TIDM58KM
RNS Number : 6208Y
AT & T Inc.
02 March 2012
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, 2011
OR
.. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas, 75202
Telephone Number 210-821-4105
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 registrant's 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. [ X ]
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 $31.41 per share on June 30, 2011,
the aggregate market value of our voting and non-voting common
stock held by non-affiliates was $186.1 billion.
At January 31, 2012, common shares outstanding were
5,928,751,656.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of AT&T Inc.'s Annual Report to Stockholders for the fiscal year ended December 31,
2011 (Parts I and II).
(2) Portions of AT&T Inc.'s Notice of 2012 Annual Meeting and Proxy Statement dated on or about
March 9, 2012 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
TABLE OF CONTENTS
Item Page
PART I
1. Business 1
1A. Risk Factors 8
2. Properties 9
3. Legal Proceedings 9
4. Mine Safety Disclosures 9
Executive Officers of the Registrant 10
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters 11
and Issuer Purchases of Equity Securities
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
7A. Quantitative and Qualitative Disclosures about Market Risk 11
8. Financial Statements and Supplementary Data 11
9. Changes in and Disagreements with Accountants on Accounting 11
and Financial Disclosure
9A. Controls and Procedures 11
9B. Other Information 12
PART III
10. Directors, Executive Officers and Corporate Governance 13
11. Executive Compensation 13
12. Security Ownership of Certain Beneficial Owners and 14
Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions, and Director Independence 15
14. Principal Accountant Fees and Services 15
PART IV
15. Exhibits and Financial Statement Schedules 15
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 provider 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-verse(R) 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
customers' lives more convenient and productive and foster
competition and further innovation in the communications and
entertainment industry. In 2012, 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 United States 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. At
the end of 2011, over 80% of our data traffic was carried over this
enhanced backhaul. Our network provides superior mobile broadband
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, 2011, we served 103 million
subscribers. We have also begun transitioning our network to next
generation LTE technology and expect this network to cover
approximately 80% of the U.S. population and to be largely complete
by the end of 2013. 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 data services to customers, which in turn, will
depend on the availability of additional spectrum. We are facing
significant spectrum and capacity constraints on our wireless
network in certain markets. We expect such constraints to increase
and expand to additional markets in the coming years. While we are
continuing to invest significant capital in expanding our network
capacity, our capacity constraints could affect the quality of
existing voice and data services and our ability to launch new,
advanced wireless broadband services, unless we are able to obtain
more spectrum. Any spectrum solution will require that the FCC
makes new spectrum available to the wireless industry and allows us
to obtain the spectrum we need more immediately to meet the needs
of our customers. We will continue to attempt to address spectrum
and capacity constraints on a market-by-market basis.
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
expanding our AT&T U-verse high-speed broadband and video
offerings and on developing IP-based services that allow customers
to unite their home or business wireline services with their
wireless service.
U-verse Services During 2011, we continued to expand our
offerings of U-verse High Speed Internet and TV services.
As of December 31, 2011, we reached our deployment goal of 30
million living units and have now passed 30.3 million living units
(constructed housing units as well as platted housing lots). We are
marketing U-verse services to 78% of those units and had 3.8
million subscribers by year-end 2011. During 2012, we will continue
our efforts to increase sales to this base.
We believe that our U-verse TV service is a "video service"
under the Federal Communications Act. However, some cable providers
and municipalities have claimed that certain IP services should be
treated as a traditional cable service and therefore subject to the
applicable state and local cable regulation. Certain municipalities
have delayed our requests to offer this service or have refused us
permission to use our existing or new right-of-ways to deploy or
activate our U-verse-related equipment, services and products,
resulting in litigation. Petitions have been filed at the FCC
alleging that the manner in which we provision "public, educational
and governmental" (PEG) programming over our U-verse TV service
conflicts with federal law, and a lawsuit has been filed in a
California state superior court raising similar allegations under
California law. If courts having jurisdiction where we have
significant deployments of our U-verse services were to decide that
federal, state and/or local cable regulation were applicable to our
U-verse services, or if the FCC, state agencies or the courts were
to rule that we must deliver PEG programming in a manner
substantially different from the way we do today or in ways that
are inconsistent with our current network architecture, it could
have a material adverse effect on the cost and extent of our
U-verse offerings.
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Voice over Internet Protocol (VoIP) VoIP is generally used to
describe the transmission of voice using IP-based technology rather
than a traditional wire and switch-based telephone network. A
company using this technology can often 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 based on our strategic direction of the
business, needs of the network (wireless or wireline) providing
services and other assets needed to provide emerging services to
our customers. Actuarial gains and losses from pension and other
postretirement benefits, interest expense and other income
(expense) - net, are managed only on a total company basis and are,
accordingly, reflected only in consolidated results. Therefore,
these items are not included in the calculation of each segment's
percentage of our total segment income. Each segment's percentage
of total segment operating revenue and income calculations is
derived from our segment results, and income percentage may total
more than 100 percent due to losses in one or more segments. 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 32 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 50% of 2011
total segment operating revenues and 94% of our 2011 total segment
income. At December 31, 2011, we had more than 103 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 also
offer prepaid voice service to certain 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, 2011, we were
a leading provider of wireless data in the U.S. wireless industry
based on subscribers.
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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 41 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 47% of 2011 segment
operating revenues and 45% of our 2011 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 2012.
Services and Products
Data -We provide data services that rely on IP-based technology
and data services that rely on older, circuit-based technology. 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.
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 (LAN) interconnection, remote site,
point of sale and branch office communications. High-speed packet
services are used extensively by enterprise (large business)
customers.
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Enterprise networking services provide comprehensive support
from network design, implementation and installation to ongoing
network operations and management for networks of varying scales,
including LANs, 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.
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, 2011, our wireline subsidiaries served approximately
19 million retail consumer access lines, 16 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.
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
Private Branch Exchange (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 in 2011. In 2011, segment operating
expenses exceeded revenues due to a recorded impairment of goodwill
and a trade name. This segment sells advertising services
throughout the United States, with our print directory operations
primarily covering our 22-state area.
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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 less than 1% of total segment operating
revenues in 2011. In 2011, segment operating expenses exceeded
revenues. We also include in this segment the equity income (loss)
from our investments in Telefonos de Mexico, S.A. de C.V. and
America Movil, S.A. de C.V.
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
-----------------------------------
2011 2010 2009
------------------- ----------- ---------- ----------
Wireless Segment
Wireless service 45% 43% 40%
Wireline Segment
Data 23% 22% 21%
Voice 20% 23% 26%
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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. The FCC's rules have a direct impact on whether the wireless
industry has sufficient spectrum available to support the high
quality, innovative services our customers demand. 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, provided such state regulation is consistent with federal
law. These subsidiaries are also subject to the jurisdiction of the
FCC with respect to intercarrier compensation, interconnection, and
interstate and international rates and services, including
interstate access charges. Access charges are a form of
intercarrier compensation designed to compensate our wireline
subsidiaries for the use of their networks by other carriers.
Our subsidiaries operating outside the United States. 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 headings
"Operating Environment Overview" beginning on page 40 and
"Regulatory Developments" beginning on page 42 and are incorporated
herein by reference pursuant to General Instruction G(2).
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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 40 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.
MAJOR CUSTOMER
No customer accounted for 10% or more of our consolidated
revenues in 2011, 2010 or 2009.
COMPETITION
Information relating to competition in each of our operating
segments is contained in the Annual Report under the heading
"Competition" beginning on page 42, 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 $1,197 in 2011, $1,280 in 2010, and
$993 million in 2009.
EMPLOYEES
As of January 31, 2012, we employed approximately 256,000
persons. Approximately 55% of our employees are represented by the
Communications Workers of America, the International Brotherhood of
Electrical Workers or other unions. Contracts covering
approximately 120,000 employees will expire during 2012. For
contracts covering approximately 80,000 (mainly wireline)
employees, the union is entitled to call a work stoppage in the
absence of a new contract being reached.
At December 31, 2011, we had approximately 335,000 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 53 through 55
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 at favorable rates.
-- Changes in available technology and the effects of such changes, including product substitutions and deployment
costs.
-- Increases in our benefit plans' costs, including increases due to adverse changes in the U.S. and foreign
securities markets, resulting in worse-than-assumed investment
returns and discount rates and adverse medical cost trends and unfavorable healthcare legislation and regulations.
-- The final outcome of FCC and other federal agency proceedings and reopenings of such proceedings and judicial
reviews, if any, of such proceedings, including issues
relating to access charges, universal service, broadband deployment, E911 services, competition, net neutrality,
unbundled loop and transport elements, availability
of new spectrum from the FCC on fair and balanced terms, wireless license awards and renewals and wireless
services, including data roaming agreements.
-- The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings
and judicial reviews, if any, of such proceedings,
including proceedings relating to Interconnection terms, access charges, universal service, unbundled network
elements and resale and wholesale rates; broadband
deployment including our U-verse services; net neutrality; performance measurement plans; service standards; and
traffic compensation.
-- Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our
subsidiaries and foreign investments, including
laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or
higher operating costs.
-- Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative
technologies (e.g., cable, wireless and VoIP) and
our ability to maintain capital expenditures.
-- The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless
operating margins.
-- Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our
wireless and wireline markets.
-- The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and
regulatory and legislative actions adverse to
us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable
alternative technologies (e.g., VoIP).
-- The development of attractive and profitable U-verse service offerings; the extent to which regulatory, franchise
fees and build-out requirements apply to this
initiative; and the availability, cost and/or reliability of the various technologies and/or content required to
provide such offerings.
-- Our continued ability to attract and offer a diverse portfolio of wireless devices, some on an exclusive basis.
-- The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use,
licensing and technical standards and deployment
and usage, including network management rules.
-- Our ability to manage growth in wireless data services, including network quality and acquisition of adequate
spectrum at reasonable costs and terms.
-- The outcome of pending, threatened or potential litigation, including patent and product safety claims by or
against third parties.
-- The impact on our networks and business from major equipment failures; security breaches related to the network or
customer information; our inability to obtain
handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner
from suppliers; or severe weather conditions,
natural disasters, pandemics, energy shortages, wars or terrorist attacks.
-- The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting
standards or changes to existing standards.
-- The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to
existing standards and actions by federal, state
or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and
the resolution of disputes with any taxing jurisdictions.
-- Our ability to adequately fund our wireless operations, including payment for additional spectrum network upgrades
and technological advancements.
-- Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which
may require significant amounts of cash or stock,
to respond to competition and regulatory, legislative and technological developments.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
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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, 2011,
approximately 81% of our property, plant and equipment was owned by
our wireline subsidiaries and approximately 19% was owned by our
wireless subsidiaries. Central office equipment represented 32%;
Outside Plant (including cable, wiring and other non central office
network equipment) represented approximately 30% of our telephone
plant; other equipment, comprised principally of furniture and
office equipment and vehicles and other work equipment, represented
20%; land, building and wireless 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. Property on which
communication towers are located, may be either owned or
leased.
