
At December 31,
2010 or for the
year ended
Cost of
services and
sales
(exclusive of
depreciation
and
amortization
shown
separately
below) $ 51,379 $ 52,263 $ 884
Selling, general
and
administrative 31,221 33,065 1,844
Depreciation and
amortization1,2 19,456 19,379 (77)
Income tax
(benefit)
expense2 (155) (1,162) (1,007)
Income from
Continuing
Operations 21,045 19,400 (1,645)
Net Income
Attributable to
AT&T2 21,508 19,864 (1,644)
Basic Earnings
per Share
Attributable to
AT&T $ 3.64 $ 3.36 $ (0.28)
Diluted Earnings
per Share
Attributable to
AT&T 3.62 3.35 (0.27)
Property, Plant
and Equipment -
Net1 $ 103,564 $ 103,196 $ (368)
Deferred income
taxes 22,210 22,070 (140)
Retained Earnings 50,859 31,792 (19,067)
Accumulated other
comprehensive
income (16,128) 2,712 18,840
================= ==== =========== ========= ============
At December 31,
2009 or for the
year ended
Cost of
services and
sales
(exclusive of
depreciation
and
amortization
shown
separately
below) $ 50,517 $ 50,571 $ 54
Selling, general
and
administrative 30,943 31,427 484
Depreciation and
amortization1,2 19,602 19,515 (87)
Income tax
(benefit)
expense2 6,146 6,091 (55)
Income from
Continuing
Operations 12,824 12,427 (397)
Net Income
Attributable to
AT&T2 12,535 12,138 (397)
Basic Earnings
per Share
Attributable to
AT&T $ 2.12 $ 2.06 $ (0.06)
Diluted Earnings
per Share
Attributable to
AT&T 2.12 2.05 (0.07)
Property, Plant
and Equipment -
Net1 $ 100,052 $ 99,519 $ (533)
Deferred income
taxes 23,781 23,579 (202)
Retained Earnings 39,366 21,944 (17,422)
Accumulated other
comprehensive
income (14,412) 2,678 17,090
================= ==== =========== ========= ============
At December 31,
2008 or for the
year ended
Cost of
services and
sales
(exclusive of
depreciation
and
amortization
shown
separately
below) $ 49,878 $ 56,688 $ 6,810
Selling, general
and
administrative 30,752 48,772 18,020
Depreciation and
amortization1,2 19,766 19,673 (93)
Income tax
(benefit)
expense2 7,034 (2,210) (9,244)
Income (Loss)
from Continuing
Operations 13,130 (2,362) (15,492)
Net Income (Loss)
Attributable to
AT&T2 12,867 (2,625) (15,492)
Basic Earnings
(Loss) per Share
Attributable to
AT&T $ 2.17 $ (0.44) $ (2.61)
Diluted Earnings
(Loss) per Share
Attributable to
AT&T 2.16 (0.44) (2.60)
Property, Plant
and Equipment -
Net1 $ 99,037 $ 98,415 $ (622)
Deferred income
taxes 19,171 18,935 (236)
Retained Earnings 36,591 19,566 (17,025)
Accumulated other
comprehensive
income (17,057) (418) 16,639
================= ==== =========== ========= ============
1 A portion of pension and postretirement costs are
capitalized as a part of construction labor.
2 The effect of the accounting change is also reflected
in our consolidated statements of cash flows, included
in "Net income (loss)" and relevant adjustments to
reconcile net income (loss) to net cash provided by
operating activities.
Recent Accounting Standards
Fair Value Measurements and Disclosures In January 2010, the
Financial Accounting Standards Board (FASB) issued "Fair Value
Measurements and Disclosures-Improving Disclosures about Fair Value
Measurements" (ASU 2010-06), which required new disclosures and
explanations for transfers of financial assets and liabilities
between levels in the fair value hierarchy. ASU 2010-06 also
clarifies that fair value measurement disclosures are required for
each class of financial asset and liability, which may be a subset
of a caption in the consolidated balance sheets, and those
disclosures should include a discussion of inputs and valuation
techniques. For financial assets and liabilities subject to
lowest-level measurements (Level 3), ASU 2010-06 further requires
that we separately present purchases, sales, issuances, and
settlements instead of netting these changes.
38
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Revenue Arrangements with Multiple Deliverables In October 2009,
the FASB issued "Multiple-Deliverable Revenue Arrangements" (ASU
2009-13), which addresses how revenues should be allocated among
all products and services included in our bundled sales
arrangements. It establishes a selling price hierarchy for
determining the selling price of each product or service, with
vendor-specific objective evidence at the highest level,
third-party evidence at the intermediate level, and a best estimate
at the lowest level. It eliminates the residual method as an
acceptable allocation method, and requires the use of the relative
selling price method as the basis for allocation. It also
significantly expands the disclosure requirements for such
arrangements, including, potentially, certain qualitative
disclosures. We adopted ASU 2009-13 for sales entered into or
materially modified in the year beginning January 1, 2011. ASU
2009-13 had no material effect on our financial statements or
existing revenue recognition policies.
Employee Separations We established obligations for expected
termination benefits provided under existing plans to former or
inactive employees after employment but before retirement. These
benefits include severance payments, workers' compensation,
disability, medical continuation coverage, and other benefits. At
December 31, 2010, we had severance accruals of $848 and at
December 31, 2009, we had severance accruals of $669. During the
fourth quarter of 2010, we accrued $756 in conjunction with ongoing
cost reduction initiatives.
Income Taxes We provide deferred income taxes for temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the computed tax basis of
those assets and liabilities. The tax basis of assets and
liabilities are based on amounts that meet the recognition
threshold and are measured pursuant to the measurement requirement
in current standards. We provide valuation allowances against the
deferred tax assets for which the realization is uncertain. We
review these items regularly in light of changes in federal and
state tax laws and changes in our business.
We report, on a net basis, taxes imposed by governmental
authorities on revenue-producing transactions between us and our
customers in our consolidated statements of income.
Cash and Cash Equivalents Cash and cash equivalents include all
highly-liquid investments with original maturities of three months
or less. The carrying amounts approximate fair value. At December
31, 2010, we held $332 in cash and $1,105 in money market funds and
other cash equivalents.
Revenue Recognition Revenues derived from wireless, local
telephone, long-distance, data and video services are recognized
when services are provided. This is based upon either usage (e.g.,
minutes of traffic/bytes of data processed), period of time (e.g.,
monthly service fees) or other established fee schedules. Our
wireless service revenues are billed either in advance, arrears or
are prepaid. Our wireless Rollover(R) rate plans include a feature
whereby unused anytime minutes do not expire each month but rather
are available, under certain conditions, for future use for a
period not to exceed one year from the date of purchase. Using
historical subscriber usage patterns, we defer these revenues based
on an estimate of the portion of unused minutes expected to be
utilized prior to expiration.
We record an estimated revenue reduction for future adjustments
to customer accounts, other than bad debt expense, at the time
revenue is recognized based on historical experience. Service
revenues also include billings to our customers for various
regulatory fees imposed on us by governmental authorities. Cash
incentives given to customers are recorded as a reduction of
revenue. When required as part of providing service, revenues and
associated expenses related to nonrefundable, upfront service
activation and setup fees are deferred and recognized over the
associated service contract period or customer life. Associated
expenses are deferred only to the extent of such deferred revenue.
For contracts that involve the bundling of services, revenue is
allocated to the services based on their relative fair value. We
record the sale of equipment to customers as gross revenue when we
are the primary obligor in the arrangement, when title is passed
and when the products are accepted by customers. For agreements
involving the resale of third-party services in which we are not
considered the primary obligor of the arrangement, we record the
revenue net of the associated costs incurred. For contracts in
which we provide customers with an indefeasible right to use
network capacity, we recognize revenue ratably over the stated life
of the agreement.
39
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
We recognize revenues and expenses related to publishing
directories on the amortization method, which recognizes revenues
and expenses ratably over the life of the directory title,
typically 12 months.
Traffic Compensation Expense We use various estimates and
assumptions to determine the amount of traffic compensation
expenses recognized during any reporting period. Switched traffic
compensation costs are accrued utilizing estimated rates by
product, formulated from historical data and adjusted for known
rate changes and volume levels. Such estimates are adjusted monthly
to reflect newly-available information, such as rate changes and
new contractual agreements. Bills reflecting actual incurred
information are generally not received until three to nine months
subsequent to the end of the reporting period, at which point a
final adjustment is made to the accrued switched traffic
compensation expense. Dedicated traffic compensation costs are
estimated based on the number of circuits and the average projected
circuit costs.
Allowance for Doubtful Accounts We maintain an allowance for
doubtful accounts for estimated losses that result from the failure
or inability of our customers to make required payments. When
determining the allowance, we consider the probability of
recoverability of accounts receivable based on past experience,
taking into account current collection trends as well as general
economic factors, including bankruptcy rates. Credit risks are
assessed based on historical write-offs, net of recoveries, as well
as an analysis of the aged accounts receivable balances with
allowances generally increasing as the receivable ages. Accounts
receivable may be fully reserved for when specific collection
issues are known to exist, such as pending bankruptcy or
catastrophes.
Inventory Inventories, which are included in "Other current
assets" on our consolidated balance sheets, were $1,303 at December
31, 2010, and $885 at December 31, 2009. Wireless handsets and
accessories, which are valued at the lower of cost or market
(determined using current replacement cost) were $1,185 as of
December 31, 2010, and $790 as of December 31, 2009. The remainder
of our inventory includes new and reusable supplies and network
equipment of our local telephone operations, which are stated
principally at average original cost, except that specific costs
are used in the case of large individual items. Inventories of our
other subsidiaries are stated at the lower of cost or market.
Property, Plant and Equipment Property, plant and equipment is
stated at cost, except for assets acquired using acquisition
accounting, which are initially recorded at fair value (see Note
2). The cost of additions and substantial improvements to property,
plant and equipment is capitalized. The cost of maintenance and
repairs of property, plant and equipment is charged to operating
expenses. Property, plant and equipment costs are depreciated using
straight-line methods over their estimated economic lives. Certain
subsidiaries follow composite group depreciation methodology;
accordingly, when a portion of their depreciable property, plant
and equipment is retired in the ordinary course of business, the
gross book value is reclassified to accumulated depreciation; no
gain or loss is recognized on the disposition of this plant.
Property, plant and equipment is reviewed for recoverability
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss shall be
recognized only if the carrying amount of a long-lived asset is not
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
asset.
The fair value of a liability for an asset retirement obligation
is recorded in the period in which it is incurred if a reasonable
estimate of fair value can be made. In periods subsequent to
initial measurement, period-to-period changes in the liability for
an asset retirement obligation resulting from the passage of time
and revisions to either the timing or the amount of the original
estimate of undiscounted cash flows are recognized. The increase in
the carrying value of the associated long-lived asset is
depreciated over the corresponding estimated economic life.
Software Costs It is our policy to capitalize certain costs
incurred in connection with developing or obtaining internal-use
software. Capitalized software costs are included in "Property,
Plant and Equipment" on our consolidated balance sheets and are
primarily amortized over a three-year period. In addition, there is
certain network software that allows the equipment to provide the
features and functions unique to the AT&T network, which we
include in the cost of the equipment categories for financial
reporting purposes.
Business Combinations We expense acquisition-related costs and
restructuring costs. Prior to 2009, we included acquisition-related
costs as part of our purchase accounting, and we treated
restructuring costs that we expected but were not obligated to
incur, including changes to benefit plans, as if they were a
liability assumed at the acquisition date. We applied current
guidance to acquisitions completed after 2009, including the
acquisitions of Centennial Communications Corp. (Centennial) and
certain properties from Verizon Wireless (see Note 2).
40
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Goodwill and Other Intangible Assets AT&T has four major
classes of intangible assets: goodwill, Federal Communications
Commission (FCC) licenses, other indefinite-lived intangible
assets, made up predominately of the AT&T and other brand
names, and various other finite-lived intangible assets.
Goodwill represents the excess of consideration paid over the
fair value of net assets acquired in business combinations. FCC
licenses provide us with the exclusive right to utilize certain
radio frequency spectrum to provide wireless communications
services. While FCC licenses are issued for a fixed time (generally
10 years), renewals of FCC licenses have occurred routinely and at
nominal cost. Moreover, we have determined that there are currently
no legal, regulatory, contractual, competitive, economic or other
factors that limit the useful lives of our FCC licenses. We
acquired the rights to the AT&T and other brand names in
previous acquisitions. We have the effective ability to retain
these exclusive rights permanently at a nominal cost.
Goodwill, FCC licenses and other indefinite-lived intangible
assets are not amortized but are tested at least annually for
impairment. The testing is performed on the value as of October 1
each year, and is generally composed of comparing the book value of
the assets to their fair value. Goodwill is tested by comparing the
book value of each reporting unit, deemed to be our principle
operating segments (Wireless, Wireline and Advertising Solutions),
to the fair value of those reporting units calculated under a
market multiple approach as well as a discounted cash flow
approach. FCC licenses are tested for impairment on an aggregate
basis, consistent with the management of the business on a national
scope. Brand names are tested by comparing the book value to a fair
value calculated using a discounted cash flow approach on a
presumed royalty rate derived from the revenues related to the
brand name.
Intangible assets that have finite useful lives are amortized
over their useful lives, a weighted-average of 7.9 years (7.9 years
for customer lists and relationships and 10.3 years for other).
Customer lists and relationships are amortized using primarily the
sum-of-the-months-digits method of amortization over the expected
period in which those relationships are expected to contribute to
our future cash flows. The remaining finite-lived intangible assets
are generally amortized using the straight-line method of
amortization.
Advertising Costs We expense advertising costs for advertising
products and services or for promoting our corporate image as we
incur them (see Note 14).
Foreign Currency Translation We are exposed to foreign currency
exchange risk through our foreign affiliates and equity investments
in foreign companies. Our foreign subsidiaries and foreign
investments generally report their earnings in their local
currencies. We translate our share of their foreign assets and
liabilities at exchange rates in effect at the balance sheet dates.
We translate our share of their revenues and expenses using average
rates during the year. The resulting foreign currency translation
adjustments are recorded as a separate component of accumulated OCI
in the accompanying consolidated balance sheets. We do not hedge
foreign currency translation risk in the net assets and income we
report from these sources. However, we do hedge a large portion of
the foreign currency exchange risk involved in anticipation of
highly probable foreign currency-denominated transactions, which we
explain further in our discussion of our methods of managing our
foreign currency risk (see Note 9).
NOTE 2. ACQUISITIONS, DISPOSITIONS, AND OTHER ADJUSTMENTS
Acquisitions
Wireless Properties Transactions In June 2010, we acquired
certain wireless properties, including FCC licenses and network
assets, from Verizon Wireless for $2,376 in cash. The assets
primarily represent former Alltel Wireless assets and served
approximately 1.6 million subscribers in 79 service areas across 18
states. The fair value of the acquired net assets of $1,439
included $368 of property, plant and equipment, $937 of goodwill,
$765 of FCC licenses, and $224 of customer lists and other
intangible assets.
As the value of certain assets and liabilities are preliminary
in nature, they are subject to adjustment as additional information
is obtained about the facts and circumstances that existed at the
acquisition date. When the valuation is final, any changes to the
preliminary valuation of acquired assets and liabilities could
result in adjustments to goodwill.
41
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Centennial In December 2010, we completed our acquisition
accounting for Centennial. As of December 31, 2010, the fair value
measurement of Centennial's net assets acquired included $1,518 of
goodwill, $655 of FCC licenses, and $449 of customer lists and
other intangible assets.
Other Acquisitions In 2010, we acquired $265 of wireless
spectrum from various companies, primarily in support of our
ongoing network enhancement efforts, and a home monitoring platform
developer and other entities for $86 in cash. During 2009, we
acquired a provider of mobile application solutions and a security
consulting business for a combined $50 before closing costs.
During 2008, we acquired Easterbrooke Cellular Corporation,
Windstream Wireless, Wayport Inc., and the remaining 64% of Edge
Wireless for a combined $663, recording $449 in goodwill. The
acquisitions of these companies were designed to expand our
wireless and Wi-Fi coverage area.
Pending Acquisition In December 2010, we agreed to purchase
spectrum licenses in the Lower 700 MHz frequency band from Qualcomm
Incorporated (Qualcomm) for approximately $1,925 in cash. The
spectrum covers more than 300 million people total nationwide,
including 12 MHz of Lower 700 MHz D and E block spectrum covering
more than 70 million people in five of the top 15 metropolitan
areas and 6 MHz of Lower 700 MHz D block spectrum covering more
than 230 million people across the rest of the U.S. We plan to
deploy this spectrum as supplemental downlink capacity, using
carrier aggregation technology once compatible handsets and network
equipment are developed. The transaction is subject to regulatory
approvals and other customary closing conditions. In February 2011,
the waiting period under the Hart-Scott-Rodino Act expired without
the Department of Justice (DOJ) requesting additional information.
AT&T and Qualcomm anticipate closing the purchase in the second
half of 2011.
Dispositions
Sale of Sterling Operations In August 2010, we sold our Sterling
Commerce Inc. (Sterling) subsidiary to International Business
Machines Corporation (IBM) for approximately $1,400 in cash.
Sterling provides business applications and integration solutions
to approximately 18,000 customers worldwide. In conjunction with
the sale, we divested $649 of goodwill and other intangible assets.
We also entered into a transition services agreement with IBM
related to short-term support of Sterling's operations after the
sale.
During the second quarter of 2010, we accounted for Sterling as
a discontinued operation. We determined that the cash inflows under
the transition services agreement and our cash outflows under the
enterprise license agreement will not constitute significant
continuing involvement with Sterling's operations after the sale.
We have reclassified Sterling's operating results, for all
historical periods, to income from discontinued operations in the
accompanying consolidated statements of income. We also applied
held-for-sale treatment to Sterling's assets and liabilities, and,
accordingly, included Sterling's assets in other current assets,
and the related liabilities in accounts payable and accrued
liabilities, on our consolidated balance sheets. Sterling's assets
and liabilities included the following as of December 31:
2009
--------------------------------------------- ------
Assets held for sale:
Current assets $ 333
Property, plant and equipment 40
Goodwill and other intangible assets 672
Other assets 47
--------------------------------------------- -----
Total assets $1,092
============================================= =====
Liabilities related to assets held for sale:
Current liabilities $ 365
Other liabilities 126
--------------------------------------------- -----
Total liabilities $ 491
============================================= =====
42
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The following table includes Sterling's operating results, which
we historically included in our Other segment:
Aug. 27, 2010 Dec. 31, 2009 Dec. 31, 2008
------------------------ --------------- --------------- ---------------
Operating revenues $ 349 $ 563 $ 633
Operating expenses 327 523 616
------------------------ ---- --------- ---- --------- ---- ---------
Operating income 22 40 17
------------------------ ---- --------- ---- --------- ---- ---------
Income (loss) before
income taxes 18 29 (1)
Income tax expense 8 9 1
------------------------ ---- --------- ---- --------- ---- ---------
Income (loss) from
discontinued
operations during
phase-out period 10 20 (2)
Gain on disposal
of discontinued
operations 769 - -
------------------------ ---- --------- ---- --------- ---- ---------
Income (loss) from
discontinued
operations, net
of tax $ 779 $ 20 $ (2)
======================== ==== ========= ==== ========= ==== =========
Centennial In October 2009, the DOJ cleared our acquisition of
Centennial, subject to the DOJ's condition that we divest
Centennial's operations in eight service areas in Louisiana and
Mississippi. In August 2010, we sold those eight service areas for
$273 in cash.
Other Dispositions In 2010, we also sold our domestic Japanese
outsourcing services company for $109. In 2009, we sold a
professional services business for $174 and eliminated $113 of
goodwill. In 2008, we sold to Local Insight Regatta Holdings Inc.,
the parent company of Local Insight Yellow Pages, the Independent
Line of Business segment of the L.M. Berry Company, for $230.
Other Adjustments During 2010, we recorded $78 in reductions of
Dobson Communications Corporation and BellSouth Corporation
(BellSouth) restructuring liabilities previously included in the
purchase accounting for those deals, and we recorded an offsetting
reduction of goodwill.
Notes to Consolidated Financial Statements (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 income from
continuing operations for the years ended December 31, 2010, 2009
and 2008, are shown in the table below:
Year Ended December 31, 2010 2009 2008
------------------------------------ ------- ------- -------
Numerators
Numerator for basic earnings per
share:
Income (loss) from continuing
operations $19,400 $12,427 $(2,362)
Income attributable to
noncontrolling interest (315) (309) (261)
------------------------------------ ------ ------ ------
Income (loss) from continuing
operations attributable to
AT&T 19,085 12,118 (2,623)
Dilutive potential common shares:
Other share-based payment 11 10 9
------------------------------------ ------ ------ ------
Numerator for diluted earnings per
share $19,096 $12,128 $(2,614)
==================================== ====== ====== ======
Denominators (000,000)
Denominator for basic earnings per
share:
Weighted-average number of
common shares outstanding 5,913 5,900 5,927
Dilutive potential common shares:
Stock options 3 3 9
Other share-based payment 22 21 22
------------------------------------ ------ ------ ------
Denominator for diluted earnings per
share 5,938 5,924 5,958
==================================== ====== ====== ======
Basic earnings (loss) per share
from continuing operations
attributable to AT&T $ 3.23 $ 2.06 $ (0.44)
Basic earnings per share from
discontinued operations
attributable to AT&T 0.13 - -
------------------------------------ ------ ------ ------
Basic earnings (loss) per share
attributable to AT&T $ 3.36 $ 2.06 $ (0.44)
==================================== ====== ====== ======
Diluted earnings (loss) per share
from continuing operations
attributable to AT&T $ 3.22 $ 2.05 $ (0.44)
Diluted earnings per share from
discontinued operations
attributable to AT&T 0.13 - -
------------------------------------ ------ ------ ------
Diluted earnings (loss) per share
attributable to AT&T $ 3.35 $ 2.05 $ (0.44)
==================================== ====== ====== ======
At December 31, 2010, 2009 and 2008, we had issued and
outstanding options to purchase approximately 130 million, 178
million and 204 million shares of AT&T common stock. The
exercise prices of 100 million, 163 million and 144 million shares
in 2010, 2009 and 2008 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
periods. At December 31, 2010, the exercise prices of 25 million
vested stock options were below market price.
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer different
products and services over various technology platforms and are
managed accordingly. We analyze our various operating segments
based on segment income before income taxes. Actuarial gains and
losses from pension and other postretirement benefits, interest
expense and other income (expense) - net, are managed only on a
total company basis and are, accordingly, reflected only in
consolidated results. Therefore, these items are not included in
the calculation of each segment's percentage of our consolidated
results. The customers and long-lived assets of our reportable
segments are predominantly in the United States. We have four
reportable segments: (1) Wireless, (2) Wireline, (3) Advertising
Solutions and (4) Other.
44
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The Wireless segment uses our nationwide network to provide
consumer and business customers with wireless voice and advanced
data communications services.
The Wireline segment uses our regional, national and global
network to provide consumer and business customers with landline
voice and data communications services, AT&T U-verseSM TV,
high-speed broadband and voice services (U-verse) and managed
networking to business customers. Additionally, we receive
commissions on sales of satellite television services offered
through our agency arrangements.
The Advertising Solutions segment includes our directory
operations, which publish Yellow and White Pages directories and
sell directory advertising and Internet-based advertising and local
search.
The Other segment includes results from customer information
services, our portion of the results from our international equity
investments and all corporate and other operations. Also included
in the Other segment are impacts of corporate-wide decisions for
which the individual operating segments are not being evaluated,
including interest cost and expected return on pension and
postretirement benefits. In May 2010, we announced the sale of
Sterling. The Other segment results for all periods shown have been
restated to exclude the results of Sterling, which are now
reflected in discontinued operations (see Note 2).
In January 2011, we announced a change in our method of
recognizing actuarial gains and losses for pension and other
postretirement benefits as well as the attribution of those benefit
costs to our segments (see Note 1). Historically, the total benefit
costs were attributed to each segment. As part of the benefit
accounting change, the service cost and the amortization of prior
service costs, which represent the benefits earned by active
employees during the period, will continue to be attributed to the
segment in which the employee is employed, while interest cost and
expected return on assets will now be recorded in the Other segment
as those financing activities are managed on a corporate level.
Actuarial gains and losses resulting from the remeasurement of our
pension and postretirement benefit plans, which generally only
occurs in the fourth quarter, will be reflected in AT&T's
consolidated results only. We have adjusted prior-period segment
information to conform to the current period's presentation.
Historically, the intersegment activity had been reported as
revenue in the billing segment and offsetting operating expense in
the purchasing segment. Upon consolidation, the intersegment
revenue and expense were eliminated with the consolidated results,
reflecting the cash operating and depreciation expense of providing
the intersegment service. As part of AT&T's ongoing initiatives
to manage its business from an external customer perspective, we no
longer report intersegment revenue and instead report the cash
operating and depreciation expense related to intersegment activity
in the purchasing segment, which provided services to the external
customer. While this change did not affect AT&T's total
consolidated results, the impact to each operating segment varied.
In particular, the Wireless segment, as a purchaser of network, IT
and other services from the Wireline segment, experienced a
reduction in cash operating expense partially offset by increased
depreciation expense, with the net result being increased operating
margins. This change was effective with the reporting of operating
results for the quarter ended March 31, 2010. We have applied this
change retrospectively, adjusting prior-period segment
information.
In the following tables, we show how our segment results are
reconciled to our consolidated results reported. The Wireless,
Wireline, Advertising Solutions and Other columns represent the
segment results of each such operating segment. The Consolidations
column adds in those line items that we manage on a consolidated
basis only: actuarial gains and losses from pension and other
postretirement benefits, interest expense and other income
(expense) - net. In the Segment assets line item, we have
eliminated the value of our investments in our fully consolidated
subsidiaries and the intercompany financing assets as these have no
impact to the segments' operations.
45
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Segment results, including a reconciliation to AT&T
consolidated results, for 2010, 2009 and 2008 are as follows:
At December 31, 2010 or
for the year ended
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations Results
---------------- -------- -------- ------------- -------- ------------------ --------------
Total segment
operating
revenues $ 58,500 $ 61,202 $ 3,935 $ 643 $ - $ 124,280
---------------- ------- ------- --------- ------ -------- ---- ----------
Operations and
support
expenses 36,746 41,008 2,583 2,470 2,521 85,328
Depreciation and
amortization
expenses 6,497 12,371 497 14 - 19,379
---------------- ------- ------- --------- ------ -------- ---- ----------
Total segment
operating
expenses 43,243 53,379 3,080 2,484 2,521 104,707
---------------- ------- ------- --------- ------ -------- ---- ----------
Segment
operating
income (loss) 15,257 7,823 855 (1,841) (2,521) 19,573
Interest expense - - - - 2,994 2,994
Equity in net
income of
affiliates 9 11 - 742 - 762
Other income
(expense) -
net - - - - 897 897
---------------- ------- ------- --------- ------ -------- ---- ----------
Segment
income
(loss)
before
income
taxes $ 15,266 $ 7,834 $ 855 $(1,099) $ (4,618) $ 18,238
================ ======= ======= ========= ====== ======== === ==========
Segment
assets $122,011 $149,230 $ 8,736 $ 9,067 $ (20,556) $ 268,488
Investments
in equity
method
affiliates 14 - - 4,501 - 4,515
Expenditures
for
additions to
long-lived
assets 9,171 11,071 29 31 - 20,302
================ ======= ======= ========= ====== ======== ==== ==========
At December 31, 2009 or
for the year ended
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations Results
---------------- -------- -------- ------------- -------- ------------------ --------------
Total segment
operating
revenues $ 53,504 $ 63,514 $ 4,724 $ 771 $ - $ 122,513
---------------- ------- ------- --------- ------ -------- ---- ----------
Operations and
support
expenses 33,631 42,352 2,743 3,057 215 81,998
Depreciation and
amortization
expenses 6,043 12,743 650 79 - 19,515
---------------- ------- ------- --------- ------ -------- ---- ----------
Total segment
operating
expenses 39,674 55,095 3,393 3,136 215 101,513
---------------- ------- ------- --------- ------ -------- ---- ----------
Segment
operating
income (loss) 13,830 8,419 1,331 (2,365) (215) 21,000
Interest expense - - - - 3,368 3,368
Equity in net
income of
affiliates 9 17 - 708 - 734
Other income
(expense) -
net - - - - 152 152
---------------- ------- ------- --------- ------ -------- ---- ----------
Segment
income
(loss)
before
income
taxes $ 13,839 $ 8,436 $ 1,331 $(1,657) $ (3,431) $ 18,518
================ ======= ======= ========= ====== ======== === ==========
Segment
assets $116,720 $156,130 $ 9,654 $ 8,908 $ (23,100) $ 268,312
Investments
in equity
method
affiliates 4 - - 2,917 - 2,921
Expenditures
for
additions to
long-lived
assets 6,066 11,200 22 6 - 17,294
================ ======= ======= ========= ====== ======== ==== ==========
46
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
For the year ended
December 31, 2008
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations Results
-------------- ---------- ---------- ------------- ------- ------------------ ----------------
Total segment
operating
revenues $ 49,174 $ 67,890 $ 5,416 $ 963 $ - $ 123,443
-------------- ------ ------ --------- ----- -------- ---- --------
Operations and
support
expenses 31,530 44,817 2,900 1,063 25,150 105,460
Depreciation
and
amortization
expenses 6,025 12,786 789 73 - 19,673
-------------- ------ ------ --------- ----- -------- ---- --------
Total segment
operating
expenses 37,555 57,603 3,689 1,136 25,150 125,133
-------------- ------ ------ --------- ----- -------- ---- --------
Segment
operating
income
(loss) 11,619 10,287 1,727 (173) (25,150) (1,690)
Interest
expense - - - - 3,369 3,369
Equity in
net income
of
affiliates 6 19 - 794 - 819
Other
income
(expense)
- net - - - - (332) (332)
-------------- ------ ------ --------- ----- -------- --- --------
Segment
income
(loss)
before
income
taxes $ 11,625 $ 10,306 $ 1,727 $ 621 $ (28,851) $ (4,572)
============== ====== ====== ========= ===== ======== === ========
47
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at
December 31:
Lives (years) 2010 2009
------------------------------------ -------------- -------- --------
Land - $ 1,694 $ 1,724
Buildings 35-45 25,979 24,238
Central office equipment1 3-10 79,607 78,314
Cable, wiring and conduit 10-50 75,732 73,191
Other equipment1 5-15 46,622 39,723
Software 3-5 9,219 8,812
Under construction - 4,980 3,159
------------------------------------- ------------- ------- -------
243,833 229,161
------------------------------------ ------------- ------- -------
Accumulated depreciation and
amortization 140,637 129,642
------------------------------------- ------------- ------- -------
Property, plant and equipment - net $103,196 $ 99,519
===================================== ============= ======= =======
1 Includes certain network software.
Our depreciation expense was $16,402 in 2010, $15,849 in 2009
and $15,191 in 2008.