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," "Wage and Hour Litigation," "NSA Litigation" and
"Universal Service Fees Litigation" on pages 46 through 47, 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 EPA's 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
(As of February 1, 2012)
Name Age Position Held Since
Randall L. Stephenson 51 Chairman of the Board, Chief Executive Officer and President 6/2007
William A. Blase Jr. 56 Senior Executive Vice President - Human Resources 6/2007
James W. Cicconi 59 Senior Executive Vice President - External and Legislative Affairs, AT&T 11/2008
Services, Inc.
Catherine M. Coughlin 54 Senior Executive Vice President and Global Marketing Officer 6/2007
Ralph de la Vega 60 President and Chief Executive Officer, AT&T Mobility 10/2008
John M. Donovan 51 Senior Executive Vice President - AT&T Technology and Network Operations 1/2012
Andrew M. Geisse 55 Senior Executive Vice President - AT&T Business and Home Solutions 1/2012
Forrest E. Miller* 59 Group President - Corporate Strategy and Development 6/2007
John T. Stankey 49 Group President and Chief Strategy Officer 2/2012
John J. Stephens 52 Senior Executive Vice President and Chief Financial Officer 6/2011
Wayne Watts 58 Senior Executive Vice President and General Counsel 6/2007
Rayford Wilkins, Jr.* 60 Chief Executive Officer - AT&T Diversified Businesses 10/2008
*Retiring March 30, 2012.
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, except for Mr. Donovan. Mr. Donovan was
executive vice president of product, sales, marketing and
operations at VeriSign Inc., a technology company that provides
Internet infrastructure services, from November 2006 to April 2008.
Mr. Donovan joined AT&T as Chief Technology Officer in April
2008. Executive officers are not appointed to a fixed term of
office.
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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, 2011 and 2010
was 1,301,479 and 1,372,019. The number of stockholders of record
as of February 17, 2012, was 1,291,207. We declared dividends, on a
quarterly basis, totaling $1.73 per share in 2011 and $1.69 per
share in 2010.
Other information required by this Item is included in the
Annual Report under the headings "Quarterly Financial Information"
on page 91, "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 56, 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 51 through 52,
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 57 through 91, 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, 2011. Based
on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the registrant's disclosure controls and
procedures were effective as of December 31, 2011.
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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, 2011. 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, 2011, 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 94, 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 2011 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 9,
2011 (Proxy Statement) under the heading "Election of
Directors."
There is no disclosure in this Form 10-K of reporting person
delinquencies in response to Item 405 of Regulation S-K and the
registrant, at the time of filing this Annual Report on Form 10-K,
has reviewed the information necessary to ascertain, and has
determined that Item 405 disclosure is not expected to be contained
in this Form 10-K or incorporated herein by reference.
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 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).
Equity Compensation Plan Information
The following table provides information as of December 31,
2011, concerning shares of AT&T common stock authorized for
issuance under AT&T's existing equity compensation plans.
Equity Compensation Plan Information
----------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation
outstanding options, outstanding Plans (excluding securities
warrants and rights options, warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
----------------------------- ---------------------------- ---------------------------- ---------------------------
Equity compensation plans
approved by security holders 54,719,855 (1) $30.17 120,659,837 (2)
----------------------------- ---------------------------- ---------------------------- ---------------------------
Equity compensation plans not
approved by security holders 14,409,771 (3) $34.37 0
----------------------------- ---------------------------- ---------------------------- ---------------------------
Total 69,129,626 (4) $31.65 120,659,837
============================= ============================ ============================ ===========================
(1) Includes the issuance of stock in connection with the following stockholder approved plans:
(a) 20,978,906 stock options under the 1996 Stock and Incentive Plan, 2001 Incentive Plan,
and Stock Purchase and Deferral Plan (SPDP), (b) 2,016,811 phantom stock units under the Stock
Savings Plan (SSP), 5,641,603 phantom stock units under the SPDP, and 3,876,413 restricted
stock units under the 2006 Incentive Plan, (c) 13,933,552 target number of stock-settled performance
shares under the 2006 Incentive Plan, and (d) 12,808 target number of stock-settled performance
shares under the 2011 Incentive Plan. At payout, the target number of performance shares may
be reduced to zero or increased by up to 150% (220,432 of the performance shares under the
2006 Incentive Plan may be increased by up to 200%). Each phantom stock unit and performance
share is settleable in stock on a 1-to-1 basis. The weighted-average exercise price in the
table does not include outstanding performance shares or phantom stock units.
The SSP was approved by stockholders in 1994 and then was amended by the Board of Directors
in 2000 to increase the number of shares available for purchase under the plan (including
shares from the Company match and reinvested dividend equivalents) and shares subject to options.
Stockholder approval was not required for the amendment. To the extent applicable, the amount
shown for approved plans in column (a), in addition to the above amounts, includes 2,889,928
phantom stock units (computed on a first-in-first-out basis) and 5,360,513 stock options that
were approved by the Board in 2000. Under the SSP, shares could be purchased with payroll
deductions and reinvested dividend equivalents by mid-level and above managers and limited
Company partial matching contributions. No new contributions may be made to the plan. In addition,
participants received approximately 2 options for each share purchased with employee payroll
deductions. The options have a 10-year term and a strike price equal to the fair market value
of the stock on the date of grant.
(2) Includes 10,301,866 shares that may be issued under the SPDP, 89,888,357 shares that may be
issued under the 2011 Incentive Plan, and up to 4,172,934 shares that may be purchased through
reinvestment of dividends on phantom shares held in the SSP.
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(3) Number of outstanding stock options under the 1995 Management Stock Option Plan (1995 MSOP),
which has not been approved by stockholders. The 1995 MSOP provides for grants of stock options
to management employees (10-year terms) subject to vesting requirements and shortened exercise
terms upon termination of employment. No further options may be issued under this plan.
(4) Does not include certain stock options issued by companies acquired by AT&T that were converted
into options to acquire AT&T stock. As of December 31, 2011, there were 25,383,452 shares
of AT&T common stock subject to the converted options, having a weighted-average exercise
price of $29.00. Also, does not include 88,242 outstanding phantom stock units that were issued
by companies acquired by AT&T that are convertible into stock on a 1-to-1 basis, along with
up to 64,270 shares that may be purchased with reinvested dividend equivalents paid on the
outstanding phantom stock units. These units have no exercise price. No further phantom stock
units, other than reinvested dividends, may be issued under the assumed plans. The weighted-average
exercise price in the table does not include outstanding performance shares or phantom stock
units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Information required by Item 404 of Regulation S-K is included
in the registrant's 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, 2011. (See Part II.)
Page
(2) Financial Statement Schedules:
II - Valuation and Qualifying Accounts 21
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.
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(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
2 Stock Purchase Agreement by and Between Deutsche Telekom AG and AT&T Inc. dated March 20,
2011. (Exhibit 2.1 to Form 8-K dated March 20, 2011.)
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 June 24, 2011. (Exhibit 3 to Form 8-K dated June 24, 2011.)
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 Southwestern Bell Telephone
Co.
4-d Guaranty of certain obligations of Ameritech Capital Funding Corp., Indiana Bell Telephone
Co. Inc., Michigan Bell Telephone Co., Pacific Bell Telephone Co., and Wisconsin Bell, Inc.
4-e Guarantee of certain obligations of AT&T Corp.
4-f Guarantee of certain obligations of BellSouth.
4-g Cingular Third Supplemental Indenture.
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.)
10-a Short Term Incentive Plan, dated November 18, 2005. (Exhibit 10-a to Form 10-K for 2008.)
10-b 2001 Incentive Plan, dated November 18, 2005. (Exhibit 10-t to Form 10-K for 2008.)
10-c 2006 Incentive Plan, amended and restated effective through January 28, 2010. (Exhibit 10-c
to Form 10-Q filed for June 30, 2010.)
10-d 2011 Incentive Plan. (Exhibit 10.4 to Form 10-Q filed for March 31, 2011.)
10-e 1995 Management Stock Option Plan, dated November 16, 2001. (Exhibit 10-w to Form 10-K for
2008.)
10-f Supplemental Life Insurance Plan, amended and restated effective January 1, 2010. (Exhibit
10-d to Form 10-Q filed for June 30, 2009.)
10-g Supplemental Retirement Income Plan, amended and restated December 31, 2008. (Exhibit 10-c
to Form 10-K for 2008.)
10-h 2005 Supplemental Employee Retirement Plan, amended and restated December 15, 2011. (Exhibit
10.1 to Form 8-K dated December 15, 2011.)
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10-i 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-j 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-k Salary and Incentive Award Deferral Plan, dated December 31, 2004.
10-l Stock Savings Plan, dated December 31, 2004.
10-m Stock Purchase and Deferral Plan, amended and restated June 24, 2010. (Exhibit 10-b to Form
10-Q filed for June 30, 2010.)
10-n Cash Deferral Plan, amended and restated June 24, 2010. (Exhibit 10-a to Form 10-Q filed for
June 30, 2010.)
10-o 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.)
10-p Officer Disability Plan, amended and restated effective January 1, 2010. (Exhibit 10-i to
Form 10-Q filed for June 30, 2009.)
10-q AT&T Inc. Health Plan, amended and restated effective January 1, 2011.
10-r AT&T Management Relocation Plan.
10-r(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-s Pension Benefit Makeup Plan No.1, amended and restated December 31, 2010. (Exhibit 10-jj to
Form 10-K for 2010.)
10-t AT&T Inc. Change in Control Severance Plan, amended and restated effective January 1, 2011.
(Exhibit 10-v to Form 10-K for 2010.)
10-u AT&T Inc. Equity Retention and Hedging Policy. (Exhibit 10.2 to Form 8-K dated December 15,
2011.)
10-v Form of Non-Disclosure and Non-Solicitation Agreement.
(Exhibit 10-jjj to Form 10-K for 2009.)
10-w Administrative Plan, amended and restated effective January 1, 2011. (Exhibit 10-k to Form
10-K for 2010.)
10-x Retirement Plan for Non-Employee Directors.
10-y 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-z Non-Employee Director Stock Purchase Plan, effective June 27, 2008. (Exhibit 10-e to Form
10-Q filed for June 30, 2008.)
10-aa Communications Concession Program for Directors, amended and restated November 2009. (Exhibit
10-y to Form 10-K for 2009.)
10-bb Form of Indemnity Agreement, effective July 1, 1986, between SBC (now AT&T Inc.) and its directors
and officers.
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10-cc Transition Agreement by and between BellSouth Corporation and Rafael de la Vega, dated December
29, 2003.
10-dd Transition Agreement.
10-ee Transition Agreement.
10-ff Agreement and Release and Waiver of Claims between Richard G. Lindner and AT&T Inc. (Exhibit
10.1 to Form 8-K/A dated March 4, 2011.)
10-gg Pacific Telesis Group Supplemental Cash Balance Plan, amended as of July 1, 1996.
10-hh Pacific Telesis Group Deferred Compensation Plan for Nonemployee Directors.
10-hh(i) Resolutions amending the Plan, effective November 21, 1997.
10-ii Pacific Telesis Group Outside Directors' Deferred Stock Unit Plan.