Certain facilities and equipment used in operations are leased
under operating or capital leases. Rental expenses under operating
leases were $3,060 for 2010, $2,889 for 2009 and $2,733 for 2008.
At December 31, 2010, the future minimum rental payments under
noncancelable operating leases for the years 2011 through 2015 were
$2,590, $2,454, $2,257, $2,134 and $2,022, with $13,347 due
thereafter. Certain real estate operating leases contain renewal
options that may be exercised. Capital leases are not
significant.
American Tower Corp. Agreement
In August 2000, we reached an agreement with American Tower
Corp. (American Tower) under which we granted American Tower the
exclusive rights to lease space on a number of our communications
towers. In exchange, we received a combination of cash and equity
instruments as complete prepayment of rent with the closing of each
leasing agreement. The value of the prepayments was recorded as
deferred revenue and recognized in income as revenue over the life
of the leases. The balance of deferred revenue was $480 in 2010,
$509 in 2009 and $539 in 2008.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amounts of goodwill, by segment (which
is the same as the reporting unit for Wireless, Wireline and
Advertising Solutions), for the years ended December 31, 2010 and
2009, were as follows:
Advertising
Wireless Wireline Solutions Other Total
------------ ---------- ---------- ------------ ------- -------
Balance as
of January
1, 2009 $ 33,851 $ 31,381 $ 5,694 $ 426 $71,352
Goodwill
acquired 1,276 344 36 - 1,656
Other (90) (117) 1 (20) (226)
------------ ------ ------ ----------- --- ------
Balance as
of December
31, 2009 35,037 31,608 5,731 406 72,782
Goodwill
acquired 937 - - 43 980
Other (219) 62 - (4) (161)
------------ ------ ------ ----------- --- ------
Balance
as of
December
31,
2010 $ 35,755 $ 31,670 $ 5,731 $ 445 $73,601
============ ====== ====== =========== === ======
The reclassification of Sterling as a discontinued operation
impacted goodwill by $477 and other intangible assets balances by
$195 at December 31, 2009 and $254 at January 1, 2009. Goodwill
acquired in 2010 relates primarily to the acquisition of certain
wireless properties from Verizon Wireless and in 2009 relates to
certain wireless and wireline properties acquired from Centennial.
Changes to goodwill during 2010 include adjustments totaling $(219)
related to wireless business combinations and $62 due primarily to
adjustments relating to a wireline business combination. Changes to
goodwill during 2009 include adjustments totaling $90 related to
wireless liabilities in connection with a business combination and
disposition of a wireline entity for $117 (see Note 2).
48
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Our other intangible assets are summarized as follows:
December 31, 2010 December 31, 2009
------------------ ---------------------------- ----------------------------
Gross Gross
Other Intangible Carrying Accumulated Carrying Accumulated
Assets Amount Amortization Amount Amortization
------------------ ------------ -------------- ------------ --------------
Amortized
intangible
assets:
Customer lists
and
relationships:
AT&T
Mobility
LLC $ 6,987 $ 5,240 $ 7,729 $ 5,023
BellSouth 9,215 6,807 9,215 5,597
AT&T Corp. 3,134 2,647 3,134 2,377
Other 350 284 524 212
------------------ -------- ---------- -------- ----------
Subtotal 19,686 14,978 20,602 13,209
Other 525 239 778 519
------------------ -------- ---------- -------- ----------
Total $ 20,211 $ 15,217 $ 21,380 $ 13,728
================== ======== ========== ======== ==========
Indefinite-life
intangible assets
not subject to
amortization:
Licenses $ 50,372 $ 48,741
Trade name 5,154 5,235
------------------ -------- --------
Total $ 55,526 $ 53,976
================== ======== ========
Amortized intangible assets are definite-life assets, and as
such, we record amortization expense based on a method that most
appropriately reflects our expected cash flows from these assets.
Amortization expense for definite-life intangible assets was $2,977
for the year ended December 31, 2010, $3,666 for the year ended
December 31, 2009, and $4,482 for the year ended December 31, 2008.
Amortization expense is estimated to be $2,007 in 2011, $1,325 in
2012, $739 in 2013, $346 in 2014 and $214 in 2015. In 2009,
Mobility wrote off $2,963 in fully amortized intangible assets
(primarily customer lists). We review other long-lived assets for
impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable over the remaining life of
the asset or asset group.
Licenses include wireless FCC licenses of $50,356 at December
31, 2010, and $48,650 at December 31, 2009, that provide us with
the exclusive right to utilize certain radio frequency spectrum to
provide wireless communications services. In 2010, we recorded an
$85 impairment for a trade name.
NOTE 7. EQUITY METHOD INVESTMENTS
Investments in partnerships, joint ventures and
less-than-majority-owned subsidiaries in which we have significant
influence are accounted for under the equity method.
Our investments in equity affiliates include primarily
international investments. As of December 31, 2010, our investments
in equity affiliates included an 8.4% interest in Telefonos de
Mexico, S.A. de C.V. (Telmex), Mexico's national telecommunications
company, and a 9.0% interest in America Movil, S.A. de C.V.
(America Movil), primarily a wireless provider in Mexico with
telecommunications investments in the United States and Latin
America. We are a member of a consortium that holds all of the
class AA shares of Telmex stock, representing voting control of the
company. Another member of the consortium, Carso Global Telecom,
S.A.B. de C.V. (CGT), has the right to appoint a majority of the
directors of Telmex. We also are a member of a consortium that
holds all of the class AA shares of America Movil stock,
representing voting control of the company. Another member of the
consortium has the right to appoint a majority of the directors of
America Movil.
America Movil Transactions On June 11, 2010, as part of a tender
offer from America Movil, we exchanged all our shares in Telmex
Internacional, S.A.B. de C.V. (TI) for America Movil L shares at
the offered exchange rate of 0.373, which resulted in a pretax gain
of $658. The exchange was accounted for at fair value. In addition,
we paid $202 to purchase additional shares of America Movil L
shares to maintain our ownership percentage at a pretransaction
level.
49
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The following table is a reconciliation of our investments in
equity affiliates as presented on our consolidated balance
sheets:
2010 2009
----------------------------------- ------ ------
Beginning of year $2,921 $2,332
Additional investments 220 44
Equity in net income of affiliates 762 734
Dividends received (159) (315)
Dispositions (204) -
Currency translation adjustments 203 125
Telmex Internacional exchange 658 -
Other adjustments 114 1
----------------------------------- ----- -----
End of year $4,515 $2,921
=================================== ===== =====
Undistributed earnings from equity affiliates were $5,137 and
$4,534 at December 31, 2010 and 2009. The currency translation
adjustment for 2010 and 2009 reflects the effect of exchange rate
fluctuations on our investments in Telmex, TI and America
Movil.
The fair value of our investment in Telmex, based on the
equivalent value of Telmex L shares at December 31, 2010, was
$1,231. The fair value of our investment in America Movil, based on
the equivalent value of America Movil L shares at December 31,
2010, was $10,383.
NOTE 8. DEBT
Long-term debt of AT&T and its subsidiaries, including
interest rates and maturities, is summarized as follows at December
31:
2010 2009
------------------------------------------------ ------- -------
Notes and debentures
Interest Rates Maturities1
---------------------- -----------------------
0.35% - 2.99% 2010 - 2015 $ 2,250 $ 3,500
3.00% - 4.99% 2010 - 2014 5,880 5,853
5.00% - 6.99% 2010 - 2095 43,506 41,331
7.00% - 9.10% 2010 - 2097 11,986 19,069
Other 14 136
Fair value of interest rate swaps recorded in
debt 435 310
------------------------------------------------ ------ ------
64,071 70,199
Unamortized premium, net of discount 185 1,612
------------------------------------------------ ------ ------
Total notes and debentures 64,256 71,811
Capitalized leases 259 237
------------------------------------------------ ------ ------
Total long-term debt, including current
maturities 64,515 72,048
Current maturities of long-term debt (5,544) (7,328)
------------------------------------------------ ------ ------
Total long-term debt $58,971 $64,720
================================================ ====== ======
1 Maturities assume putable debt is redeemed by the holders at
the next opportunity.
Current maturities of long-term debt include debt that may be
put back to us by the holders in 2011. We have $1,000 of annual put
reset securities issued by BellSouth that may be put each April
until maturity in 2021. If the holders do not require us to
repurchase the securities, the interest rate will be reset based on
current market conditions. Likewise, we have an accreting
zero-coupon note that 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.
50
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Debt maturing within one year consisted of the following at
December 31:
2010 2009
------------------------------------- ------ ------
Current maturities of long-term debt $5,544 $7,328
Commercial paper 1,625 -
Bank borrowings1 27 33
------------------------------------- ----- -----
Total $7,196 $7,361
===================================== ===== =====
1 Outstanding balance of short-term credit facility of a foreign
subsidiary.
During 2010, we received net proceeds of $2,235 from the
issuance of $2,250 of 2.50% global notes due in 2015. Debt proceeds
were used for general corporate purposes. We also received net
proceeds of $1,620 from the net issuance of commercial paper and
other short-term bank borrowings.
During 2010, debt repayments totaled $9,294 and consisted
of:
-- $5,668 in repayments of long-term debt with a weighted-average
interest rate of 2.86%.
-- $3,000 for the early redemption of the New Cingular
Wireless Services, Inc. 7.875% notes originally due
on March 1, 2011.
-- $594 related to the private exchange we completed
on September 2, 2010 whereby holders exchanged $1,362
of New Cingular Wireless Services, Inc. 8.75% senior
notes due 2031 and $1,537 of AT&T Corp. (ATTC) 8.00%
senior notes due 2031 for $3,500 of new 5.35% AT&T
Inc. global notes due 2040 plus a cash payment.
-- $32 in repayments of capitalized leases.
As of December 31, 2010 and 2009, we were in compliance with all
covenants and conditions of instruments governing our debt.
Substantially all of our outstanding long-term debt is unsecured.
Maturities of outstanding long-term notes and debentures, as of
December 31, 2010, and the corresponding weighted-average interest
rate scheduled for repayment are as follows:
2011 2012 2013 2014 2015 Thereafter
----------------------- ------ ------ ------ ------ ------ ------------
Debt repayments1 $5,535 $5,454 $5,823 $4,788 $4,514 $ 38,042
Weighted-average
interest rate 6.2% 6.4% 5.6% 5.1% 4.3% 6.4%
======================= ===== ===== ===== ===== ===== ========
1 Debt repayments assume putable debt is redeemed by the holders
at the next opportunity.
Credit Facilities In December 2010, we replaced our five-year,
$9,465 revolving credit facility with two new revolving credit
facilities with a syndicate of banks - a four-year, $5,000
agreement and a $3,000, 364-day agreement. In the event advances
are made under either agreement, those advances would be used for
general corporate purposes, which could include repayment of
maturing commercial paper. Advances are not conditioned on the
absence of a material adverse change. All advances must be repaid
no later than the date on which lenders are no longer obligated to
make any advances under each agreement. Under each agreement, we
can terminate, in whole or in part, amounts committed by the
lenders in excess of any outstanding advances; however, we cannot
reinstate any such terminated commitments. At December 31, 2010, we
had no advances outstanding under either agreement and were in
compliance with all covenants under each agreement.
The Four-Year Agreement
We can request the lenders to further increase their commitments
(i.e., raise the available credit) up to an additional $2,000
provided no event of default has occurred. The obligations of the
lenders to provide advances will terminate on December 20, 2014,
unless prior to that date either: (i) we reduce to $0 the
commitments of the lenders, or (ii) certain events of default
occur. We and lenders representing more than 50% of the facility
amount may agree to extend their commitments for an additional one
year beyond the December 20, 2014 termination date (with a
potential one-year further renewal), under certain
circumstances.
51
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Advances would bear interest, at our option, either:
-- at an annual rate equal to (1) the highest of (a)
the base (or prime) rate of a designated bank, (b)
0.50% per annum above the Federal funds rate, and
(c) the British Bankers Association Interest Settlement
Rate applicable to Dollars for a period of one month
plus 1.00%, plus (2) a rate based on AT&T's credit
default swap mid-rate spread and subject to a floor
or cap as set forth in the Agreement (Applicable Margin)
minus 1.00% provided such total exceeds zero; or
-- at a rate equal to: (i) the London InterBank Offered
Rate (LIBOR) (adjusted upwards to reflect any bank
reserve costs) for a period of one, two, three or
six months, as applicable, plus (ii) the Applicable
Margin.
If we pledge assets or otherwise have liens on our properties,
then advances will be ratably secured, subject to specified
exceptions. We also must maintain a debt-to-EBITDA (earnings before
interest, income taxes, depreciation and amortization, and other
modifications described in the agreement) ratio of not more than
three-to-one, as of the last day of each fiscal quarter, for the
four quarters then ended.
Defaults under the agreement, which would permit the lenders to
accelerate required repayment and which would increase the
Applicable Margin by 2.00% per annum, include:
-- We fail to pay principal or interest, or other amounts
under the agreement beyond any grace period,
-- We fail to pay when due other debt of $400 or more
that results in acceleration of that debt (commonly
referred to as "cross-acceleration") or a creditor
commences enforcement proceedings within a specified
period after a money judgment of $400 or more has
become final,
-- A person acquires beneficial ownership of more than
50% of AT&T common shares or more than a majority
of AT&T's directors changes in any 24-month period
other than as elected by the remaining directors (commonly
referred to as a "change in control"),
-- Material breaches of representations or warranties
in the agreement,
-- We fail to comply with the negative pledge or debt-to-EBITDA
ratio covenants described above,
-- We fail to comply with other covenants under the Agreement
for a specified period after notice,
-- We fail to make certain minimum funding payments under
Employee Retirement Income Security Act of 1941, as
amended (ERISA), and
-- Our bankruptcy or insolvency.
364-day Agreement
The obligations of the lenders to provide advances will
terminate on December 19, 2011, unless prior to that date either:
(i) we reduce to $0 the commitments of the lenders, or (ii) certain
events of default occur. We and lenders representing more than 50%
of the facility amount may agree to extend their commitments for an
additional 364-day period beyond the December 19, 2011 termination
date, under certain circumstances. We also can convert all or part
of outstanding advances under the 364-day Agreement into term
loan(s) maturing no later than the first anniversary of the
termination date, under certain circumstances.
Advances would bear interest, at our option, either:
-- at a variable annual rate equal to (1) the highest
of (a) the base (or prime) rate of a designated bank,
(b) 0.50% per annum above the Federal funds rate,
and (c) the British Bankers Association Interest Settlement
Rate applicable to Dollars for a period of one month
plus 1.00%, plus (2) a rate based on AT&T's credit
default swap mid-rate spread and subject to a floor
or cap as set forth in such Agreement (Applicable
Margin) minus 1.00% provided such total exceeds zero;
or
-- at a rate equal to: (i) LIBOR (adjusted upwards to
reflect any bank reserve costs) for a period of one,
two, three or six months, as applicable, plus (ii)
the Applicable Margin.
The 364-day Agreement contains a negative pledge covenant that
is identical to the negative pledge described above. In the event
we elect to convert any outstanding advances to term loan(s), the
debt-to-EBITDA financial ratio covenant described above also would
apply while such term loan(s) were outstanding. The events of
default described above also apply to the 364-day Agreement.
52
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
NOTE 9. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a
three-tiered fair value hierarchy that gives highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy are described below:
Level 1 Inputs to the valuation methodology are unadjusted
quoted prices for identical assets or liabilities
in active markets that AT&T has the ability to access.
Level 2 Inputs to the valuation methodology include:
-- Quoted prices for similar assets and liabilities
in active markets;
-- Quoted prices for identical or similar assets or
liabilities in inactive markets;
-- Inputs other than quoted market prices that are
observable for the asset or liability;
-- Inputs that are derived principally from or corroborated
by observable market data by correlation or other
means.
If the asset or liability has a specified (contractual)
term, the Level 2 input must be observable for substantially
the full term of the asset or liability.
Level 3 Inputs to the valuation methodology are unobservable
and significant to the fair value measurement.
-- Fair value is often based on internally developed
models in which there are few, if any, external observations.
The asset's or liability's fair value measurement level within
the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. Valuation
techniques used should maximize the use of observable inputs and
minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair
value calculation that may not be indicative of future net
realizable value or reflective of future fair values. AT&T
believes its valuation methods are appropriate and consistent with
other market participants. The use of different methodologies or
assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at
the reporting date. There have been no changes in the methodologies
used at December 31, 2010, and December 31, 2009.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term
debt, including current maturities and other financial instruments,
are summarized as follows:
December 31, 2010 December 31, 2009
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------- ------------- ------- ------------ -------
Notes and debentures $ 64,256 $69,313 $ 71,811 $75,212
Commercial paper 1,625 1,625 - -
Bank borrowings 27 27 33 33
Investment
securities 2,183 2,183 1,885 1,885
==================== === ======= ====== === ======= ======
The fair values of our notes and debentures were estimated based
on quoted market prices, where available. The carrying value of
debt with an original maturity of less than one year approximates
market value.
Investment Securities
Our investment securities consist of primarily
available-for-sale instruments, which include equities, fixed
income bonds and other securities. Substantially all the fair
values of our available-for-sale securities were estimated based on
quoted market prices. Investments in securities not traded on a
national securities exchange are valued using pricing models,
quoted prices of securities with similar characteristics or
discounted cash flows. Realized gains and losses on these
securities are included in other income (expense) - net in the
consolidated statements of income using the specific identification
method. Unrealized gains and losses, net of tax, on
available-for-sale securities are recorded in accumulated OCI.
Unrealized losses that are considered other-than-temporary are
recorded in other income (expense) - net, with the corresponding
reduction to the carrying basis of the investment. Fixed income
investments have maturities of $228 in 2011, $107 in 2012 and 2013,
$52 in 2014 and 2015, and $252 for years thereafter.
53
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Our short-term investments, other short- and long-term
held-to-maturity investments (including money market securities)
and customer deposits are recorded at amortized cost, and the
respective carrying amounts approximate fair values.
Our investment securities maturing within one year are recorded
in "Other current assets," and instruments with maturities of more
than one year are recorded in "Other Assets" on the consolidated
balance sheets.
Following is the fair value leveling for available-for-sale
securities and derivatives as of December 31, 2010, and December
31, 2009.
December 31, 2010
Level 1 Level 2 Level 3 Total
------------------------------ --------- --------- --------- -----
Available-for-Sale Securities
Domestic equities $ 976 $ - $ - $ 976
International equities 513 - - 513
Fixed income bonds - 639 - 639
Asset Derivatives
Interest rate swaps - 537 - 537
Cross-currency swaps - 327 - 327
Interest rate locks - 11 - 11
Foreign exchange
contracts - 6 - 6
Liability Derivatives
Cross-currency swaps - (675) - (675)
Interest rate locks - (187) - (187)
Foreign exchange
contracts - (2) - (2)
============================== ===== ===== ==== === ====
December 31, 2009
Level 1 Level 2 Level 3 Total
----------------------------- --------- --------- --------- ------
Available-for-Sale Securities
Domestic equities $ 1,047 $ - $ - $1,047
International equities 412 - - 412
Fixed income bonds - 341 - 341
Asset Derivatives
Interest rate swaps - 399 - 399
Cross-currency swaps - 635 - 635
Interest rate locks - 150 - 150
Foreign exchange
contracts - 2 - 2
Liability Derivatives
Cross-currency swaps - (390) - (390)
Interest rate locks - (6) - (6)
Foreign exchange
contracts - (7) - (7)
============================= ===== ===== ==== === =====
Derivative Financial Instruments
We employ derivatives to manage certain market risks, primarily
interest rate risk and foreign currency exchange risk. This
includes the use of interest rate swaps, interest rate locks,
foreign exchange forward contracts and combined interest rate
foreign exchange contracts (cross-currency swaps). We do not use
derivatives for trading or speculative purposes. We record
derivatives on our consolidated balance sheets at fair value, which
is derived from observable market data, including yield curves and
foreign exchange rates (all of our derivatives are Level 2). Cash
flows associated with derivative instruments are presented in the
same category on the consolidated statements of cash flows as the
item being hedged.
The majority of our derivatives are designated either as a hedge
of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), or as a hedge of a
forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability (cash
flow hedge).
54
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Fair Value Hedging We designate our fixed-to-floating interest
rate swaps as fair value hedges. The purpose of these swaps is to
manage interest rate risk by managing our mix of fixed-rate and
floating-rate debt. These swaps involve the receipt of fixed-rate
amounts for floating interest rate payments over the life of the
swaps without exchange of the underlying principal amount. Accrued
and realized gains or losses from interest rate swaps impact
interest expense on the consolidated statements of income.
Unrealized gains on interest rate swaps are recorded at fair market
value as assets, and unrealized losses on interest rate swaps are
recorded at fair market value as liabilities. Changes in the fair
value of the interest rate swaps offset changes in the fair value
of the fixed-rate notes payable they hedge due to changes in the
designated benchmark interest rate and are recognized in interest
expense, though they net to zero. Gains or losses realized upon
early termination of our fair value hedges would be recognized in
interest expense.
Cash Flow Hedging Unrealized gains on derivatives designated as
cash flow hedges are recorded at fair value as assets, and
unrealized losses on derivatives designated as cash flow hedges are
recorded at fair value as liabilities, both for the period they are
outstanding. For derivative instruments designated as cash flow
hedges, the effective portion is reported as a component of
accumulated OCI until reclassified into interest expense in the
same period the hedged transaction affects earnings. The gain or
loss on the ineffective portion is recognized in other income
(expense) - net in each period.
We designate our cross-currency swaps as cash flow hedges. We
have entered into multiple cross-currency swaps to hedge our
exposure to variability in expected future cash flows that are
attributable to foreign currency risk generated from the issuance
of our Euro and British pound sterling denominated debt. These
agreements include initial and final exchanges of principal from
fixed foreign denominations to fixed U.S. denominated amounts, to
be exchanged at a specified rate, which was determined by the
market spot rate upon issuance. They also include an interest rate
swap of a fixed foreign-denominated rate to a fixed U.S.
denominated interest rate. We evaluate the effectiveness of our
cross-currency swaps each quarter. In the years ended December 31,
2010, and December 31, 2009, no ineffectiveness was measured.
Periodically, we enter into and designate interest rate locks to
partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during the
period leading up to the probable issuance of fixed-rate debt. We
designate our interest rate locks as cash flow hedges. Gains and
losses when we settle our interest rate locks are amortized into
income over the life of the related debt, except where a material
amount is deemed to be ineffective, which would be immediately
reclassified to income. In the second quarter of 2010, we settled
$200 of notional rate locks without utilizing them in a debt
issuance. The total impact to interest expense was $(5). We are
confident our remaining rate locks will be utilized given our
probable refinancing needs over the next two years. No other
ineffectiveness was measured in the year ended December 31, 2010.
Over the next 12 months, we expect to reclassify $15 from
accumulated OCI to interest expense due to the amortization of net
losses on historical interest rate locks. Our unutilized interest
rate locks carry mandatory early terminations, the latest occurring
in April 2012.
We hedge a large portion of the exchange risk involved in
anticipation of highly probable foreign currency-denominated
transactions. In anticipation of these transactions, we often enter
into foreign exchange contracts to provide currency at a fixed
rate. Some of these instruments are designated as cash flow hedges
while others remain non-designated, largely based on size and
duration. Gains and losses at the time we settle or take delivery
on our designated foreign exchange contracts are amortized into
income over the next few months as the hedged funds are spent by
our foreign subsidiaries, except where a material amount is deemed
to be ineffective, which would be immediately reclassified to
income. In the year ended December 31, 2010, no ineffectiveness was
measured. No transactions were designated in the year ended
December 31, 2009.
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. Collateral is exchanged on a weekly basis. At
December 31, 2010, we had posted collateral of $82 (a deposit
asset) and held collateral of $26 (a receipt liability). Under the
agreements, if our credit rating had been downgraded one rating
level by Moody's and Fitch before the final collateral exchange in
December, we would have been required to post additional collateral
of $115. At December 31, 2009, we held $222 of counterparty
collateral. We do not offset the fair value of collateral, whether
the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable), against the fair
value of the derivative instruments.
55
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Following is the notional amount of our outstanding derivative
positions at December 31:
2010 2009
--------------------------- ------- -------
Interest rate swaps $11,050 $ 9,000
Cross-currency swaps 7,502 7,502
Interest rate locks 3,400 3,600
Foreign exchange contracts 221 293
--------------------------- ------ ------
Total $22,173 $20,395
=========================== ====== ======
Following are our derivative instruments and their related
hedged items affecting our financial position and performance:
Fair Value of Derivatives on the Consolidated Balance Sheets
Derivatives designated as hedging instruments are reflected as
other assets, other liabilities and, for a portion of interest rate
swaps, accounts receivable at December 31.
Asset Derivatives 2010 2009
--------------------------- --------- ---------
Interest rate swaps $ 537 $ 399
Cross-currency swaps 327 635
Interest rate locks 11 150
Foreign exchange contracts 6 2
--------------------------- ----- -----
Total $ 881 $ 1,186
=========================== ===== =====
Liability Derivatives 2010 2009
--------------------------- --------- ---------
Cross-currency swaps $ (675) $ (390)
Interest rate locks (187) (6)
Foreign exchange contracts (2) (7)
--------------------------- ----- -----
Total $ (864) $ (403)
=========================== ===== =====
Effect of Derivatives in the Consolidated Statement of
Income
Fair Value Hedging Relationships
For the year ended December 31, 2010 2009
---------------------------------------- --------- ---------
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 125 $ (216)
Gain (Loss) on long-term debt (125) 216
======================================== ===== =====
In addition, the net swap settlements that accrued and settled
in the year ended December 31 were also reported as reductions of
interest expense.
Cash Flow Hedging Relationships
For the year ended December 31, 2010 2009
----------------------------------------------------- --------- ----
Cross-currency swaps:
Gain (Loss) recognized in accumulated Other
Comprehensive Income $ (201) $738
Other income (expense) - net reclassified from
accumulated Other Comprehensive Income into
income - -
Interest rate locks:
Gain (Loss) recognized in accumulated Other
Comprehensive Income (320) 203
Interest expense reclassified from accumulated
Other Comprehensive Income into income (19) (23)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated Other
Comprehensive Income 5 (2)
Other income (expense) - net reclassified from - -
accumulated Other Comprehensive Income into
income
===================================================== ===== ===
56
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The balance of the unrealized derivative gain (loss) in
accumulated OCI was $(180) at December 31, 2010, and $142 at
December 31, 2009.
NOTE 10. INCOME TAXES
Significant components of our deferred tax liabilities (assets)
are as follows at December 31:
2010 2009
------------------------------------------- -------- --------
Depreciation and amortization $ 34,172 $ 37,341
Intangibles (nonamortizable) 1,958 1,990
Employee benefits (13,612) (14,375)
Net operating loss and other carryforwards (1,552) (1,820)
Other - net (1,015) (1,983)
------------------------------------------- ------- -------
Subtotal 19,951 21,153
Deferred tax assets valuation allowance 949 1,179
------------------------------------------- ------- -------
Net deferred tax liabilities $ 20,900 $ 22,332
=========================================== ======= =======
Net long-term deferred tax liabilities $ 22,070 $ 23,579
Less: Net current deferred tax assets (1,170) (1,247)
------------------------------------------- ------- -------
Net deferred tax liabilities $ 20,900 $ 22,332
=========================================== ======= =======
In March 2010, the President of the United States signed into
law comprehensive healthcare reform legislation under the Patient
Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act of 2010, which included a change in
the tax treatment related to Medicare Part D subsidies. We recorded
a $995, or $0.17 per diluted share, charge to income tax expense in
our consolidated statement of income during the first quarter of
2010 and increased our deferred income taxes liability balance to
reflect the impact of this change.
In September 2010, we reached a settlement with the Internal
Revenue Service (IRS) on tax basis calculations related to a 2008
restructuring of our wireless operations. The IRS settlement
resolves the uncertainty regarding the amount and timing of
amortization deductions related to certain of our wireless assets.