10-jj Pacific Telesis Group 1996 Directors' Deferred Compensation Plan.
10-jj(i) Resolutions amending the Plan, effective November 21, 1997. (Contained in and filed as Exhibit
10-hh(i)).
10-kk Pacific Telesis Group 1996 Executive Deferred Compensation Plan, amended November 20, 2008.
(Exhibit 10-u to Form 10-K for 2008.)
10-ll Pacific Telesis Group Executive Deferral Plan, amended November 20, 2008. (Exhibit 10-z to
Form 10-K for 2008.)
10-mm 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-nn Master Trust Agreement for AT&T Corp. Deferred Compensation Plans and Other Executive Benefit
Plans, effective January 13, 1994.
10-nn(i) First Amendment to Master Trust Agreement, effective December 23, 1997.
10-oo 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-pp 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-qq 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-rr AT&T Corp. 1997 Long Term Incentive Program, dated March 14, 2000.
10-ss BellSouth Corporation Nonqualified Deferred Compensation Plan, dated January 1, 2005.
10-tt BellSouth Officer Compensation Deferral Plan, amended January 1, 2005. (Exhibit 10-mm to Form
10-K for 2009.)
10-uu BellSouth Corporation Deferred Compensation Plan for Non-Employee Directors, dated March 9,
1984.
10-vv BellSouth Corporation Director's Compensation Deferral Plan, as amended and restated effective
as of January 1, 2005.
18
AT&T Inc.
---------
10-ww BellSouth Corporation Stock Plan, dated April 24, 1995.
10-xx BellSouth Corporation Stock and Incentive Compensation Plan, as amended June 28, 2004. (Exhibit
10-qq for Form 10-K for 2009.)
10-xx(i) First Amendment to the BellSouth Corporation Stock and Incentive Compensation Plan, dated September
26, 2005.
10-xx(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-yy BellSouth Corporation Supplemental Executive Retirement Plan, amended and restated as of December
31, 2011. (Exhibit10-zz to Form 10-Q filed for September 30, 2011.)
10-zz 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.)
10-aaa BellSouth Corporation Amended And Restated Trust Under Board Of Directors Benefit Plan(s),
effective October 11, 2006.
10-bbb BellSouth Non-Employee Directors Charitable Contribution Program, effective February 29, 1992.
10-bbb(i) First Amendment to the Non-Employee Directors Charitable Contribution Program, effective January
27, 1997.
10-bbb(ii) Second Amendment to the Non-Employee Directors Charitable Contribution Program, effective February
25, 2002.
10-ccc 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-ddd BellSouth Supplemental Life Insurance Plan, amended and restated November 1, 2009. (Exhibit
10-aaa to Form 10-K for 2009.)
10-eee BellSouth Compensation Deferral Plan, as amended and restated effective January 1, 2005.
10-fff BellSouth Nonqualified Deferred Income Plan, as amended and restated effective January 1,
2005. (Exhibit 10-eee to Form 10-K for 2008.)
10-ggg BellSouth Corporation Executive Incentive Award Deferral Plan, as amended and restated effective
January 1, 2008.
10-hhh Cingular Wireless Cash Deferral Plan, effective November 1, 2001.
10-iii Cingular Wireless Long Term Compensation Plan, amended and restated effective November 1,
2007.
10-jjj Cingular Wireless BLS Executive Transition Benefit Plan.
10-kkk Cingular Wireless SBC Executive Transition Benefit Plan.
10-lll AT&T Mobility 2005 Cash Deferral Plan.
10-mmm 364 Day Credit Agreement dated December 19, 2011. (Exhibit 10-b to Form 8-K dated December
19, 2011.)
19
AT&T Inc.
---------
10-nnn Amended and Restated Four Year Credit Agreement dated December 19, 2011. (Exhibit 10-a to
Form 8-K dated December 19, 2011.)
10-ooo Credit Agreement dated as of March 31, 2011, among AT&T Inc., Bank of America, N.A., Barclays
Capital, and Citibank, N.A. (Exhibit 10.a to Form 8-K dated March 31, 2011.)
10-ppp Stockholder's Agreement by and between Deutsche Telekom AG and AT&T Inc. dated March 20, 2011
(Exhibit 10.1 to Form 8-K dated March 20, 2011.)
10-qqq Letter Agreement to Deutsche Telekom AG (exhibit 10 to Form 8-K dated December 19, 2011.)
12 Computation of Ratios of Earnings to Fixed Charges
13 Portions of AT&T's Annual Report to Stockholders for the fiscal year ended December 31, 2011.
Only the information incorporated by reference into this Form 10-K is included in the exhibit.
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
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.
20
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 Charged to
Balance at Beginning Costs and Other Accounts Balance at End of
of Period Expenses (a) (b) Acquisitions Deductions (c) Period
---------- --------------------- -------------- -------------- ------------ -------------- ---------------------
Year 2011 $ 957 1,136 38 - 1,253 $ 878
Year 2010 $ 1,202 1,334 (28) - 1,551 $ 957
Year 2009 $ 1,268 1,762 29 2 1,859 $ 1,202
---------- ----- -------------- -------------- -------------- ------------ -------------- ---- ---------------
(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.
21
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 24th day of February, 2012.
AT&T INC.
/s/ John J. Stephens
John J. Stephens
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:
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
/s/ John J. Stephens
John J. Stephens, as attorney-in-fact
and on his own behalf as Principal
Financial Officer and Principal
Accounting Officer
February 24, 2012
Directors:
---------------------- ---------------------
Randall L. Stephenson* Jon C. Madonna*
Gilbert F. Amelio* Lynn M. Martin*
Reuben V. Anderson* John B. McCoy*
James H. Blanchard* Joyce M. Roche*
Jaime Chico Pardo* Matthew K. Rose*
James P. Kelly* Laura D'Andrea Tyson*
* by power of attorney
Selected Financial and Operating Data
Dollars in millions except per share
amounts
At December 31 and for the year ended: 2011 2010 2009 2008 2007
-------------------------------------- -------- -------- -------- -------- --------
Financial Data
-------------------------------------- -------- -------- -------- -------- --------
Operating revenues $126,723 $124,280 $122,513 $123,443 $118,322
-------------------------------------- ------- ------- ------- ------- -------
Operating expenses $117,505 $104,707 $101,513 $125,133 $ 89,181
-------------------------------------- ------- ------- ------- ------- -------
Operating income (loss) $ 9,218 $ 19,573 $ 21,000 $ (1,690) $ 29,141
-------------------------------------- ------- ------- ------- ------- -------
Interest expense $ 3,535 $ 2,994 $ 3,368 $ 3,369 $ 3,460
-------------------------------------- ------- ------- ------- ------- -------
Equity in net income of affiliates $ 784 $ 762 $ 734 $ 819 $ 692
-------------------------------------- ------- ------- ------- ------- -------
Other income (expense) - net $ 249 $ 897 $ 152 $ (332) $ 814
-------------------------------------- ------- ------- ------- ------- -------
Income tax expense (benefit) $ 2,532 $ (1,162) $ 6,091 $ (2,210) $ 9,917
-------------------------------------- ------- ------- ------- ------- -------
Net Income (Loss) $ 4,184 $ 20,179 $ 12,447 $ (2,364) $ 17,228
-------------------------------------- ------- ------- ------- ------- -------
Less: Net Income Attributable to
Noncontrolling Interest $ (240) $ (315) $ (309) $ (261) $ (196)
-------------------------------------- ------- ------- ------- ------- -------
Net Income (Loss) Attributable to AT&T $ 3,944 $ 19,864 $ 12,138 $ (2,625) $ 17,032
====================================== ======= ======= ======= ======= =======
Earnings (Loss) Per Common Share:
Net Income (Loss) Attributable to
AT&T $ 0.66 $ 3.36 $ 2.06 $ (0.44) $ 2.78
-------------------------------------- ------- ------- ------- ------- -------
Earnings (Loss) Per Common Share -
Assuming Dilution:
Net Income (Loss) Attributable to
AT&T $ 0.66 $ 3.35 $ 2.05 $ (0.44) $ 2.76
====================================== ======= ======= ======= ======= =======
Total assets3 $270,344 $269,391 $268,312 $264,700 $274,951
-------------------------------------- ------- ------- ------- ------- -------
Long-term debt $ 61,300 $ 58,971 $ 64,720 $ 60,872 $ 57,253
-------------------------------------- ------- ------- ------- ------- -------
Total debt $ 64,753 $ 66,167 $ 72,081 $ 74,990 $ 64,112
-------------------------------------- ------- ------- ------- ------- -------
Construction and capital expenditures $ 20,272 $ 20,302 $ 17,294 $ 20,290 $ 17,831
-------------------------------------- ------- ------- ------- ------- -------
Dividends declared per common share $ 1.73 $ 1.69 $ 1.65 $ 1.61 $ 1.47
-------------------------------------- ------- ------- ------- ------- -------
Book value per common share $ 17.85 $ 18.94 $ 17.28 $ 16.35 $ 19.07
-------------------------------------- ------- ------- ------- ------- -------
Ratio of earnings to fixed charges4 2.21 4.52 4.42 - 6.95
-------------------------------------- ------- ------- ------- ------- -------
Debt ratio 38.0% 37.1% 41.4% 43.8% 35.7%
-------------------------------------- ------- ------- ------- ------- -------
Weighted average common shares
outstanding (000,000) 5,928 5,913 5,900 5,927 6,127
-------------------------------------- ------- ------- ------- ------- -------
Weighted average common shares
outstanding with dilution (000,000) 5,950 5,938 5,924 5,958 6,170
-------------------------------------- ------- ------- ------- ------- -------
End of period common shares
outstanding (000,000) 5,927 5,911 5,902 5,893 6,044
====================================== ======= ======= ======= ======= =======
Operating Data
-------------------------------------- ------- ------- ------- ------- -------
Wireless subscribers (000)1 103,247 95,536 85,120 77,009 70,052
-------------------------------------- ------- ------- ------- ------- -------
In-region network access lines in
service (000)3 36,734 41,883 47,534 53,604 59,686
-------------------------------------- ------- ------- ------- ------- -------
Broadband connections (000)2,3 16,427 16,309 15,789 15,077 14,156
-------------------------------------- ------- ------- ------- ------- -------
Number of employees 256,420 266,590 282,720 302,660 309,050
====================================== ======= ======= ======= ======= =======
1 The number presented represents 100% of AT&T Mobility wireless customers.
2 Broadband connections include in-region DSL lines, in-region U-verse High Speed Internet access,
and satellite broadband.
3 Prior period amounts are restated to conform to current period reporting methodology.
4 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,"
"AT&T" or the "Company" throughout this document, and the names
of the particular subsidiaries and affiliates providing the
services generally have been omitted. AT&T is a holding company
whose subsidiaries and affiliates operate in the communications
services industry in both the United States and internationally,
providing wireless and wireline telecommunications services and
equipment as well as advertising services. You should read this
discussion in conjunction with the consolidated financial
statements 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 are not considered meaningful 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 2012 in the "Operating
Environment and Trends of the Business" section.