The allowed amortization deductions on these settlement-related
assets and the related cash flow impacts are expected to be
recognized over a 15-year period, which began in 2008. Pursuant to
the settlement, we paid $300 to the IRS during the fourth quarter
of 2010 as a result of the disallowance of a portion of the
amortization deductions taken on our 2008 and 2009 income tax
returns. We recorded an $8,300, or $1.40 per diluted share,
reduction to income tax expense in our consolidated statement of
income during the third quarter of 2010 and corresponding decreases
of $6,760 to our net noncurrent deferred income tax liabilities and
$1,540 to other net tax liabilities to reflect the tax benefits of
the settlement. The IRS settlement resulted in a reduction to our
unrecognized tax benefits (UTBs) for tax positions related to prior
years of $1,057, which also reduced the total amount of UTBs that,
if recognized, would impact the effective tax rate.
At December 31, 2010, we had combined net operating and capital
loss carryforwards (tax effected) for federal income tax purposes
of $181 and for state and foreign income tax purposes of $1,052,
expiring through 2029. Additionally, we had federal credit
carryforwards of $73 and state credit carryforwards of $246,
expiring primarily through 2027.
We recognize a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion,
or all, of a deferred tax asset will not be realized. Our valuation
allowances at December 31, 2010 and 2009, relate primarily to state
net operating loss carryforwards.
We recognize the financial statement effects of a tax return
position when it is more likely than not, based on the technical
merits, that the position will ultimately be sustained. For tax
positions that meet this recognition threshold, we apply our
judgment, taking into account applicable tax laws and our
experience in managing tax audits and relevant GAAP, to determine
the amount of tax benefits to recognize in our financial
statements. For each position, the difference between the benefit
realized on our tax return and the benefit reflected in our
financial statements is recorded on our consolidated balance sheets
as an UTB. We update our UTBs at each financial statement date to
reflect the impacts of audit settlements and other resolution of
audit issues, expiration of statutes of limitation, developments in
tax law and ongoing discussions with taxing authorities. A
reconciliation of the change in our UTB balance from January 1 to
December 31 for 2010 and 2009 is as follows:
57
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Federal, State and Foreign Tax 2010 2009
-------------------------------------------------- ------- -------
Balance at beginning of year $ 5,969 $ 6,176
Increases for tax positions related to the
current year 324 980
Increases for tax positions related to prior
years 562 876
Decreases for tax positions related to prior
years (1,989) (1,982)
Lapse of statute of limitations (44) -
Settlements (462) (81)
-------------------------------------------------- ------ ------
Balance at end of year 4,360 5,969
Accrued interest and penalties 1,329 1,537
-------------------------------------------------- ------ ------
Gross unrecognized income tax benefits 5,689 7,506
Less: Deferred federal and state income tax
benefits (817) (892)
Less: Tax attributable to timing items
included above (2,073) (2,540)
-------------------------------------------------- ------ ------
Total UTB that, if recognized, would impact
the effective income tax rate as of the end
of the year $ 2,799 $ 4,074
================================================== ====== ======
During 2010 and 2009, we made net deposits totaling $206 and
$1,151 to several taxing jurisdictions. These deposits are not
included in the reconciliation above but reduce our UTBs balance.
Net of these deposits and deposits made in 2008 of $191 and a
$1,000 deposit made in 2007, our UTBs balance at December 31, 2010,
was $3,141, which was included in "Other noncurrent liabilities" on
our consolidated balance sheets. Our UTBs balance at December 31,
2009, was $5,164, of which $4,865 was included in "Other noncurrent
liabilities" and $299 was included in "Accrued taxes" on our
consolidated balance sheets.
We record interest and penalties related to federal, state and
foreign UTBs in income tax expense. Accrued interest and penalties
included in UTBs were $1,329 as of December 31, 2010, and $1,537 as
of December 31, 2009. Interest and penalties included in our
consolidated statements of income were $(194) for 2010, $(216) for
2009, and $152 for 2008.
We file income tax returns in the U.S. federal jurisdiction and
various state, local and foreign jurisdictions. Our income tax
returns are regularly audited by the IRS as well as by state, local
and foreign taxing authorities.
The IRS has completed field examinations of our tax returns
through 2005, and all audit periods prior to 1998 are closed for
federal purposes. We were unable to reach agreement with the IRS
regarding treatment of Universal Service Fund receipts on our 1998
and 1999 tax returns and, as a result, we filed a refund suit in
U.S. District Court (District Court). In July 2009, the District
Court granted the Government's motion for summary judgment and
entered final judgment for the Government. We appealed the final
judgment to the U.S. Court of Appeals for the Fifth Circuit (Court
of Appeals). In January 2011, the Court of Appeals affirmed the
judgment of the District Court. We are considering whether to
petition the U.S. Supreme Court for a writ of certiorari with
regard to this tax refund matter. We are engaged with the IRS
Appeals Division in resolving issues related to our 1999 - 2005
returns; we are unable to estimate the impact the resolution of
these issues may have on our UTBs. The IRS began its examination of
our 2006 - 2008 income tax returns in 2009.
The components of income tax (benefit) expense are as
follows:
2010 2009 2008
-------------------------- ------- ------ -------
Federal:
Current $ 307 $2,849 $ 1,158
Deferred - net (2,105) 2,149 (2,970)
-------------------------- ------ ----- ------
(1,798) 4,998 (1,812)
-------------------------- ------ ----- ------
State, local and foreign:
Current 141 1,193 (21)
Deferred - net 495 (100) (377)
-------------------------- ------ ----- ------
636 1,093 (398)
-------------------------- ------ ----- ------
Total $(1,162) $6,091 $(2,210)
========================== ====== ===== ======
58
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
A reconciliation of income tax expense (benefit) and the amount
computed by applying the statutory federal income tax rate (35%) to
income from continuing operations before income taxes is as
follows:
2010 2009 2008
---------------------------------- ------- ------ -------
Taxes computed at federal
statutory rate $ 6,383 $6,481 $(1,600)
Increases (decreases) in income
taxes resulting from:
State and local income taxes -
net of federal income tax
benefit 441 554 (229)
Healthcare Reform Legislation 917 - -
IRS Settlement - 2008 Wireless
Restructuring (8,300) - -
Other - net (603) (944) (381)
---------------------------------- ------ ----- ------
Total $(1,162) $6,091 $(2,210)
================================== ====== ===== ======
Effective Tax Rate (6.4)% 32.9% 48.3%
================================== ====== ===== ======
NOTE 11. PENSION AND POSTRETIREMENT BENEFITS
Pension Benefits and Postretirement Benefits
Substantially all of our U.S. employees are covered by one of
our noncontributory pension and death benefit plans. Many of our
management employees participate in pension plans that have a
traditional pension formula (i.e., a stated percentage of
employees' adjusted career income) and a frozen cash balance or
defined lump sum formula. In 2005, the management pension plan for
those employees was amended to freeze benefit accruals previously
earned under a cash balance formula. Each employee's existing cash
balance continues to earn interest at a variable annual rate. After
this change, those management employees, at retirement, may elect
to receive the portion of their pension benefit derived under the
cash balance or defined lump sum as a lump sum or an annuity. The
remaining pension benefit, if any, will be paid as an annuity if
its value exceeds a stated monthly amount. Management employees of
former ATTC, BellSouth, AT&T Mobility LLC and new hires after
2006 participate in cash balance pension plans. Nonmanagement
employees' pension benefits are generally calculated using one of
two formulas: benefits are based on a flat dollar amount per year
according to job classification or are calculated under a cash
balance plan that is based on an initial cash balance amount and a
negotiated annual pension band and interest credits. Most
nonmanagement employees can elect to receive their pension benefits
in either a lump sum payment or an annuity.
We also provide a variety of medical, dental and life insurance
benefits to certain retired employees under various plans and
accrue actuarially determined postretirement benefit costs as
active employees earn these benefits.
In January 2011, we announced a change in our method of
recognizing actuarial gains and losses for pension and other
postretirement benefits for all benefit plans. Historically, we
recognized the actuarial gains and losses as a component of
Stockholders' Equity on our consolidated balance sheets on an
annual basis and amortized them into our operating results over the
average future service period of the active employees of these
plans, to the extent such gains and losses were outside of a
corridor. We have elected to immediately recognize actuarial gains
and losses in our operating results, noting that it is generally
preferable to accelerate the recognition of deferred gains and
losses into income rather than to delay such recognition. This
change will improve transparency in our operating results by more
quickly recognizing the effects of economic and interest rate
conditions on plan obligations, investments and assumptions.
Generally, these gains and losses are measured annually as of
December 31 and accordingly will be recorded during the fourth
quarter. Additionally, for purposes of calculating the expected
return on plan assets, we will no longer use a permitted averaging
technique for the market-related value of plan assets but instead
will use actual fair value of plan assets. We have applied these
changes retrospectively, adjusting all prior periods (see Note
1).
Obligations and Funded Status
For defined benefit pension plans, the benefit obligation is the
"projected benefit obligation," the actuarial present value, as of
our December 31 measurement date, of all benefits attributed by the
pension benefit formula to employee service rendered to that date.
The amount of benefit to be paid depends on a number of future
events incorporated into the pension benefit formula, including
estimates of the average life of employees/survivors and average
years of service rendered. It is measured based on assumptions
concerning future interest rates and future employee compensation
levels.
59
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
For postretirement benefit plans, the benefit obligation is the
"accumulated postretirement benefit obligation," the actuarial
present value as of a date of all future benefits attributed under
the terms of the postretirement benefit plan to employee service
rendered to the valuation date.
The following table presents this reconciliation and shows the
change in the projected benefit obligation for the years ended
December 31:
Postretirement
Pension Benefits Benefits
-------------------- -----------------
2010 2009 2010 2009
--------------------- ---------- ------- ------- -------
Benefit obligation at
beginning of year $ 50,850 $50,822 $36,225 $37,531
Service cost -
benefits earned
during the period 1,075 1,070 348 334
Interest cost on
projected benefit
obligation 3,150 3,355 2,257 2,434
Amendments 2 (685) (742) (3,115)
Actuarial loss 4,224 2,439 1,046 1,402
Special termination
benefits 101 118 7 9
Benefits paid (5,485) (6,269) (2,536) (2,370)
Other - - 33 -
--------------------- ------ ------ ------ ------
Benefit obligation at
end of year $ 53,917 $50,850 $36,638 $36,225
===================== ====== ====== ====== ======
The following table presents the change in the value of plan
assets for the years ended December 31 and the plans' funded status
at December 31:
Postretirement
Pension Benefits Benefits
-------------------- -------------------
2010 2009 2010 2009
------------------- ---------- ------- -------- --------
Fair value of plan
assets at
beginning of year $ 46,873 $46,828 $ 11,513 $ 10,175
Actual return on
plan assets 6,230 6,312 1,472 1,991
Benefits paid1 (5,485) (6,269) (244) (823)
Contributions - 2 - 195
Other 3 - 6 (25)
------------------- ------ ------ ------- -------
Fair value of plan
assets at end of
year 47,621 46,873 12,747 11,513
------------------- ------ ------ ------- -------
Unfunded status at
end of year2 $ (6,296) $(3,977) $(23,891) $(24,712)
=================== ====== ====== ======= =======
1 At our discretion, certain postretirement benefits
are paid from AT&T cash accounts and do not reduce
Voluntary Employee Beneficiary Association (VEBA)
assets. Future benefit payments may be made from VEBA
trusts and thus reduce those asset balances.
2 Funded status is not indicative of our ability to
pay ongoing pension benefits or of our obligation
to fund retirement trusts. Required pension funding
is determined in accordance with ERISA regulations.
Amounts recognized on our consolidated balance sheets at
December 31 are listed below:
Pension Benefits Postretirement Benefits
-------------------- ---------------------------
2010 2009 2010 2009
------------- ---------- ------- -------------- ----------
Current
portion of
employee
benefit
obligation1 $ - $ - $ (2,394) $ (2,021)
Employee
benefit
obligation2 (6,296) (3,977) (21,497) (22,691)
------------- ------ ------ ---------- ---------
Net amount
recognized $ (6,296) $(3,977) $ (23,891) $ (24,712)
============= ====== ====== ========== =========
1 Included in "Accounts payable and accrued liabilities."
2 Included in "Postemployment benefit obligation."
Prior service credits included in our accumulated OCI that have
not yet been recognized in net periodic benefit cost were $164 for
pension and $4,760 for postretirement benefits at December 31,
2010, and $181 for pension and $4,644 for postretirement at
December 31, 2009.
The accumulated benefit obligation for our pension plans
represents the actuarial present value of benefits based on
employee service and compensation as of a certain date and does not
include an assumption about future compensation levels. The
accumulated benefit obligation for our pension plans was $51,915 at
December 31, 2010, and $49,122 at December 31, 2009.
60
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Net Periodic Benefit Cost and Other Amounts Recognized in Other
Comprehensive Income
Our combined net pension and postretirement cost recognized in
our consolidated statements of income was $3,750, $2,253 and
$25,237 for the years ended December 31, 2010, 2009 and 2008. A
portion of pension and postretirement benefit costs are capitalized
as part of the benefit load on internal construction and capital
expenditures, providing a small reduction in the net expense
recorded.
The following tables present the components of net periodic
benefit obligation cost, and other changes in plan assets and
benefit obligations recognized in OCI:
Net Periodic Benefit Cost
Postretirement
Pension Benefits Benefits
--------------------------- -------------------------
2010 2009 2008 2010 2009 2008
------------------------ ------- ------- ------- ------ ------ -------
Service cost -
benefits earned
during the
period $ 1,075 $ 1,070 $ 1,173 $ 348 $ 334 $ 429
Interest cost on
projected benefit
obligation 3,150 3,355 3,319 2,257 2,434 2,550
Expected return on plan
assets1 (3,775) (3,766) (5,808) (943) (784) (1,339)
Amortization of prior
service cost (credit) (16) 58 133 (624) (469) (360)
Actuarial (gain)
loss1 1,768 (103) 22,559 510 124 2,581
------------------------ ------ ------ ------ ----- ----- ------
Net pension and
postretirement
cost (benefit)2 $ 2,202 $ 614 $21,376 $1,548 $1,639 $ 3,861
======================== ====== ====== ====== ===== ===== ======
1 Amounts for 2008 and 2009 are adjusted for the change
in accounting policy as discussed in Note 1.
2 During 2010, 2009 and 2008, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 reduced
postretirement benefit cost by $237, $255 and $263.
This effect is included in several line items above.