Percent Change
--------------------------------
2011 2010 2009 2011 vs. 2010 2010 vs. 2009
----------------------------------------- --------- -------- -------- --------------- ---------------
Operating Revenues $126,723 $124,280 $122,513 2.0% 1.4%
------------------------------------------ ------- ------- -------
Operating expenses
Cost of services and sales 57,374 52,379 50,639 9.5 3.4
Selling, general and administrative 38,844 32,864 31,359 18.2 4.8
Impairment of intangible assets 2,910 85 - - -
Depreciation and amortization 18,377 19,379 19,515 (5.2) (0.7)
------------------------------------------ ------- ------- -------
Total Operating Expenses 117,505 104,707 101,513 12.2 3.1
------------------------------------------ ------- ------- -------
Operating Income 9,218 19,573 21,000 (52.9) (6.8)
------------------------------------------ ------- ------- -------
Interest expense 3,535 2,994 3,368 18.1 (11.1)
Equity in net income of affiliates 784 762 734 2.9 3.8
Other income (expense) - net 249 897 152 (72.2) -
------------------------------------------ ------- ------- -------
Income from continuing operations before
income taxes 6,716 18,238 18,518 (63.2) (1.5)
Income from continuing operations 4,184 19,400 12,427 (78.4) 56.1
Net Income Attributable to AT&T $ 3,944 $ 19,864 $ 12,138 (80.1 ) % 63.7%
========================================== ======= ======= ======= ========= ==== ==========
Overview
Operating income decreased $10,355, or 52.9%, in 2011 and
$1,427, or 6.8%, in 2010. Our operating margin was 7.3% in 2011,
down from 15.7% in 2010 and 17.1% in 2009. Operating income for
2011 declined due to a noncash charge of $6,280 from actuarial
losses related to pension and postretirement benefit plans, charges
of $4,181 related to our decision to terminate the acquisition of
T-Mobile USA, Inc. (T-Mobile) and noncash charges of $2,910 related
to impairments of directory intangible assets. The 2011 operating
income also declined due to higher wireless handset subsidies and
commissions, partially offset by growth in wireless service and
equipment revenue driven by continued subscriber growth and
increased Wireline data revenue related to AT&T U-verse(R)
(U-verse) growth. Operating income for 2010 and 2009 included
actuarial losses of $2,521 and $215, respectively. Operating income
in 2010 also reflected growth in wireless service and data
revenues, and higher wireline data revenue from U-verse growth,
partially offset by declines in voice and print directory
advertising revenue.
Operating revenues increased $2,443, or 2.0%, in 2011 and
$1,767, or 1.4%, in 2010. The increases in 2011 and 2010 reflect
continued growth in wireless service revenues driven by increases
in the subscriber base and the increasing percentage of
smartphones, which contribute to higher wireless data revenues. In
addition, higher wireline data revenues from the continued growth
of U-verse and strategic business services also contributed to the
increase in both years. These increases were partially offset by
continued declines in wireline voice and print directory
advertising revenues.
Revenue growth continues to be tempered by declines in our voice
revenues. During 2011, total switched access lines decreased 12.3%.
Customers disconnecting access lines switched to wireless, Voice
over Internet Protocol (VoIP) and cable offerings for voice and
data or terminated service permanently as businesses closed or
consumers left residences. While we lose wireline voice revenues,
we have the opportunity to increase wireless service and wireline
data revenues should customers choose us as their wireless
provider, and for customers with our U-verse service, as their VoIP
provider.
2
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Cost of services and sales expenses increased $4,995, or 9.5%,
in 2011 and $1,740, or 3.4%, in 2010. Excluding the increase of
$1,668 related to the actuarial loss, expense increases in 2011
were primarily due to higher wireless handset costs related to
strong smartphone sales, partially offset by lower
financing-related costs associated with our pension and
postretirement benefits (referred to as Pension/OPEB expenses) and
other employee-related expenses. Excluding the increase of more
than $700 in expense related to the actuarial loss, expense
increases in 2010 were primarily due to higher smartphone handset
costs, higher interconnect and network system costs, and higher
Universal Service Fund (USF) costs, partially offset by lower
Pension/OPEB financing costs and other employee-related
expenses.
Selling, general and administrative expenses increased $5,980,
or 18.2%, in 2011 and $1,505, or 4.8%, in 2010. The 2011 expenses
increased by $2,091 related to the actuarial loss, $4,181
associated with T-Mobile and higher commissions paid on smartphone
sales, slightly offset by lower severance accruals, Pension/OPEB
financing costs and other employee-related charges. Expenses for
2010 increased $1,600 related to the actuarial loss, as well as
increases in advertising and various support expenses, mostly
offset by lower bad debt expense, Pension/OPEB financing costs and
other employee-related expenses.
Impairment of intangible assets In 2011, we recorded noncash
charges for impairments in our Advertising Solutions segment, which
consisted of a $2,745 goodwill impairment and a $165 impairment of
a trade name. The 2010 impairment of $85 was for the impairment of
a trade name.
Depreciation and amortization expenses decreased $1,002, or
5.2%, in 2011 and $136, or 0.7%, in 2010. The decreases in 2011 and
2010 were primarily due to lower amortization of intangibles for
customer lists related to acquisitions.
Interest expense increased $541, or 18.1%, in 2011 and decreased
$374, or 11.1%, in 2010. The increase in interest expense for 2011
was primarily due to no longer capitalizing interest on certain
spectrum that will be used to support our Long Term Evolution (LTE)
technology, partially offset by a decrease in our average debt
balances. Effective January 1, 2011, we ceased capitalization of
interest on certain spectrum for LTE as this spectrum was
determined to be ready for its intended use.
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 $22, or 2.9%, in
2011 and $28, or 3.8%, in 2010. Increased equity in net income of
affiliates in 2011 was due to improved operating results at America
Movil, S.A. de C.V. (America Movil), partially offset by lower
results from Telefonos de Mexico, S.A. de C.V. (Telmex). The 2010
increase was due to improved results at America Movil.
Other income (expense) - net We had other income of $249 in
2011, $897 in 2010 and $152 in 2009. Results for 2011 included $97
of net gains from the sale of investments, $80 of leveraged lease
income and $73 of interest and dividend income.
Other income for 2010 included a $658 gain on the exchange of
Telmex Internacional, S.A.B. de C.V. (Telmex Internacional) shares
for Am rica M vil shares, $197 due to gains on the sale of
investments, $71 of interest and dividend income and $66 of
leveraged lease income, partially offset by $98 of investment
impairments. Results for 2009 included gains of $154 on the sale of
investments, $77 of interest and dividend income and leveraged
lease income of $41, partially offset by $102 of investment
impairments.
Income tax expense increased $3,694 in 2011 and decreased $7,253
in 2010. The increase in income tax in 2011 is primarily due to a
settlement with the Internal Revenue Service (IRS) that occurred in
the third quarter of 2010 related to a restructuring of our
wireless operations, which lowered our income taxes in 2010 by
$8,300. The tax benefit of the IRS settlement was partially offset
by a $995 charge to income tax expense recorded during the first
quarter of 2010 to reflect the deferred tax impact of enacted U.S.
healthcare legislation and by lower income before income taxes
during 2011 (see Note 10). Our effective tax rate in 2011 was
37.7%, compared to (6.4)% in 2010 and 32.9% in 2009.
3
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Income from discontinued operations, net of tax In the third
quarter of 2010, we sold our subsidiary Sterling Commerce Inc.
(Sterling). Income from discontinued operations in 2010 was $779,
including a gain of $769. Income from discontinued operations in
2009 was $20.
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 based on our strategic direction of the
business, needs of the network (wireless or wireline) providing
services and other assets needed to provide emerging services to
our customers. Actuarial gains and losses from pension and other
postretirement benefits, interest expense and other income
(expense) - net, are managed only on a total company basis and are,
accordingly, reflected only in consolidated results. Therefore,
these items are not included in the calculation of each segment's
percentage of our total segment income. Each segment's percentage
of total segment operating revenue and income calculations is
derived from our segment results table in Note 4, and income
percentage may total more than 100 percent due to losses in one or
more segments. We have four reportable segments: (1) Wireless, (2)
Wireline, (3) Advertising Solutions and (4) Other.
The Wireless segment accounted for approximately 50% of our 2011
total segment operating revenues as compared to 47% in 2010 and 94%
of our 2011 total segment income as compared to 67% in 2010. 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 47% of our 2011
total segment operating revenues as compared to 49% in 2010 and 45%
of our 2011 total segment income as compared to 34% in 2010. 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.
The Advertising Solutions segment accounted for approximately 3%
of our 2011 and 2010 total segment operating revenues. During 2011,
expenses exceeded revenue and the segment incurred a loss, due to
recorded impairments of goodwill and a trade name. During 2010,
segment income was 4% of our 2010 total segment income. 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 less than 1% of our 2011 and
2010 total segment operating revenues. Since segment operating
expenses exceeded revenue in both years, a segment loss was
incurred in both 2011 and 2010. 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.
Operations and support expenses include bad debt expense;
advertising costs; sales and marketing functions, including
customer service centers; real estate costs, including maintenance
and utilities on all buildings; credit and collection functions;
and corporate support costs, such as finance, legal, human
resources and external affairs. Pension and postretirement service
costs, net of amounts capitalized as part of construction labor,
are also included to the extent that they are associated with these
employees. Our Wireless and Wireline segments also include certain
network planning and engineering expenses, information technology,
our repair technicians and repair services, and property taxes as
operations and support expenses.
The following sections discuss our operating results by segment.
We discuss capital expenditures for each segment in "Liquidity and
Capital Resources."
4
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Wireless
Segment Results
---------------- --------------- ------------------ ------------------ -------- ------- --------- ------
Percent Change
------------------------------------
2011 vs. 2010 vs.
2011 2010 2009 2010 2009
---------------- --------------- ------------------ ------------------ ----------------- -----------------
Segment
operating
revenues
Service $ 56,726 $ 53,510 $ 48,563 6.0% 10.2%
Equipment 6,486 4,990 4,941 30.0 1.0
---------------- ----------- --- ------------- --- -------------
Total Segment
Operating
Revenues 63,212 58,500 53,504 8.1 9.3
---------------- ----------- --- ------------- --- -------------
Segment
operating
expenses
Operations
and support 41,581 36,746 33,631 13.2 9.3
Depreciation
and
amortization 6,324 6,497 6,043 (2.7) 7.5
---------------- ----------- --- ------------- --- -------------
Total Segment
Operating
Expenses 47,905 43,243 39,674 10.8 9.0
---------------- ----------- --- ------------- --- -------------
Segment
Operating
Income 15,307 15,257 13,830 0.3 10.3
Equity in Net
Income (Loss)
of
Affiliates (29) 9 9 - -
---------------- ----------- --- ------------- --- -------------
Segment Income $ 15,278 $ 15,266 $ 13,839 0.1% 10.3%
================ =========== === ============= === ============= ======== ====== ========= =====
The following table highlights other key measures of performance for the Wireless segment:
2010
vs.
2011 2010 2009 2011 vs. 2010 2009
-------------------------------- ----------- ---------------- ---------------- ------------------ ------------
Wireless Subscribers (000)1 103,247 95,536 85,120 8.1% 12.2%
Gross Subscriber Additions
(000)2 23,869 22,879 21,316 4.3 7.3
Net Subscriber Additions
(000)2 7,699 8,853 7,278 (13.0) 21.6
(16)
Total Churn 1.37% 1.31% 1.47% 6 BP BP
Postpaid Subscribers (000) 69,309 68,041 64,627 1.9% 5.3%
Net Postpaid Subscriber
Additions (000)2 1,429 2,153 4,199 (33.6) (48.7)
Postpaid Churn 1.18% 1.09% 1.13% 9 BP (4) BP
Prepaid Subscribers (000) 7,225 6,524 5,350 10.7% 21.9%
Net Prepaid Subscriber
Additions (000)2 674 952 (801) (29.2) -
Reseller Subscribers (000) 13,644 11,645 10,439 17.2 11.6
Net Reseller Subscriber
Additions (000)2 1,874 1,140 1,803 64.4 (36.8)
Connected Device Subscribers
(000)3 13,069 9,326 4,704 40.1 98.3
Net Connected Device
Subscriber Additions (000) 3,722 4,608 2,077 (19.2 ) % -
================================ ========== ================ ================ =========== ===== ====== ====
1 Represents 100% of AT&T Mobility wireless customers.
2 Excludes merger and acquisition-related additions during the period.
3 Includes data-centric devices such as eReaders, home security monitoring, fleet management,
and smart grid devices.
Wireless Metrics
Subscriber Additions As of December 31, 2011, we served 103.2
million wireless subscribers. Lower net subscriber additions (net
additions) in 2011 were primarily attributable to lower net
postpaid additions and lower net connected device additions. The
decline in net postpaid additions in 2011 reflected slowing growth
in the industry's subscriber base and higher postpaid churn
attributable in part to the integration of Alltel Wireless (Alltel)
customers into our network. The 4.3% increase in gross additions in
2011 was primarily related to higher activations of postpaid
smartphones (handsets with voice and data capabilities using an
advanced operating system to better manage data and Internet
access), including Android devices and other non-iPhone
smartphones, sales of tablets and connected devices, and growth in
our reseller subscriber base.
5
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Higher net additions in 2010 were primarily attributable to
higher net connected device additions. Lower net postpaid additions
in 2010 reflected slowing growth in the industry's subscriber base
and lower postpaid churn throughout the industry. The 7.3% increase
in gross additions in 2010 was primarily related to higher sales of
connected devices.
Average service revenue per user (ARPU) from postpaid
subscribers increased 1.8% in 2011 and 2.9% in 2010, driven by
increases in postpaid data services ARPU of 15.3% in 2011 and 19.3%
in 2010, reflecting increased usage of more advanced handsets by
our subscribers. Of our total postpaid subscriber base, 71% now use
more advanced handsets (with 57% using smartphones), up from 61% a
year earlier (with 43% using smartphones) and 47% two years ago
(with 33% using smartphones). Approximately 72% of our postpaid
subscribers were on data plans as of December 31, 2011, up from 63%
as of December 31, 2010. The growth in postpaid data services ARPU
in 2011 and 2010 was partially offset by a 5.3% decrease in
postpaid voice and other service ARPU in 2011 and a 4.1% decrease
in 2010. Postpaid voice and other service ARPU declined due to
lower access and airtime charges and roaming revenues in both years
and a decline in long-distance usage in 2010. Continued growth in
our FamilyTalk(R) Plans (family plans) subscriber base, which
generates lower ARPU compared to ARPU for our traditional postpaid
subscribers, has also contributed to these declines. About 86% of
our postpaid subscribers are on family plans or business discount
plans.
Total ARPU declined 3.8% in 2011 and 1.8% in 2010, reflecting
stronger growth in connected devices and tablet subscribers
compared to postpaid subscribers, in both years, and stronger
growth in reseller subscribers in 2011. Connected devices and other
data-centric devices, such as tablets, have lower-priced data-only
plans compared with our postpaid plans, which have voice and data
features. Accordingly, ARPU for these subscribers is typically
lower compared to that generated from our subscribers on postpaid
and other plans. Data services ARPU increased 9.8% in 2011 and
14.7% in 2010, reflecting subscriber growth trends. We expect
continued revenue growth from data services as more customers
purchase advanced handsets and data-centric devices, and as we
continue to expand our network. Voice and other service ARPU
declined 10.8% in 2011 and 8.6% in 2010 due to lower access and
airtime charges and a greater percentage of data-centric devices.
We expect continued pressure on voice and other service ARPU.
Churn The effective management of subscriber churn is critical
to our ability to maximize revenue growth and to maintain and
improve margins. Churn rate is calculated by dividing the aggregate
number of wireless subscribers who canceled service during a period
by the total number of wireless subscribers at the beginning of
that period. The churn rate for the annual period is equal to the
average of the churn rate for each month of that period. Higher
total, postpaid and connected device churn rates in 2011
contributed to the decline in net additions for the year. Postpaid
churn increased in 2011 as we transitioned former Alltel
subscribers to our network. Reseller subscribers, who comprise an
increasing share of net additions and generally have the lowest
churn rate among our wireless subscribers, had a slightly lower
churn rate in 2011. A lower prepaid churn rate in 2011, due in part
to the introduction of additional tablets to the marketplace after
the first quarter of 2010, partially offset higher postpaid and
connected device churn rates in 2011.
Improvement in our total and postpaid churn rates contributed to
our net additions in 2010. These churn rate declines reflected
network enhancements and broader coverage, more affordable rate
plans and exclusive devices, continued growth in family plans, and
free mobile-to-mobile calling among our wireless subscribers.
Data-centric device subscribers increased their share of net
additions in 2010.
Wireless Subscriber Relationships
The wireless industry continues to mature. Accordingly, we
believe that future wireless growth will increasingly depend on our
ability to offer innovative services and devices. To attract and
retain subscribers, we offer a wide variety of service plans in
addition to offering a broad handset line. Our postpaid subscribers
typically sign a two-year contract, which includes discounted
handsets and early termination fees. We also offer data plans at
different price levels to attract a wide variety of subscribers and
to differentiate us from our competitors. Many of our subscribers
are on family plans or business plans, which provide for service on
multiple handsets at discounted rates, and such subscribers tend to
have higher retention and lower churn rates. As of December 31,
2011, 86% of our postpaid subscribers are on family plans or
business discount plans. We also introduced in 2011 our Mobile to
Any Mobile feature, which enables our new and existing subscribers
on these and other qualifying plans to make unlimited mobile calls
to any mobile number in the United States as part of an unlimited
text plan, subject to certain conditions. Such offerings are
intended to encourage existing subscribers to upgrade their current
services and/or add connected devices, attract subscribers from
other providers, and minimize subscriber churn. In 2011, we
continued to see a significant portion of our subscriber base
upgrade from their current devices to smartphones.
6
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
We offer a large variety of handsets, including at least 16
smartphones with advanced operating systems from nine
manufacturers. As technology evolves, rapid changes are occurring
in the handset and device industry with the continual introduction
of new models (e.g., various Windows, Android and other
smartphones) or significant revisions of existing models. We
believe a broad offering of a wide variety of handsets reduces
dependence on any single product as these products continue to
evolve in terms of technology and subscriber appeal. From time to
time, we offer and have offered attractive handsets on an exclusive
basis. As these exclusivity arrangements expire, we expect to
continue to offer such handsets (based on historical industry
practice), and we believe our service plan offerings will help to
retain our subscribers by providing incentives not to move to a new
carrier. As is common in the industry, most of our phones are
designed to work only with our wireless technology, requiring
subscribers who desire to move to a new carrier with a different
technology to purchase a new device. While the expiration of our
iPhone exclusivity arrangement in the first quarter of 2011
contributed slightly to the increase in postpaid churn in 2011,
this increase was largely due to customers who were not currently
using an iPhone. While the expiration of our iPhone exclusivity
arrangement may continue to affect our net postpaid subscriber
additions, we do not expect exclusivity terminations to have a
material impact on our Wireless segment income, consolidated
operating margin or our cash flows from operations.
We also believe future wireless growth will depend upon a
wireless network that has sufficient spectrum and capacity to
support innovative services and devices, and makes these
innovations available to more wireless subscribers. Due to
substantial increases in the demand for wireless service in the
United States, AT&T is facing significant spectrum and capacity
constraints on its wireless network in certain markets. We expect
such constraints to increase and expand to additional markets in
the coming years. While we are continuing to invest significant
capital in expanding our network capacity, our capacity constraints
could affect the quality of existing voice and data services and
our ability to launch new, advanced wireless broadband services,
unless we are able to obtain more spectrum. Any spectrum solution
will require that the Federal Communications Commission (FCC) makes
new spectrum available to the wireless industry and allows us to
obtain the spectrum we need more immediately to meet the needs of
our customers. We will continue to attempt to address spectrum and
capacity constraints on a market-by-market basis.
Operating Results
Our Wireless segment operating income margin was 24.2% in 2011,
compared to 26.1% in 2010 and 25.8% in 2009. The margin decrease in
2011 reflected higher equipment subsidies and selling costs
associated with higher smartphone sales and handset upgrades,
partially offset by higher revenues generated by our subscribers.
While we subsidize the sales prices of various smartphones, we
expect to recover that cost over time from increased usage of the
devices, especially data usage by the subscriber. We also expect a
recent change in our handset upgrade policy (to lengthen the time
between upgrades) to help our margin.
The increase in our Wireless segment operating income margin in
2010 was primarily due to higher data revenues generated by our
subscribers during the year, partially offset by the higher selling
costs associated with more advanced handset activations. The rate
of margin growth flattened in 2010 due to a significant number of
subscribers upgrading their handsets during the second half of the
year.
Service revenues are comprised of local voice and data services,
roaming, long distance and other revenue. Service revenues
increased $3,216, or 6.0%, in 2011 and $4,947, or 10.2%, in 2010.
The increases consisted of the following:
-- Data service revenues increased $3,824, or 21.0%, in 2011 and
$4,052, or 28.7%, in 2010. The increases were primarily due to the
increased number of subscribers and increased Internet access by
subscribers using advanced handsets and data-centric devices, such
as eReaders, tablets, and mobile navigation devices. Data service
revenues accounted for approximately 38.8% of our wireless service
revenues in 2011, compared to 34.0% in 2010 and 29.1% in 2009.
-- Voice and other service revenues decreased $608, or 1.7%, in
2011 and increased $895, or 2.6%, in 2010. While the number of
wireless subscribers increased 8.1% in 2011, these revenues
continued to decline due to pricing decisions and usage declines,
as noted in the ARPU and subscriber relationships discussions
above. The increase in 2010 was due to a 12.2% increase in the
number of wireless subscribers partially offset by declining
ARPU.