Other Changes in Plan Assets and Benefit Obligations Recognized
in Other Comprehensive Income
Postretirement
Pension Benefits Benefits
--------------------- ----------------------
2010 2009 2008 2010 2009 2008
------------------- ----- ----- ------ ----- ------ -----
Prior service
cost (credit) $ - $ 394 $ 17 $ 459 $1,863 $ 2
Reversal of
amortization
of prior
service cost
(credit) (10) 67 82 (388) (223) (223)
------------------- ---- ---- ---- ----- ----
Total recognized
in other
comprehensive
(income) loss
(pretax) $ (10) $ 461 $ 99 $ 71 $1,640 $(221)
=================== ==== ==== ==== ===== ====
The estimated prior service credits that will be amortized from
accumulated OCI into net periodic benefit cost over the next fiscal
year is $15 for pension and $694 for postretirement benefits.
Assumptions
In determining the projected benefit obligation and the net
pension and postemployment benefit cost, we used the following
significant weighted-average assumptions:
2010 2009 2008
----------------------------------------- ----- ---- ----
Discount rate for determining
projected benefit obligation at
December 31 5.80% 6.50% 7.00%
Discount rate in effect for
determining net cost 6.50% 7.00% 6.50%
Long-term rate of return on plan assets 8.50% 8.50% 8.50%
Composite rate of compensation
increase for determining projected
benefit obligation and net pension
cost (benefit) 4.00% 4.00% 4.00%
========================================== ==== ==== ====
Uncertainty in the securities markets and U.S. economy could
result in investment returns less than those assumed. Should the
securities markets decline or medical and prescription drug costs
increase at a rate greater than assumed, we would expect increasing
annual combined net pension and postretirement costs for the next
several years. Should actual experience differ from actuarial
assumptions, the projected pension benefit obligation and net
pension cost and accumulated postretirement benefit obligation and
postretirement benefit cost would be affected in future years.
61
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Discount Rate Our assumed discount rate of 5.80% at December 31,
2010, reflects the hypothetical rate at which the projected benefit
obligations could be effectively settled or paid out to
participants. We determined our discount rate based on a range of
factors, including a yield curve composed of the rates of return on
several hundred high-quality, fixed-income corporate bonds
available at the measurement date and the related expected duration
for the obligations. These bonds were all rated at least Aa3 or AA-
by one of the nationally recognized statistical rating
organizations, denominated in U.S. dollars, and neither callable,
convertible nor index linked. For the year ended December 31, 2010,
we decreased our discount rate by 0.70%, resulting in an increase
in our pension plan benefit obligation of $3,238 and an increase in
our postretirement benefit obligation of $2,817. For the year ended
December 31, 2009, we decreased our discount rate by 0.50%,
resulting in an increase in our pension plan benefit obligation of
$2,065 and an increase in our postretirement benefit obligation of
$1,847.
Expected Long-Term Rate of Return Our expected long-term rate of
return on plan assets of 8.25% for 2011 and 8.50% for 2010 reflects
the average rate of earnings expected on the funds invested, or to
be invested, to provide for the benefits included in the projected
benefit obligations. In setting the long-term assumed rate of
return, management considers capital markets future expectations
and the asset mix of the plans' investments. Actual long-term
return can, in relatively stable markets, also serve as a factor in
determining future expectations. We consider many factors that
include, but are not limited to, historical returns on plan assets,
current market information on long-term returns (e.g., long-term
bond rates) and current and target asset allocations between asset
categories. The target asset allocation is determined based on
consultations with external investment advisers. If all other
factors were to remain unchanged, we expect that a 1% decrease in
the actual long-term rate of return would cause 2011 combined
pension and postretirement cost to increase $575. However, any
differences in the rate and actual returns will be included with
the actuarial gain or loss recorded in the fourth quarter when our
plans are remeasured.
Composite Rate of Compensation Increase Our expected composite
rate of compensation increase of 4% reflects the long-term average
rate of salary increases.
Healthcare Cost Trend Our healthcare cost trend assumptions are
developed based on historical cost data, the near-term outlook and
an assessment of likely long-term trends. In addition to the
healthcare cost trend, we assume an annual 3% growth in
administrative expenses and an annual 3% growth in dental claims.
Due to benefit design changes (e.g., increased copays and
deductibles for prescription drugs and certain medical services),
we have generally experienced better-than-expected claims cost in
recent years. Our assumed annual healthcare cost trend rate for
2011 and 2010 is 5.00%.
A one percentage-point change in the assumed combined medical
and dental cost trend rate would have the following effects:
One Percentage-
One Percentage-Point Increase Point Decrease
----------------------- ----------------------------- -----------------
Increase (decrease)
in total of service
and interest cost
components $ 312 $ (252)
Increase (decrease)
in accumulated
postretirement
benefit obligation 3,606 (2,973)
======================= ===== ====================== === ============
Prior to August 2009, a majority of our labor contracts
contained an annual dollar cap for nonmanagement retirees who
retire during the term of the labor contract. However, we waived
the cap during the relevant contract periods and thus did not
collect contributions from those retirees. We have similarly waived
the cap for nonmanagement retirees who retired prior to inception
of the labor contract. We did not account for the cap in the value
of our accumulated postretirement benefit obligation (i.e., we
assumed the cap would be waived for all future contract periods).
In August 2009, the Company announced that the annual dollar caps
would be enforced for some groups beginning in 2010, with
alternative uncapped plans available. We have accounted for
participants moving to these alternative plans.
Plan Assets
Plan assets consist primarily of private and public equity,
government and corporate bonds, and real assets (real estate and
natural resources). The asset allocations of the pension plans are
maintained to meet ERISA requirements. Any plan contributions, as
determined by ERISA regulations, are made to a pension trust for
the benefit of plan participants. We maintain VEBA trusts to
partially fund postretirement benefits; however, there are no ERISA
or regulatory requirements that these postretirement benefit plans
be funded annually.
62
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The principal investment objectives are to ensure the
availability of funds to pay pension and postretirement benefits as
they become due under a broad range of future economic scenarios,
to maximize long-term investment return with an acceptable level of
risk based on our pension and postretirement obligations, and to be
broadly diversified across and within the capital markets to
insulate asset values against adverse experience in any one market.
Each asset class has broadly diversified characteristics.
Substantial biases toward any particular investing style or type of
security are sought to be avoided by managing the aggregation of
all accounts with portfolio benchmarks. Asset and benefit
obligation forecasting studies are conducted periodically,
generally every two to three years, or when significant changes
have occurred in market conditions, benefits, participant
demographics or funded status. Decisions regarding investment
policy are made with an understanding of the effect of asset
allocation on funded status, future contributions and projected
expenses. The current asset allocation policy and risk level for
the pension plan and VEBA assets are based on a study completed and
approved during 2009.
The plans' weighted-average asset targets and actual allocations
as a percentage of plan assets, including the notional exposure of
future contracts by asset categories at December 31, are as
follows:
Postretirement (VEBA)
Pension Assets Assets
--------------------------- --------------------------
Target 2010 2009 Target 2010 2009
----------------- ------- ---- ---- ------ ---- ----
Equity
securities:
25% -% 37% -%
Domestic 35 29% 34% 47 42% 39%
10% -% 29% -%
International 20 15 16 39 34 27
Fixed income 30% -% 9% -%
securities 40 34 30 19 14 20
6% -%
Real assets 16 9 8 0% - 6% 1 2
4% -%
Private equity 14 12 10 0% - 9% 4 4
1% -%
Other 0% - 5% 1 2 11 5 8
------------------ ------ ---- ---- ------ ---- ----
Total 100% 100% 100% 100%
================== ====== ==== ==== ====== ==== ====
At December 31, 2010, AT&T securities represented less than
0.5% of assets held by our pension plans and VEBA trusts.
Investment Valuation
Investments are stated at fair value. Fair value is the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. See "Fair Value Measurements" for further
discussion.
Investments in securities traded on a national securities
exchange are valued at the last reported sales price on the last
business day of the year. If no sale was reported on that date,
they are valued at the last reported bid price. Investments in
securities not traded on a national securities exchange are valued
using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. Over-the-counter (OTC)
securities and government obligations are valued at the bid price
or the average of the bid and asked price on the last business day
of the year from published sources where available and, if not
available, from other sources considered reliable. Depending on the
types and contractual terms of OTC derivatives, fair value is
measured using a series of techniques, such as Black-Scholes option
pricing models, simulation models or a combination of various
models.
Common/collective trust funds and other commingled (103-12)
investment entities are valued at quoted redemption values that
represent the net asset values of units held at year end which
management has determined approximates fair value.
Alternative investments, including investments in private
equity, real estate, natural resources, mezzanine and distressed
debt, limited partnership interest, private bonds and hedge funds
do not have readily available market values. These estimated fair
values may differ significantly from the values that would have
been used had a ready market for these investments existed, and
such differences could be material. Alternative investments not
having an established market are valued at fair value as determined
by the investment managers. Private equity, mezzanine and
distressed investments are often valued initially by the investment
managers based upon cost. Thereafter, investment managers may use
available market data to determine adjustments to carrying value
based upon observations of the trading multiples of public
companies considered comparable to the private companies being
valued. Such market data used to determine adjustments to accounts
for cash flows and company-specified issues include current
operating performance and future expectations of the investments,
changes in market outlook, and the third-party financing
environment. Private equity partnership holdings may also include
publicly held equity investments in liquid markets that are
marked-to-market at quoted public values, subject to adjustments
for large positions held. Real estate and natural resource direct
investments are valued either at amounts based upon appraisal
reports prepared by independent third-party appraisers or at
amounts as determined by internal appraisals performed by the
investment manager, which has been agreed to by an external
valuation consultant. Private bond valuation is based upon pricing
provided by an external pricing service when such pricing is
available. In the event a security is too thinly traded or narrowly
held to be priced by such a pricing service, or the price furnished
by such external pricing services is deemed inaccurate, the
managers will then solicit broker/dealer quotes (spreads or
prices). In cases where such quotes are available, fair value will
be determined based solely upon such quotes provided. Managers will
typically use a pricing matrix for determining fair value in cases
where an approved pricing service or a broker/dealer is unable to
provide a fair valuation for specific fixed-rate securities such as
many private placements. New fixed-rate securities will be
initially valued at cost at the time of purchase. Thereafter, each
bond will be assigned a spread from a pricing matrix that will be
added to current Treasury rates. The pricing matrix derives spreads
for each bond based on external market data, including the current
credit rating for the bonds, credit spreads to Treasuries for each
credit rating, sector add-ons or credits, issue specific add-ons or
credits as well as call or other options.
63
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Purchases and sales of securities are recorded as of the trade
date. Realized gains and losses on sales of securities are
determined on the basis of average cost. Interest income is
recognized on the accrual basis. Dividend income is recognized on
the ex-dividend date.
Non-interest bearing cash, temporary assets and overdrafts are
valued at cost, which approximates fair value.
Fair Value Measurements
See Note 9 "Fair Value Measurements and Disclosure" for a
discussion of fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value.
64
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The following table sets forth by level, within the fair value
hierarchy, the pension and postretirement assets and liabilities at
fair value as of December 31, 2010:
Pension Assets and Liabilities at Fair Value as of
December 31, 2010
-------------------------------------------------------------------
Level 1 Level 2 Level 3 Total
------- ------- ------- -------
Non-interest bearing cash $ 100 $ - $ - $ 100
Interest bearing cash - 74 - 74
Foreign exchange contract - 57 - 57
Equity securities:
Domestic equities 9,692 16 - 9,708
International equities 4,960 4 - 4,964
Fixed income securities:
Asset-backed
securities - 730 6 736
Mortgage-backed
securities - 2,744 - 2,744
Collateralized
mortgage-backed
securities - 335 - 335
Collateralized
mortgage
obligations/REMICS - 565 - 565
Other corporate and
other bonds and
notes 430 4,637 - 5,067
U.S. Government and
governmental
agencies - 1,831 - 1,831
Municipal bonds - 233 - 233
Convertible and
preferred securities 87 204 - 291
Fixed income funds - - 377 377
Registered investment
companies - 1 - 1
Private equity funds 35 1 5,821 5,857
Real assets:
Real assets - - 2,383 2,383
Real estate funds - 448 1,545 1,993
Commingled funds:
Interest bearing
investments - 2,351 - 2,351
Hedge funds - 831 50 881
Equities - 1,769 - 1,769
Fixed income - 1,101 - 1,101
Market value of
securities on loan:
Interest bearing
investments - 209 - 209
Equity securities:
Domestic 2,113 20 - 2,133
International 320 - - 320
Fixed income securities:
Asset-backed securities - 9 - 9
Mortgage-backed securities - 24 - 24
Collateralized
mortgage-backed securities - 8 - 8
Other corporate and other
bonds and notes 42 763 - 805
U.S. Government and
governmental agencies - 2,028 - 2,028
Convertible and preferred
securities 12 16 - 28
Securities lending
collateral 2,558 3,110 - 5,668
Variation margin
receivable 3 - - 3
------ ------ ------ ------
Assets at fair value 20,352 24,119 10,182 54,653
------ ------ ------ ------
Overdrafts 3 4 - 7
Unrealized depreciation
on foreign currency
contracts - 57 - 57
Investments sold short 405 24 140 569
Written options payable 1 - - 1
------ ------ ------ ------
Liabilities at fair value 409 85 140 634
------------------------------- ------ ------ ------ ------
Total plan net assets at
fair value $19,943 $24,034 $10,042 $54,019
------------------------------- ------ ------ ------ ------
Other assets
(liabilities)1 (6,398)
------------------------------- ------ ------ ------ ------
Total Plan Net Assets $47,621
=============================== ====== ====== ====== ======
1 Other assets (liabilities) include accounts receivable,
accounts payable and net adjustment for securities lending
payable.
65
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Postretirement Assets and Liabilities at Fair Value
as of December 31, 2010
-------------------------------------------------------------------------
Level 1 Level 2 Level 3 Total
--------- --------- --------- -------
Interest bearing investments $ 1 $ 525 $ - $ 526
Equity securities:
International 3,373 - - 3,373
Domestic 3,361 1 - 3,362
Fixed income securities:
Asset-backed
securities - 51 - 51
Collateralized
mortgage-backed
securities - 37 - 37
Collateralized
mortgage obligations - 43 - 43
Other corporate and
other bonds and
notes 20 308 19 347
U.S. Government and
governmental
agencies 1 574 - 575
Registered investment
companies 169 - - 169
Commingled funds:
Interest bearing
investments - 295 - 295
Hedge funds - 77 26 103
Equities - 1,167 - 1,167
Fixed income 80 1,526 - 1,606
Private equity assets 12 3 496 511
Real assets - - 157 157
Market value of securities
on loan:
Equity securities:
International 245 - - 245
Domestic 361 - - 361
Fixed income securities:
Other
corporate
and other
bonds and
notes - 15 - 15
U.S.