Equipment revenues increased $1,496, or 30.0%, in 2011 and $49,
or 1.0%, in 2010. The increase in 2011was primarily due to the
launch of this year's iPhone model, which resulted in even higher
iPhone sales and upgrades when compared to iPhone sales and
upgrades during last year's model launch, and higher sales of
Android devices and other smartphones in 2011. As previously noted,
an increasing share of our postpaid subscriber base now uses a
smartphone, and manufacturers continue to introduce smartphones to
the marketplace. Our mix of smartphone sales as a percentage of
total sales and upgrades to postpaid subscribers has continued to
increase contributing to the year-over-year increase in equipment
revenues.
7
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
The increase in 2010 was primarily due to higher sales and
upgrades of postpaid smartphones and other advanced handsets.
Operations and support expenses increased $4,835, or 13.2%, in
2011 and $3,115, or 9.3%, in 2010. The increase in 2011 was
primarily due to the following:
-- Higher volumes of smartphone sales and handset upgrades, as
well as handsets provided to former Alltel subscribers, increased
equipment costs $2,836 and related commission expenses $1,080.
-- Network system, interconnect, and long-distance costs
increased $1,132 due to higher network traffic, higher recurring
personnel-related network support costs in conjunction with our
network enhancement efforts, and higher leasing costs.
-- Selling expenses (other than commissions) increased $288 due
to higher payroll and benefits costs, bad debt expense, and
advertising, partially offset by lower costs associated with
customer billing functions.
Partially offsetting these increases in 2011 were the
following:
-- Reseller, USF, and incollect roaming fees decreased $280
primarily due to lower usage and handset insurance costs, less the
impact of a USF rate increase.
-- Administrative expenses decreased $216 due to lower payroll,
legal and operating tax costs, and a reclassification of shared
information technology costs.
The increase in 2010 was primarily due to the following:
-- Higher volumes of advanced handset sales and upgrades
increased equipment costs $1,340 and commission expenses $132.
-- Interconnect, USF and network system costs increased $1,103
due to higher network traffic, network enhancement efforts, revenue
growth and a USF rate increase. These increases were partially
offset by reseller service and long-distance cost decreases,
totaling $93, due to lower usage.
-- Administrative expenses increased $432 due in part to higher
leasing, legal, and benefits costs.
-- Selling expenses (other than commissions) increased $201,
primarily due to increased advertising, partially offset by lower
bad debt expense and customer service costs.
Depreciation and amortization expenses decreased $173, or 2.7%,
in 2011 and increased $454, or 7.5%, in 2010. In 2011, amortization
expense decreased $524, or 39.7%, primarily due to lower
amortization of intangibles for customer lists related to
acquisitions. Depreciation expense increased $351, or 6.8%,
primarily due to ongoing capital spending for network upgrades and
expansion and the reclassification of shared information technology
costs partially offset by certain network assets becoming fully
depreciated.
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 the 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.
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
--------------------------------
2011 2010 2009 2011 vs. 2010 2010 vs. 2009
----------------------------------- ------- ------- ------- --------------- ---------------
Segment operating revenues
Data $29,606 $27,555 $25,644 7.4% 7.5%
Voice 25,131 28,332 32,345 (11.3) (12.4)
Other 5,028 5,413 5,632 (7.1) (3.9)
----------------------------------- ------ ------ ------
Total Segment Operating Revenues 59,765 61,300 63,621 (2.5) (3.6)
----------------------------------- ------ ------ ------
Segment operating expenses
Operations and support 40,879 41,096 42,439 (0.5) (3.2)
Depreciation and amortization 11,615 12,371 12,743 (6.1) (2.9)
----------------------------------- ------ ------ ------
Total Segment Operating Expenses 52,494 53,467 55,182 (1.8) (3.1)
----------------------------------- ------ ------ ------
Segment Operating Income 7,271 7,833 8,439 (7.2) (7.2)
Equity in Net Income of Affiliates - 11 17 - (35.3)
----------------------------------- ------ ------ ------
Segment Income $ 7,271 $ 7,844 $ 8,456 (7.3 ) % (7.2 ) %
=================================== ====== ====== ====== ========= ==== ========= ====
Operating Results
Our Wireline segment operating income margin was 12.2% in 2011,
compared to 12.8% in 2010 and 13.3% in 2009. Results for 2011 and
2010 reflect revenue declines that exceeded expense declines. Our
Wireline segment operating income decreased $562, or 7.2%, in 2011
and $606, or 7.2%, in 2010. Our operating income and margins
continued to be pressured by access line declines as our consumer
and business customers either reduced usage or disconnected
traditional landline services and switched to alternative
technologies, such as wireless and VoIP. Our strategy is to offset
these line losses by increasing non-access-line-related revenues
from customer connections for data, video and U-verse voice.
Additionally, we have the opportunity to increase Wireless segment
revenues if customers choose AT&T Mobility as an alternative
provider. The Wireline segment operating margins also reflect
increases in data revenue growth and decreases in employee-related
cost, driven by continuing cost-control initiatives and workforce
reductions.
Data revenues increased $2,051, or 7.4%, in 2011 and $1,911, or
7.5%, in 2010. Data revenues accounted for approximately 50% of
wireline operating revenues in 2011, 45% in 2010 and 40% in 2009.
Data revenues include transport, IP and packet-switched data
services.
-- IP data revenues increased $2,502, or 16.1%, in 2011 and
$2,495, or 19.1%, in 2010 primarily driven by U-verse services,
broadband additions and growth in IP-based strategic business
services, which include Ethernet and application services. U-verse
video revenues increased $1,150 in 2011 and $1,227 in 2010,
strategic business services increased $873 in 2011 and $650 in 2010
and broadband high-speed Internet access revenue increased $364 in
2011 and $446 in 2010. New and existing U-verse customers are
shifting from traditional landlines and DSL to our U-verse VoIP and
High Speed Internet access offerings. The increase in IP data
revenues in 2011 and 2010 reflects continued growth in the customer
base and migration from other traditional data and voice
circuit-based services.
-- Traditional packet-switched data services, which include
frame relay and asynchronous transfer mode services, decreased
$367, or 23.2%, in 2011 and $431, or 21.4%, in 2010. This decrease
was primarily due to lower demand as customers continue to shift to
IP-based technology such as Virtual Private Networks (VPN), U-verse
High Speed Internet access and managed Internet services. We expect
these traditional services to continue to decline as a percentage
of our overall data revenues.
9
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Voice revenues decreased $3,201, or 11.3%, in 2011 and $4,013,
or 12.4%, in 2010 primarily due to declining demand for traditional
voice services by our consumer and business customers. Included in
voice revenues are revenues from local voice, long distance
(including international) and local wholesale services. Voice
revenues do not include VoIP revenues, which are included in data
revenues.
-- Local voice revenues decreased $2,061, or 11.8%, in 2011 and
$2,258, or 11.4%, in 2010. The decrease in 2011 was driven
primarily by a 12.3% decline in switched access lines. The decrease
in 2010 was driven primarily by an 11.9% 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 competition from alternative technologies and the
disconnection of additional lines.
-- Long-distance revenues decreased $1,069, or 11.0%, in 2011
and $1,587, or 14.1%, in 2010. Lower demand for long-distance
service from global businesses and consumer customers decreased
revenues $828 in 2011 and $1,260 in 2010. Additionally, expected
declines in the number of national mass-market customers decreased
revenues $236 in 2011 and $332 in 2010.
Other operating revenues decreased $385, or 7.1%, in 2011 and
$219, or 3.9%, in 2010. Major items included in other operating
revenues are integration services and customer premises equipment,
government-related services and outsourcing, which account for more
than 60% of total other revenue for both periods.
Operations and support expenses decreased $217, or 0.5%, in 2011
and $1,343, or 3.2%, in 2010. Operations and support expenses
consist of costs incurred to provide our products and services,
including costs of operating and maintaining our networks and
personnel costs, such as compensation and benefits.
The 2011 decrease was primarily due to lower employee-related
expense of $441, reflecting ongoing workforce reduction
initiatives, decreased traffic compensation expense of $403 and
lower bad debt expense of $213 due to lower revenue from business
customers and improvements in cash collections. These decreases
were partially offset by increased cost of sales, primarily related
to U-verse expansion-related expenses of $461, increased
nonemployee-related expenses of $278 and increased contract
services expense of $150.
The 2010 decrease was primarily due to lower employee-related
expense of $734, reflecting ongoing workforce reduction
initiatives, decreased traffic compensation expense of $452,
decreased contract services expense of $314 and lower bad debt
expense of $178 due to lower revenue from business customers and
improvements in cash collections. These decreases were partially
offset by increased cost of sales, primarily related to U-verse
expansion-related expenses of $369.
Depreciation and amortization expenses decreased $756, or 6.1%,
in 2011 and $372, or 2.9%, in 2010. 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, Wireline Broadband and Video Connections Summary
Our switched access lines and other services provided by our
local exchange telephone subsidiaries at December 31, 2011, 2010,
and 2009 are shown below and trends are addressed throughout this
segment discussion.
Percent Change
-----------------------------------
2011 vs.
(in 000s) 2011 2010 2009 2010 2010 vs. 2009
----------------------------------- ---------- --------- --------- ------------ -------------
Switched Access Lines1
Retail consumer 18,954 22,515 26,378 (15.8)% (14.6)%
Retail business2 15,613 17,006 18,486 (8.2) (8.0)
----------------------------------- --------- --------- ---------
Retail Subtotal2 34,567 39,521 44,864 (12.5) (11.9)
----------------------------------- --------- --------- ---------
Wholesale Subtotal2 2,120 2,300 2,590 (7.8) (11.2)
Total Switched Access Lines2,3 36,734 41,883 47,534 (12.3) (11.9)
=================================== ========= ========= =========
Total Retail Consumer Voice
Connections6 21,232 24,195 27,332 (12.2) (11.5)
=================================== ========= ========= =========
Total Wireline Broadband
Connections2,4 16,427 16,309 15,789 0.7 3.3
=================================== ========= ========= =========
Satellite service5 1,765 1,930 2,174 (8.5) (11.2)
U-verse video 3,791 2,987 2,065 26.9 44.6
----------------------------------- --------- --------- ---------
Video Connections 5,556 4,917 4,239 13.0% 16.0%
=================================== ========= ========= ========= ============ =============
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.
Total switched access lines include payphone access lines of 47 at December 31, 2011, 62 at
3 December 31, 2010, and 80 at December 31, 2009.
Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite
4 broadband.
5 Satellite service includes connections under our agency and resale agreements.
Includes consumer U-verse VoIP connections of 2,278 at December 31, 2011, 1,680 at December
6 31, 2010, and 954 at December 31, 2009.