Government
and
governmental
agencies 5 55 - 60
Commingled funds
Private equity
assets 5 - - 5
Securities lending
collateral 636 71 - 707
Receivable for foreign
exchange contracts 2 - - 2
----- ----- ----- ------
Assets at fair value 8,271 4,748 698 13,717
----- ----- ----- ------
Foreign exchange contracts
payable 2 - - 2
----- ----- ----- ------
Liabilities at fair
value 2 - - 2
------------------------------- ----- ----- ----- ------
Total plan net assets at fair
value $ 8,269 $ 4,748 $ 698 $13,715
------------------------------- ----- ----- ----- ------
Other assets (liabilities)1 (968)
------------------------------- ----- ----- ----- ------
Total Plan Net Assets $12,747
=============================== ===== ===== ===== ======
1 Other assets (liabilities) include accounts receivable,
accounts payable and net adjustment for securities lending
payable.
66
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The table below sets forth a summary of changes in the fair
value of the Level 3 pension and postretirement assets for the year
ended December 31, 2010:
Fixed Private
Pension Income Hedge Equity Real
Assets Equities-Domestic Funds Funds Funds Assets Total
------------------ ------------------- ------- ------ -------- ------- -------
Balance,
beginning
of year $ 1 $ 337 $ 102 $ 4,874 $ 3,297 $ 8,611
Transfers
into Level
3 (140) 3 - - - (137)
Transfers
out of
Level 3 - (1) - - - (1)
Realized
gains
(losses) (2) 41 - 442 92 573
Unrealized
gains
(losses) (1) 15 (52) 950 628 1,540
Purchases,
sales,
issuances
and
settlements
(net) 2 (12) - (445) (89) (544)
------------------ --------------- ------ ----- ------- ------ ------
Balance, end
of year $ (140) $ 383 $ 50 $ 5,821 $ 3,928 $10,042
================== =============== ====== ===== ======= ====== ======
Private
Postretirement Fixed Income Hedge Equity Real
Assets Securities Fund Assets Assets Total
------------------ ------------ ------ -------- ------- -------
Balance,
beginning of
year $ 19 $ 72 $ 480 $ 171 $ 742
Transfers into
Level 3 - - (12) - (12)
Realized gains
(losses) - - - 14 14
Unrealized
gains
(losses) - - 7 (18) (11)
Purchases,
sales,
issuances and
settlements
(net) - (46) 21 (10) (35)
------------------ -------- ----- ------- ------ ---
Balance, end of
year $ 19 $ 26 $ 496 $ 157 $ 698
================== ======== ===== ======= ====== ===
67
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The following tables set forth by level, within the fair value
hierarchy, the pension and postretirement assets and liabilities at
fair value as of December 31, 2009:
Pension Assets and Liabilities at Fair Value as of
December 31, 2009
---------------------------------------------------------------------
Level 1 Level 2 Level 3 Total
------- ------- --------- -------
Non-interest bearing cash $ 464 $ - $ - $ 464
Interest bearing cash - 248 - 248
Foreign exchange contract - 22 - 22
Equity securities:
Domestic equities 8,704 22 1 8,727
International equities 5,367 13 - 5,380
Fixed income securities:
Asset-backed
securities - 999 - 999
Mortgage-backed
securities - 1,727 - 1,727
Collateralized
mortgage-backed
securities - 499 - 499
Collateralized
mortgage
obligations/REMICS - 925 - 925
Other corporate and
other bonds and
notes - 4,618 - 4,618
U.S. Government and
governmental
agencies - 953 - 953
Municipal bonds - 119 - 119
Convertible and
preferred securities 91 200 - 291
Fixed income funds - - 337 337
Registered investment
companies 509 - - 509
Private equity funds 36 - 4,874 4,910
Real assets:
Real assets - - 1,955 1,955
Real estate funds - 352 1,342 1,694
Commingled funds:
Interest bearing
investments - 2,212 - 2,212
Hedge funds - 751 102 853
Equities - 3,213 - 3,213
Fixed income - 985 - 985
Market value of
securities on loan:
Interest bearing
investments - 300 - 300
Equity securities:
Domestic 1,943 1 - 1,944
International 562 15 - 577
Fixed income securities:
Asset-backed securities - 7 - 7
Mortgage-backed securities - 588 - 588
Collateralized
mortgage-backed securities - 3 - 3
Collateralized mortgage
obligations/REMICS - 32 - 32
Other corporate and other
bonds and notes - 687 - 687
U.S. Government and
governmental agencies - 2,304 - 2,304
Convertible and preferred
securities 23 8 - 31
Securities lending
collateral - 6,606 - 6,606
Receivable for
investments sold short 191 - - 191
------ ------ ----- ------
Assets at fair value 17,890 28,409 8,611 54,910
------ ------ ----- ------
Overdrafts 1 - - 1
Unrealized depreciation
on foreign currency
contracts - 20 - 20
Investments sold short 435 290 - 725
Written options payable 4 - - 4
Variation margin payable 30 - - 30
------ ------ ----- ------
Liabilities at fair value 470 310 - 780
------------------------------- ------ ------ ----- ------
Total plan net assets at
fair value $17,420 $28,099 $ 8,611 $54,130
------------------------------- ------ ------ ----- ------
Other assets
(liabilities)1 (7,257)
------------------------------- ------ ------ ----- ------
Total Plan Net Assets $46,873
=============================== ====== ====== ===== ======
1 Other assets (liabilities) include accounts receivable,
accounts payable and net adjustment for securities lending
payable.
68
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Postretirement Assets and Liabilities at Fair Value
as of December 31, 2009
-----------------------------------------------------------------
Level Level Level
1 2 3 Total
------ ------ ------ ----------
Interest bearing investments $ 372 $ - $ - $ 372
Equity securities:
International 2,121 - - 2,121
Domestic 2,363 11 - 2,374
Fixed income securities:
Asset-backed
securities - 49 - 49
Collateralized
mortgage-backed
securities - 11 - 11
Collateralized
mortgage obligations - 57 - 57
Other corporate and
other bonds and
notes - 276 19 295
U.S. Government and
governmental
agencies 16 301 - 317
Registered investment
companies 182 - - 182
Futures (1) - - (1)
Commingled funds:
Interest bearing
investments - 468 - 468
Hedge funds - 155 72 227
Equities 102 2,108 - 2,210
Fixed income 75 1,449 - 1,524
Private equity assets 15 6 480 501
Real assets - - 171 171
Market value of securities
on loan:
Equity securities:
International 248 - - 248
Domestic 396 - - 396
Fixed income securities:
Other
corporate
and other
bonds and
notes - 13 - 13
U.S.
Government
and
governmental
agencies 25 50 - 75
Commingled funds
Private equity assets 6 - - 6
Securities lending
collateral 700 65 - 765
Receivable for foreign
exchange contracts 10 - - 10
----- ----- ----- ------
Assets at fair value 6,630 5,019 742 12,391
----- ----- ----- ------
Foreign exchange contracts
payable 10 - - 10
Written options - - - -
----- ----- ----- ------
Liabilities at fair value 10 - - 10
------------------------------- ----- ----- ----- ------
Total plan net assets at fair
value $6,620 $5,019 $ 742 $12,381
------------------------------- ----- ----- ----- ------
Other assets (liabilities)1 (868)
------------------------------- ----- ----- ----- ------
Total Plan Net Assets $11,513
=============================== ===== ===== ===== ======
1 Other assets (liabilities) include accounts receivable,
accounts payable and net adjustment for securities lending
payable.
69
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The table below sets forth a summary of changes in the fair
value of the Level 3 pension and postretirement assets for the year
ended December 31, 2009:
Fixed Private
Pension Income Hedge Equity Real
Assets Equities-Domestic Funds Funds Funds Assets Total
------------------ ------------------- ------- ------ -------- ------- -------
Balance,
beginning
of year $ 1 $ 248 $ 114 $ 5,152 $ 5,281 $10,796
Realized
gains
(losses) - 19 - 97 (47) 69
Unrealized
gains
(losses) (1) (7) - (582) (1,613) (2,203)
Purchases,
sales,
issuances
and
settlements
(net) 1 77 (12) 207 (324) (51)
------------------ --- -------------- ------ ----- ------- ------ ------
Balance, end
of year $ 1 $ 337 $ 102 $ 4,874 $ 3,297 $ 8,611
================== === ============== ====== ===== ======= ====== ======
Private
Postretirement Equity Fixed Income Hedge Equity Real
Assets Securities Securities Funds Assets Assets Total
--------------------- ------------ ------------ ------ -------- ------- -----
Balance,
beginning of
year $ 6 $ - $ 55 $ 553 $ 265 $ 879
Realized gains
(losses) - - - 23 (34) (11)
Unrealized
gains
(losses) - - - (74) (64) (138)
Purchases,
sales,
issuances and
settlements
(net) (6) 19 17 (22) 4 12
--------------------- -------- -------- ----- ------- ------ ----
Balance, end of
year $ - $ 19 $ 72 $ 480 $ 171 $ 742
===================== ======== ======== ===== ======= ====== ====
Estimated Future Benefit Payments
Expected benefit payments are estimated using the same
assumptions used in determining our benefit obligation at December
31, 2010. Because benefit payments will depend on future employment
and compensation levels, average years employed and average life
spans, among other factors, changes in any of these factors could
significantly affect these expected amounts. The following table
provides expected benefit payments under our pension and
postretirement plans:
Postretirement Medicare Subsidy
Pension Benefits Benefits Receipts
------------- ----------------- -------------------- -------------------
2011 $ 5,912 $ 2,594 $ (114)
2012 6,191 2,558 (124)
2013 4,008 2,546 (134)
2014 4,002 2,483 (144)
2015 4,025 2,430 (154)
Years 2016 -
2020 20,211 11,874 (926)
============= === ============ ==== ============== ===== ============
Supplemental Retirement Plans
We also provide certain senior- and middle-management employees
with nonqualified, unfunded supplemental retirement and savings
plans. While these plans are unfunded, we have assets in a
designated nonbankruptcy remote trust that are independently
managed and used to provide for these benefits. These plans include
supplemental pension benefits as well as compensation-deferral
plans, some of which include a corresponding match by us based on a
percentage of the compensation deferral.
We use the same significant assumptions for the discount rate
and composite rate of compensation increase used in determining the
projected benefit obligation and the net pension and postemployment
benefit cost. The following tables provide the plans' benefit
obligations and fair value of assets at December 31 and the
components of the supplemental retirement pension benefit cost. The
net amount recorded as "Other noncurrent liabilities" on our
consolidated balance sheets at December 31, 2010, was $2,270 and
$2,139 at December 31, 2009.
70
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The following table provides information for our supplemental
retirement plans with accumulated benefit obligations in excess of
plan assets:
2010 2009
------------------------------- ------- -------
Projected benefit obligation $(2,270) $(2,139)
Accumulated benefit obligation (2,154) (2,058)
Fair value of plan assets - -
=============================== ====== ======
The following tables present the components of net periodic
benefit cost and other changes in plan assets and benefit
obligations recognized in OCI:
Net Periodic Benefit Cost 2010 2009 2008
-------------------------------------------------- ---- ---- -----
Service cost - benefits earned during the
period $ 12 $ 11 $ 13
Interest cost on projected benefit obligation 134 140 141
Amortization of prior service cost 2 5 6
Actuarial (gain) loss1 186 82 (104)
-------------------------------------------------- --- --- ----
Net supplemental retirement pension cost $334 $238 $ 56
================================================== === === ====
1 Amounts for 2008 and 2009 are adjusted for the change in
accounting policy as discussed in Note 1.
Other Changes Recognized in Other Comprehensive Income 2010 2009
------------------------------------------------------- ------ ------
Prior service cost (credit) $ (5) $ (5)
Reversal of amortization of prior service cost (2) (3)
-------------------------------------------------------
Total recognized in other comprehensive income $ (7) $ (8)
=======================================================
The estimated prior service cost for our supplemental retirement
plan benefits that will be amortized from accumulated OCI into net
periodic benefit cost over the next fiscal year is $2.
Deferred compensation expense was $96 in 2010, $95 in 2009 and
$54 in 2008. Our deferred compensation liability, included in
"Other noncurrent liabilities," was $1,021 at December 31, 2010,
and $1,031 at December 31, 2009.
Contributory Savings Plans
We maintain contributory savings plans that cover substantially
all employees. Under the savings plans, we match in cash or company
stock a stated percentage of eligible employee contributions,
subject to a specified ceiling. There are no debt-financed shares
held by the Employee Stock Ownership Plans, allocated or
unallocated.
Our match of employee contributions to the savings plans is
fulfilled with purchases of our stock on the open market or company
cash. Benefit cost is based on the cost of shares or units
allocated to participating employees' accounts and was $607, $586
and $664 for the years ended December 31, 2010, 2009 and 2008.
NOTE 12. SHARE-BASED PAYMENT
We account for our share-based payment arrangements based on the
fair value of the awards on their respective grant date, which may
affect our ability to fully realize the value shown on our
consolidated balance sheets of deferred tax assets associated with
compensation expense. Full realization of these deferred tax assets
requires stock options to be exercised at a price equaling or
exceeding the sum of the exercise price plus the fair value of the
options at the grant date. We record a valuation allowance when our
future taxable income is not expected to be sufficient to recover
the asset. Accordingly, there can be no assurance that the current
stock price of our common shares will rise to levels sufficient to
realize the entire tax benefit currently reflected on our
consolidated balance sheets. However, to the extent we generate
excess tax benefits (i.e., that additional tax benefits in excess
of the deferred taxes associated with compensation expense
previously recognized) the potential future impact on income would
be reduced.
At December 31, 2010, we had various share-based payment
arrangements, which we describe in the following discussion. The
compensation cost recognized for those plans was included in
operating expenses in our consolidated statements of income. The
total income tax benefit recognized in the consolidated statements
of income for share-based payment arrangements was $196 for 2010,
compared to $121 for 2009 and $63 for 2008.
71
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Under our various plans, senior and other management employees
and nonemployee directors have received stock options, performance
stock units, and other nonvested stock units. Stock options issued
through December 31, 2010, carry exercise prices equal to the
market price of our stock at the date of grant. Prior to 2006,
depending on the grant, stock options vesting could occur up to
five years from the date of grant, with most options vesting
ratably over three years. Stock options granted as part of a
deferred compensation plan do not have a vesting period; since
2006, these are the only options issued by AT&T. We grant
performance stock units, which are nonvested stock units, to key
employees based upon our stock price at the date of grant and award
them in the form of AT&T common stock and cash at the end of a
three-year period, subject to the achievement of certain
performance goals. We treat the cash portion of these awards as a
liability. Other nonvested stock units are valued at the market
price of our common stock at the date of grant and vest typically
over a two- to five-year period. As of December 31, 2010, we were
authorized to issue up to 97 million shares of common stock (in
addition to shares that may be issued upon exercise of outstanding
options or upon vesting of performance stock units or other
nonvested stock units) to officers, employees, and directors
pursuant to these various plans.