Advertising
Solutions
Segment Results
---------------- --------------------- --------------------- ------ ------- ----- -------- ----
Percent Change
------------------------------
2011 2010 2009 2011 vs. 2010 2010 vs. 2009
---------------- ---------------------- --------------------- ------ -------------- --------------
Total Segment
Operating
Revenues $ 3,293 $ 3,935 $4,724 (16.3 ) % (16.7 ) %
----------------- --- ---------------- ---- --------------- ----- ------- ----- -------- ----
Segment
operating
expenses
Operations and
support 2,264 2,583 2,743 (12.3) (5.8)
Impairment of
intangible
assets 2,910 - - - -
Depreciation
and
amortization 386 497 650 (22.3) (23.5)
----------------- --- ---------------- ---- --------------- ----- ------- ---- -------- ---
Total Segment
Operating
Expenses 5,560 3,080 3,393 80.5 (9.2)
----------------- --- ---------------- ---- --------------- ----- ------- ----- -------- ---
Segment Income
(Loss) $ (2,267) $ 855 $1,331 - (35.8 ) %
================= === ================ ==== =============== ===== ======= ===== ======== ====
Operating Results
Our Advertising Solutions segment operating income margin was
(68.8)% in 2011, compared to 21.7% in 2010 and 28.2% in 2009. The
decline in the operating income margin in 2011 was primarily
attributed to impairment charges of $2,910. Excluding the impacts
of the impairment charge, the operating income margin declines in
2011 and 2010 were primarily the result of decreased print
advertising revenue.
11
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Operating revenues decreased $642, or 16.3%, in 2011 and $789,
or 16.7%, in 2010. Print revenues decreased $680 in 2011,
reflecting industry-wide migration from print advertising to online
search, slightly offset by an increase in Internet-based and mobile
advertising of $30. The decrease in 2010 was largely driven by
continuing declines in print revenue of $858, partially offset by
increased Internet-based and mobile advertising revenue of $77.
Operating expenses increased $2,480, or 80.5%, in 2011 and
decreased $313, or 9.2%, in 2010. The increase in 2011 was due to
impairments of $2,910, partially offset by decreased
product-related expense of $188, lower amortization expense of $136
due to an accelerated method of customer list amortization and
lower bad debt expense of $107. The impairments were driven by
declines in print revenue as well as significant declines in the
market value of peer companies in the industry. The 2010 decrease
was largely driven by decreases in depreciation and amortization
expense of $136, decreased employee-related cost of $99 and lower
bad debt expense of $34.
Other
Segment Results
-------------------------------- ------- ------- ------- ------------- --- ------------- ---
Percent Change
--------------------------------------
2011 2010 2009 2011 vs. 2010 2010 vs. 2009
-------------------------------- ------- ------- ------- ------------- --- ------------- ---
Total Segment Operating Revenues $ 453 $ 545 $ 664 (16.9 ) % (17.9 ) %
-------------------------------- ------ ------ ------ ------------- --- ------------- ---
Total Segment Operating Expenses 5,266 2,396 3,049 - (21.4)
-------------------------------- ------ ------ ------ ------------- --- -------------
Segment Operating Loss (4,813) (1,851) (2,385) - 22.4
-------------------------------- ------ ------ ------ ------------- --- ------------- ---
Equity in Net Income of
Affiliates 813 742 708 9.6 4.8
-------------------------------- ------ ------ ------ ------------- --- ------------- ---
Segment Loss $(4,000) $(1,109) $(1,677) - (33.9 ) %
================================ ====== ====== ====== ============= === ============= ===
The Other segment includes results from customer information
services and all corporate and other operations. This segment
includes our portion of the results from our international equity
investments. Also included in the Other segment are impacts of
corporate-wide decisions for which the individual operating
segments are not being evaluated, including the interest cost and
expected return on pension and postretirement benefits assets.
Operating revenues decreased $92, or 16.9%, in 2011 and $119, or
17.9%, in 2010. The decrease in both years was primarily due to
reduced revenues from our operator services.
Operating expenses increased $2,870 in 2011 and decreased $653,
or 21.4%, in 2010. Increased operating expenses in 2011 include
$4,432 of charges related to T-Mobile, including $4,181 resulting
from our termination of the acquisition, $3,962 of which was
related to the termination fee and transfer of wireless spectrum.
These fees were partially offset by lower severance charges,
reduced Pension/OPEB financing-related costs and lower
employee-related expenses. Decreased expenses in 2010 were due to
lower Pension/OPEB financing-related costs and a decrease in
operator services operating expense.
Our Other segment also includes our equity investments in Am
rica M vil and Telmex, 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:
2011 2010 2009
----------------------------------------------------- ---- ---- ----
Am rica M vil $720 $560 $505
Telmex1 95 150 133
Telmex Internacional2 - 34 72
Other (2) (2) (2)
----------------------------------------------------- --- --- ---
Other Segment Equity in Net Income of Affiliates $813 $742 $708
===================================================== === === ===
1 Acquired by Am rica M vil in 2011
2 Acquired by Am rica M vil in 2010
12
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Equity in net income of affiliates increased $71, or 9.6%, in
2011 and $34, or 4.8%, for 2010. Increased equity in net income of
affiliates in both years was due to higher operating results at
America Movil, partially offset by lower results at Telmex in 2011.
In November 2011, we tendered all of our shares in Telmex as part
of America Movil's acquisition of the outstanding shares of
Telmex.
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
2012 Revenue Trends We expect our operating environment in 2012
to remain challenging as weak economic conditions continue and
competition remains strong. Despite these challenges, we expect our
operating revenues in 2012 to grow, reflecting continuing growth in
our wireless data and IP-related wireline data services, including
U-verse and strategic business services. We expect our primary
driver of growth to be wireless, especially in sales of and
increases in data usage on smartphones 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 2012.
2012 Expense Trends We will continue to focus sharply on
cost-control measures. 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 2012 operating income margin to improve as our revenues
improve. Expenses related to growth areas of our business,
especially in the wireless and strategic business services areas,
will apply some pressure to our operating income margin.
Market Conditions During 2011, 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 financing and operating costs. These negative economic
trends were partially offset by continued growth in our wireless
data and IP-related services. While the economy appears to have
stabilized, we do not expect a return to historical growth levels
during 2012. 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 equipment
under warranty from our suppliers.
Included on our consolidated balance sheets are assets held by
benefit plans for the payment of future benefits. We contributed
$1,000 to our pension plan in the fourth quarter of 2011 and are
not required to make further significant funding contributions to
our pension plans in 2012. 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 in
future years to make contributions to the pension plans in order to
maintain minimum funding requirements as established by ERISA.
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 changes in the performance of equity
markets, may have significant impacts on the fair value of pension
and other postretirement plans at the end of 2012 (see "Significant
Accounting Policies and Estimates").
OPERATING ENVIRONMENT OVERVIEW
AT&T subsidiaries operating within the United States are
subject to federal and state regulatory authorities. AT&T
subsidiaries operating outside the United States are subject to the
jurisdiction of national and supranational regulatory authorities
in the markets where service is provided, and regulation is
generally limited to operational licensing authority for the
provision of services to enterprise customers.
In the Telecommunications Act of 1996 (Telecom Act), Congress
established a national policy framework intended to bring the
benefits of competition and investment in advanced
telecommunications facilities and services to all Americans by
opening all telecommunications markets to competition and reducing
or eliminating regulatory burdens that harm consumer welfare.
However, since the Telecom Act was passed, the FCC and some state
regulatory commissions have maintained or expanded certain
regulatory requirements that were imposed decades ago on our
traditional wireline subsidiaries when they operated as legal
monopolies. We are pursuing additional legislative and regulatory
measures to reduce regulatory burdens that are no longer
appropriate in a competitive telecommunications market and that
inhibit our ability to compete more effectively and offer services
wanted and needed by our customers. At the same time, we also seek
to ensure that legacy regulations are not extended to broadband or
wireless services, which are subject to vigorous competition.
13
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
In addition, states representing a majority of our local service
access lines have adopted legislation that enables new video
entrants to acquire a single statewide or state-approved franchise
(as opposed to the need to acquire hundreds or even thousands of
municipal-approved franchises) to offer competitive video services.
We also are supporting efforts to update and improve regulatory
treatment for retail services. Regulatory reform and passage of
legislation is uncertain and depends on many factors.
Our wireless operations operate in robust competitive markets
but are likewise subject to substantial governmental regulation.
Wireless communications providers must be licensed by the FCC to
provide communications services at specified spectrum frequencies
within specified geographic areas and must comply with the rules
and policies governing the use of the spectrum as adopted by the
FCC. The FCC has recognized that the explosive growth of
bandwidth-intensive wireless data services requires the Government
to make more spectrum available. We seek to ensure that we have the
opportunity to obtain the spectrum we need to provide our customers
with high-quality service. While wireless communications providers'
prices and service offerings are generally not subject to state
regulation, states continue to attempt to regulate or legislate
various aspects of wireless services, such as in the area of
consumer protection.
Expected Growth Areas
We expect our wireless services and wireline IP-data products to
remain the most significant growth portions 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
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
are in a period of rapid growth in wireless data usage and believe
that there are substantial opportunities available for
next-generation converged services that combine wireless,
broadband, voice and video.
We cover most major metropolitan areas of the United States 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. At
the end of 2011, over 80% of our data traffic was carried over this
enhanced backhaul. Our network provides superior mobile broadband
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, 2011, we served 103 million
subscribers. We have also begun transitioning our network to next
generation LTE technology and expect this network to cover
approximately 80% of the U.S. population and to be largely complete
by the end of 2013. 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 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 data services to customers, which in turn, will
depend on the availability of additional spectrum. We are facing
significant spectrum and capacity constraints on our wireless
network in certain markets. We expect such constraints to increase
and expand to additional markets in the coming years. While we are
continuing to invest significant capital in expanding our network
capacity, our capacity constraints could affect the quality of
existing voice and data services and our ability to launch new,
advanced wireless broadband services, unless we are able to obtain
more spectrum. Any spectrum solution will require that the FCC
makes new spectrum available to the wireless industry and allows us
to obtain the spectrum we need more immediately to meet the needs
of our customers. We will continue to attempt to address spectrum
and capacity constraints on a market-by-market basis.
14
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
U-verse Services During 2011, we continued to expand our
offerings of U-verse High Speed Internet and TV services. As of
December 31, 2011, we reached our deployment goal of 30 million
living units and have now passed 30.3 million living units
(constructed housing units as well as platted housing lots). We are
marketing U-verse services to 78% of those units and had 3.8
million subscribers by year-end 2011. During 2012, we will continue
our efforts to increase sales to this base.
We believe that our U-verse TV service is a "video service"
under the Federal Communications Act. However, some cable providers
and municipalities have claimed that certain IP services should be
treated as a traditional cable service and therefore subject to the
applicable state and local cable regulation. Certain municipalities
have delayed our requests to offer this service or have refused us
permission to use our existing or new right-of-ways to deploy or
activate our U-verse-related equipment, services and products,
resulting in litigation. Petitions have been filed at the FCC
alleging that the manner in which we provision "public, educational
and governmental" (PEG) programming over our U-verse TV service
conflicts with federal law, and a lawsuit has been filed in a
California state superior court raising similar allegations under
California law. If courts having jurisdiction where we have
significant deployments of our U-verse services were to decide that
federal, state and/or local cable regulation were applicable to our
U-verse services, or if the FCC, state agencies or the courts were
to rule that we must deliver PEG programming in a manner
substantially different from the way we do today or in ways that
are inconsistent with our current network architecture, it could
have a material adverse effect on the cost and extent of our
U-verse offerings.