The compensation cost that we have charged against income for
our share-based payment arrangements was as follows:
2010 2009 2008
------------------------ ---- ---- ----
Performance stock units $421 $289 $151
Stock options 6 8 11
Restricted stock 85 21 9
Other 1 (2) (6)
------------------------ --- --- ---
Total $513 $316 $165
======================== === === ===
The estimated fair value of the options when granted is
amortized to expense over the options' vesting or required service
period. The fair value for these options, for the indicated years
ended, was estimated at the date of grant based on the expected
life of the option and historical exercise experience, using a
Black-Scholes option pricing model with the following
weighted-average assumptions:
2010 2009 2008
------------------------------ ------ ----- -----
Risk-free interest rate 3.06% 3.17% 3.96%
Dividend yield 6.61% 6.82% 4.36%
Expected volatility factor 15.75% 19.65% 18.76%
Expected option life in years 7.00 7.00 7.00
=============================== ===== ===== =====
A summary of option activity as of December 31, 2010, and
changes during the year then ended, is presented below (shares in
millions):
Weighted-
Average
Remaining
Contractual Aggregate
Weighted- Average Term Intrinsic Value
Options Shares Exercise Price (Years) 1
------------ ------- ----------------- ----------- ----------------
Outstanding
at January
1, 2010 178 $ 36.79 1.86 $ 115
Granted 4 25.45
Exercised (2) 22.27
Forfeited or
expired (50) 42.13
------------- ------ ------ --------- ----------- ----- ---------
Outstanding
at December
31, 2010 130 34.60 1.69 $ 150
------------- ------ ------ --------- ----------- ----- ---------
Exercisable
at December
31, 2010 125 $ 34.90 1.43 $ 134
============= ====== ====== ========= =========== ===== =========
1 Aggregate intrinsic value includes only those options
with intrinsic value (options where the exercise price
is below the market price).
72
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The weighted-average fair value of each option granted during
the period was $1.34 for 2010, compared to $1.84 for 2009 and $5.04
for 2008. The total intrinsic value of options exercised during
2010 was $13, compared to $5 for 2009, and $78 for 2008.
It is our policy to satisfy share option exercises using our
treasury shares. The actual excess tax benefit realized for the tax
deductions from option exercises from these arrangements was $2 for
2010, compared to $0 for 2009 and $10 for 2008.
A summary of the status of our nonvested stock units, which
includes performance stock units as of December 31, 2010, and
changes during the year then ended is presented as follows (shares
in millions):
Weighted-Average Grant-Date
Nonvested Stock Units Shares Fair Value
------------------------------- ------- -----------------------------
Nonvested at January 1, 2010 26 $ 26.48
Granted 15 25.48
Vested (12) 34.64
Forfeited - 25.92
Nonvested at December 31, 2010 29 $ 25.30
================================ ====== ===== ======================
As of December 31, 2010, there was $414 of total unrecognized
compensation cost related to nonvested share-based payment
arrangements granted. That cost is expected to be recognized over a
weighted-average period of 1.81 years. The total fair value of
shares vested during the year was $396 for 2010, compared to $471
for 2009 and $554 for 2008.
NOTE 13. STOCKHOLDERS' EQUITY
From time to time, we repurchase shares of common stock for
distribution through our employee benefit plans or in connection
with certain acquisitions. In December 2010, the Board of Directors
authorized the repurchase of up to 300 million shares of our common
stock. As of December 31, 2010, we repurchased no shares under this
program. In December 2007, the Board of Directors authorized the
repurchase of up to 400 million shares of our common stock. This
authorization replaced previous authorizations and expired on
December 31, 2009. As of December 31, 2009, we had repurchased
approximately 164 million shares under this program.
During the Annual Meeting of Shareholders in April 2009,
shareholders approved the increase of authorized common shares of
AT&T stock from 7 billion to 14 billion, with no change to the
currently authorized 10 million preferred shares of AT&T stock.
As of December 31, 2010 and 2009, no preferred shares were
outstanding.
In December 2010, the Company declared its quarterly dividend,
which reflected an increase in the amount per share of common stock
to $0.43. In December 2009, the Company declared its quarterly
dividend, increasing the amount per share of common stock from
$0.41 to $0.42.
73
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
NOTE 14. ADDITIONAL FINANCIAL INFORMATION
December 31,
-----------------
Consolidated Balance Sheets 2010 2009
------------------------------------- ------ ------- -------
Accounts payable and accrued
liabilities:
Accounts payable $ 7,437 $ 7,511
Accrued rents and other 2,761 3,333
Accrued payroll and commissions 2,225 2,392
Deferred directory revenue 1,278 1,491
Accrued interest 1,601 1,717
Compensated future absences 538 559
Current portion of employee
benefit obligation 2,394 2,021
Liabilities related to
discontinued operations - 491
Other 1,821 1,745
------------------------------------- ------ ------ ------
Total accounts payable and accrued
liabilities $20,055 $21,260
===================================== ====== ====== ======
Deferred compensation (included in
Other noncurrent liabilities) $ 1,572 $ 1,538
===================================== ====== ====== ======
Consolidated Statements of Income 2010 2009 2008
------------------------------------- ------ ------ ------
Advertising expense $2,989 $ 2,787 $ 3,050
===================================== ===== ====== ======
Interest expense incurred $3,766 $ 4,108 $ 4,028
Capitalized interest (772) (740) (659)
------------------------------------- ----- ------ ------
Total interest expense $2,994 $ 3,368 $ 3,369
===================================== ===== ====== ======
Consolidated Statements of Cash Flows 2010 2009 2008
------------------------------------- ----- ------ ------
Cash paid during the year for:
Interest $3,882 $ 3,862 $ 3,705
Income taxes, net of refunds 3,538 4,471 5,307
===================================== ===== ====== ======
Consolidated Statements of Changes in
Stockholders' Equity 2010 2009 2008
---------------------------------------- ------ ------ -----
Foreign currency translation adjustment $ (494) $ (765) $(912)
Unrealized gains on available-for-sale
securities 316 324 100
Unrealized gains (losses) on cash flow
hedges (180) 142 (483)
Defined benefit postretirement plans1 3,070 2,979 878
Other - (2) (1)
---------------------------------------- ----- ----- ----
Accumulated other comprehensive income
(loss) $2,712 $2,678 $(418)
======================================== ===== ===== ====
1 Amounts for 2009 and 2008 are adjusted for the change in
accounting policy as discussed in Note 1.
No customer accounted for more than 10% of consolidated revenues
in 2010, 2009 or 2008.
A majority of our employees are represented by labor unions as
of year-end 2010.
NOTE 15. CONTINGENT LIABILITIES
We are party to numerous lawsuits, regulatory proceedings and
other matters arising in the ordinary course of business. In
accordance with GAAP standards for contingencies, in evaluating
these matters on an ongoing basis, we take into account amounts
already accrued on the balance sheet. In our opinion, although the
outcomes of these proceedings are uncertain, they should not have a
material adverse effect on our financial position, results of
operations or cash flows.
We have contractual obligations to purchase certain goods or
services from various other parties. Our purchase obligations are
expected to be approximately $3,158 in 2011, $4,904 in total for
2012 and 2013, $1,934 in total for 2014 and 2015 and $607 in total
for years thereafter.
See Note 9 for a discussion of collateral and credit-risk
contingencies.
74
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables represent our quarterly financial
results:
2010 Calendar Quarter
-----------------------------------
First3 Second4 Third5 Fourth6 Annual
------------------- ------- ------- ------- ------- --------
Total Operating
Revenues $30,530 $30,808 $31,581 $31,361 $124,280
Operating Income2 5,971 6,083 5,431 2,088 19,573
Income (Loss)
from
Discontinued
Operations 2 (5) 780 2 779
Net Income2 2,540 4,082 12,396 1,161 20,179
Income from
Continuing
Operations
Attributable to
AT&T2 2,451 4,008 11,539 1,087 19,085
Net Income
Attributable to
AT&T2 2,453 4,003 12,319 1,089 19,864
------------------- ------ ------ ------ ------ -------
Basic Earnings
Per Share from
Continuing
Operations
Attributable to
AT&T1,2 $ 0.42 $ 0.68 $ 1.95 $ 0.18 $ 3.23
Basic Earnings
Per Share from
Discontinued
Operations
Attributable to
AT&T1,2 - - 0.13 - 0.13
------------------- ------ ------ ------ ------ -------
Basic Earnings
Per Share
Attributable to
AT&T1,2 $ 0.42 $ 0.68 $ 2.08 $ 0.18 $ 3.36
=================== ====== ====== ====== ====== =======
Diluted Earnings
Per Share from
Continuing
Operations
Attributable to
AT&T1,2 $ 0.41 $ 0.67 $ 1.94 $ 0.18 $ 3.22
Diluted Earnings
Per Share from
Discontinued
Operations
Attributable to
AT&T1,2 - - 0.13 - 0.13
------------------- ------ ------ ------ ------ -------
Diluted Earnings
Per Share
Attributable to
AT&T1,2 $ 0.41 $ 0.67 $ 2.07 $ 0.18 $ 3.35
=================== ====== ====== ====== ====== =======
Stock Price
High $ 28.73 $ 26.75 $ 29.15 $ 29.56
Low 24.61 23.78 23.88 27.49
Close 25.84 24.19 28.60 29.38
=================== ====== ====== ====== ====== =======
1 Quarterly earnings per share impacts may not add to
full-year earnings per share impacts due to the difference
in weighted average common shares for the quarters
versus the weighted average common shares for the
year.
2 Amounts for first, second and third quarters are adjusted
for the change in accounting policy as discussed in
Note 1 and that were included in our January 13, 2011
Form 8-K filing with the Securities and Exchange Commission.
3 Includes a charge to income tax expense related to
Medicare Part D subsidies (Note 10).
4 Includes a gain on our TI exchange (Note 7).
5 Includes an IRS tax settlement (Note 10).
6 Includes an actuarial loss on pension and postretirement
benefit plans (Note 10) and severance (Note 1).
75
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
2009 Calendar Quarter
-----------------------------------
First Second Third Fourth Annual
------------------- ------- ------- ------- ------- --------
Total Operating
Revenues $30,457 $30,614 $30,734 $30,708 $122,513
Operating Income2 5,684 5,441 5,311 4,564 21,000
Income (Loss)
from
Discontinued
Operations (3) 2 7 14 20
Net Income2 3,167 3,239 3,237 2,804 12,447
Income from
Continuing
Operations
Attributable to
AT&T2 3,094 3,160 3,148 2,716 12,118
Net Income
Attributable to
AT&T2 3,091 3,162 3,155 2,730 12,138
------------------- ------ ------ ------ ------ -------
Basic Earnings
Per Share from
Continuing
Operations
Attributable to
AT&T1,2 $ 0.52 $ 0.54 $ 0.53 $ 0.46 $ 2.06
Basic Earnings
Per Share from
Discontinued
Operations
Attributable to
AT&T1,2 - - - - -
------------------- ------ ------ ------ ------ -------
Basic Earnings
Per Share
Attributable to
AT&T1,2 $ 0.52 $ 0.54 $ 0.53 $ 0.46 $ 2.06
=================== ====== ====== ====== ====== =======
Diluted Earnings
Per Share from
Continuing
Operations
Attributable to
AT&T1,2 $ 0.52 $ 0.53 $ 0.53 $ 0.46 $ 2.05
Diluted Earnings
Per Share from
Discontinued
Operations
Attributable to
AT&T1,2 - - - - -
------------------- ------ ------ ------ ------ -------
Diluted Earnings
Per Share
Attributable to
AT&T1,2 $ 0.52 $ 0.53 $ 0.53 $ 0.46 $ 2.05
=================== ====== ====== ====== ====== =======
Stock Price
High $ 29.46 $ 27.09 $ 27.68 $ 28.61
Low 21.44 23.38 23.19 25.00
Close 25.20 24.84 27.01 28.03
=================== ====== ====== ====== ====== =======
1 Quarterly earnings per share impacts may not add to
full-year earnings per share impacts due to the difference
in weighted average common shares for the quarters
versus the weighted average common shares for the
year.
2 Amounts for 2009 are adjusted for the change in accounting
policy as discussed in Note 1.
76
Report of Management
The consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting principles. The
integrity and objectivity of the data in these financial
statements, including estimates and judgments relating to matters
not concluded by year end, are the responsibility of management, as
is all other information included in the Annual Report, unless
otherwise indicated.
The financial statements of AT&T Inc. (AT&T) have been
audited by Ernst & Young LLP, Independent Registered Public
Accounting Firm. Management has made available to Ernst & Young
LLP all of AT&T's financial records and related data, as well
as the minutes of stockholders' and directors' meetings.
Furthermore, management believes that all representations made to
Ernst & Young LLP during its audit were valid and
appropriate.
Management maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed by
AT&T 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 by the Securities and Exchange Commission's rules and
forms.
Management also seeks to ensure the objectivity and integrity of
its financial data by the careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communication programs aimed at ensuring that
its policies, standards and managerial authorities are understood
throughout the organization.
The Audit Committee of the Board of Directors meets periodically
with management, the internal auditors and the independent auditors
to review the manner in which they are performing their respective
responsibilities and to discuss auditing, internal accounting
controls and financial reporting matters. Both the internal
auditors and the independent auditors periodically meet alone with
the Audit Committee and have access to the Audit Committee at any
time.
Assessment of Internal Control
The management of AT&T is responsible for establishing and
maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) or 15d-15(f) under the Securities
Exchange Act of 1934. AT&T's internal control system was
designed to provide reasonable assurance to the company's
management and Board of Directors regarding the preparation and
fair presentation of published financial statements.
AT&T management assessed the effectiveness of the company's
internal control over financial reporting as of December 31, 2010.
In making this assessment, it used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework. Based on its
assessment, AT&T management believes that, as of December 31,
2010, the Company's internal control over financial reporting is
effective based on those criteria.
Ernst & Young LLP, the independent registered public
accounting firm that audited the financial statements included in
this Annual Report, has issued an attestation report on the
company's internal control over financial reporting.
/s/ Randall Stephenson. /s/ Richard G. Lindner.
Randall Stephenson Richard G. Lindner
Chairman of the Board, Senior Executive Vice President and
Chief Executive Officer and President Chief Financial
Officer
77
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of AT&T Inc.
We have audited the accompanying consolidated balance sheets of
AT&T Inc. (the Company) as of December 31, 2010 and 2009, and
the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2010. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2010 and 2009,
and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2010,
in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements,
the Company has elected to change its method of accounting for
actuarial gains and losses and the calculation of expected return
on plan assets related to its pension and other postretirement
benefit plans in 2010.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December
31, 2010, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 28, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP.
Dallas, Texas
February 28, 2011
78
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
The Board of Directors and Shareholders of AT&T Inc.
We have audited AT&T Inc.'s (the Company) internal control
over financial reporting as of December 31, 2010, based on criteria
established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). The Company's management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Report of
Management. Our responsibility is to express an opinion on the
company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of December 31, 2010
and 2009, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2010 and our report
dated February 28, 2011 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP.
Dallas, Texas
February 28, 2011
79
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The company news service from the London Stock Exchange
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