REGULATORY DEVELOPMENTS
Set forth below is a summary of the most significant
developments in our regulatory environment during 2011. 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 comprehensive legal analysis and
description of all of these specific issues.
International Regulation Our subsidiaries operating outside the
United States 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 2011 federal
regulatory developments follows.
Net Neutrality In December 2010, the FCC adopted "net
neutrality" rules that impose certain transparency and "no
blocking" obligations on fixed and mobile broadband Internet access
services, as well as a "no unreasonable discrimination" obligation
that applies only to fixed services. The rules became effective on
November 20, 2011. Verizon and other parties have filed appeals of
the FCC's rules, which are pending in the D.C. Circuit Court of
Appeals. We do not expect the FCC's rules to have a material impact
on our operating results.
Wireless Broadband Competition In April 2011, the FCC released a
wireless data roaming order requiring wireless carriers to offer
wireless data roaming services on "commercially reasonable terms"
to other wireless carriers in places where those operators do not
have their own systems. We have entered into a number of data
roaming agreements (including broadband data roaming agreements)
and expect to enter into additional agreements in the future.
Verizon has appealed this order in the D.C. Circuit Court of
Appeals. We do not expect this order to have a material impact on
our operating results.
Intercarrier Compensation/Universal Service In October 2011, the
FCC adopted an order fundamentally overhauling its high-cost
universal service program, through which it disburses approximately
$4.5 billion/year to carriers providing telephone service in
high-cost areas, and its existing intercarrier compensation (ICC)
rules, which govern payments between carriers for the exchange of
traffic. The order adopts rules to address immediately certain
practices that artificially increase ICC payments, as well as other
practices to avoid such payments. The order also establishes a new
ICC regime that will result in the elimination of virtually all
terminating switched access charges and reciprocal compensation
payments over a six-year transition. In the order, the FCC also
repurposed its high-cost universal service program to encourage
providers to deploy broadband facilities in unserved areas. To
accomplish this goal, the FCC will transition support amounts
disbursed through its existing high-cost program to its new Connect
America Fund, which eventually will award targeted high-cost
support amounts to providers through a competitive process.
AT&T supports many aspects of the order and new rules. AT&T
and other parties have filed appeals of the FCC's rules, which are
pending in the Tenth Circuit Court of Appeals. AT&T's appeal
challenges only certain, narrow aspects of the order; AT&T
intervened in support of the broad framework adopted by the order.
We do not expect the FCC's rules to have a material impact on our
operating results.
15
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
T-Mobile Acquisition As discussed in "Other Business Matters,"
we decided to terminate our acquisition of T-Mobile in December
2011; our decision reflected in part the delays and uncertainty
associated by the Department of Justice's (DOJ) lawsuit objecting
to the acquisition and the FCC Staff's recommendation to refer our
application to an administrative law judge for additional
review.
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, multiple licensees,
including six or more PCS licensees, two cellular licensees and one
or more enhanced specialized mobile radio licenses may operate in
each of our service areas, which results in the potential presence
of multiple competitors. Our competitors include companies such as
Verizon Wireless, Sprint Nextel Corp., T-Mobile, Metro PCS and
Cricket, a larger number of regional providers of cellular, PCS and
other wireless communications services and resellers of those
services. More than 97% of the U.S. population lives in areas with
at least three mobile telephone operators, and 90% of the
population lives in areas with at least five competing
carriers.
The FCC may develop rules to auction or otherwise make available
additional spectrum to the wireless industry. The FCC has yet to
develop the rules under which this spectrum might be available. 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/device
offerings, price, call quality, coverage area and customer
service.
Wireline
Our wireline subsidiaries expect continued competitive pressure
in 2012 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 use competitive
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
for wholesale services by state regulatory commissions for
intrastate services and by the FCC for interstate services. 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.
Our wireline subsidiaries (excluding rural carrier affiliates)
operate under state-specific forms of regulation for retail
services that was either legislatively enacted or authorized by the
appropriate state regulatory commission. Most states 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.
16
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
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
IP-based 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 continue to provide competitive pressures. We
face a number of international competitors, including Orange
Business Services, 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 or the extent
of judgment required by our management, 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 through expense
accordingly. A 10% change in the amounts estimated to be
uncollectible would result in a change in the provision for
uncollectible accounts of approximately $114.
Pension and Other Postretirement Benefits Our actuarial
estimates of retiree benefit expense and the associated significant
weighted-average assumptions are discussed in Note 11. Our assumed
discount rate of 5.30% at December 31, 2011, 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, 2011, we decreased our
discount rate by 0.50%, resulting in an increase in our pension
plan benefit obligation of $3,384 and an increase in our
postretirement benefit obligation of $2,114. 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
$3,995 and an increase in our postretirement benefit obligation of
$2,817.
17
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Our return on assets assumption was 8.25% for the year ended
December 31, 2011. In 2011, we experienced actual returns on
investments lower than expected; however, in 2012 we will maintain
8.25% for our expected return on assets, based on long-term
expectations of future market performance and the asset mix of the
plans' investments. Our expected return on plan assets is
calculated using the actual fair value of plan assets. 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 2012 combined
pension and postretirement cost to increase $525, which under our
accounting policy would be recognized in the current year as part
of our fourth-quarter remeasurement of our retiree benefit
plans.
We recognize actual gains and losses on pension and
postretirement plan assets immediately in our operating results.
These gains and losses are generally measured annually as of
December 31 and accordingly will normally be recorded during the
fourth quarter, unless an earlier remeasurement is required. 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. Note 11 also discusses the
effects of certain changes in assumptions related to medical trend
rates on retiree healthcare costs.
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, 2011. However, if all other factors were to remain unchanged,
we expect that a one-year increase in the useful lives of our plant
in service would result in a decrease of approximately $2,325 in
our 2011 depreciation expense and that a one-year decrease would
result in an increase of approximately $3,474 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 periods after
acquisition. 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, wireless FCC licenses, and other trade names 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. If, due to
changes in how we manage the business, we move a portion of a
reporting unit to another reporting unit, we determine the amount
of goodwill to reallocate to the new reporting unit based on the
relative fair value of the portion of the business moved and the
portion of the business remaining in the reporting unit. 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 indication of
impairment exists), then we perform the second step.
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.
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 Earnings Before Interest, Taxes, and Depreciation and
Amortization expenses (EBITDA). 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. Except for the
Advertising Solutions segment, the calculated fair value of the
reporting unit exceeded book value in all circumstances and no
additional testing was necessary. As a result of our 2011
impairment test, we recorded a goodwill impairment charge in the
Advertising Solutions segment due to declines in the value of our
directory business and that industry (see Note 6). We also recorded
a corresponding impairment to an indefinite-lived trade name used
by the Advertising Solutions segment. For the Wireless and Wireline
segments, 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.
18
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
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, EBITDA
margins and churn rates. We expect wireless revenue growth to trend
down from our 2011 growth rate of 8.1% to a long-term growth rate
that reflects expected long-term inflation trends. We expect our
churn rates to decline in 2012 from our rate of 1.37% in 2011, in
line with expected trends in the industry but at a rate comparable
with industry-leading churn. EBITDA margins should continue to
trend at about 40%.
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.
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 2011 and 2010, we
identified an other-than-temporary decline in the value of
immaterial equity method investments and various cost
investments.
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.
19
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
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 UTBs may affect our income tax
expense. Settlement of uncertain tax positions may require use of
our cash.
New Accounting Standards
See Note 1 for a discussion of 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.
In May 2008, the court ruled that the concession was an ERISA
pension plan. In May 2009, we filed a motion for reconsideration
with the trial court. That motion was granted in January 2011, and
a final judgment was entered in our favor. Plaintiffs have appealed
the judgment to the Fifth Circuit Court of Appeals. In June 2011,
the Fifth Circuit Court of Appeals held that a similar cash
reimbursement program currently offered to out-of-region retirees
of BellSouth Corporation (BellSouth) is not a defined benefit plan.
Plaintiffs in that case filed a petition in the United States
Supreme Court for a writ of certiorari which the Supreme Court
denied in December 2011. The Supreme Court's decision lends
significant support to our belief that an adverse outcome having a
material effect on our financial statements in this case is
unlikely, but we will continue to evaluate the potential impact of
this suit on our financial results as it progresses.
NSA Litigation Twenty-four lawsuits were filed alleging that we
and other telecommunications carriers unlawfully provided
assistance to the National Security Agency in connection with
intelligence activities that were initiated following the events of
September 11, 2001. In the first filed case, Hepting et al v.
AT&T Corp., AT&T Inc. and Does 1-20, a purported class
action filed in U.S. District Court in the Northern District of
California, plaintiffs alleged that the defendants disclosed and
are currently disclosing to the U.S. Government content and call
records concerning communications to which Plaintiffs were a party.
Plaintiffs sought damages, a declaratory judgment and injunctive
relief for violations of the First and Fourth Amendments to the
U.S. Constitution, the Foreign Intelligence Surveillance Act
(FISA), the Electronic Communications Privacy Act and other federal
and California statutes. We filed a motion to dismiss the
complaint. The United States asserted the "state secrets privilege"
and related statutory privileges and also filed a motion asking the
court to dismiss the complaint. The court denied the motions, and
we and the United States appealed. In August 2008, the U.S. Court
of Appeals for the Ninth Circuit remanded the case to the district
court without deciding the issue in light of the passage of the
FISA Amendments Act, a provision of which addresses the allegations
in these pending lawsuits (immunity provision). The immunity
provision requires the pending lawsuits to be dismissed if the
Attorney General certifies to the court either that the alleged
assistance was undertaken by court order, certification, directive
or written request or that the telecom entity did not provide the
alleged assistance. In September 2008, the Attorney General filed
his certification and asked the district court to dismiss all of
the lawsuits pending against the AT&T Inc. telecommunications
companies. The court granted the Government's motion to dismiss and
entered final judgments in July 2009. In addition, a lawsuit
seeking to enjoin the immunity provision's application on grounds
that it is unconstitutional was filed. In March 2009, we and the
Government filed motions to dismiss this lawsuit. The court granted
the motion to dismiss and entered final judgment in July 2009. All
cases brought against the AT&T entities have been dismissed. In
August 2009, plaintiffs in all cases filed an appeal with the Ninth
Circuit Court of Appeals. On December 29, 2011, the Ninth Circuit
Court of Appeals affirmed the dismissals in all cases. Management
believes that any further appeal is without merit and intends to
continue to defend these matters vigorously.
Universal Service Fees Litigation In October 2010, our wireless
subsidiary was served with a purported class action in Circuit
Court, Cole County, Missouri (MBA Surety Agency, Inc. v. AT&T
Mobility, LLC), in which the plaintiffs contend that we violated
the FCC's rules by collecting Universal Service Fees on certain
services not subject to such fees, including Internet access
service provided over wireless handsets commonly called
"smartphones" and wireless data cards, as well as collecting
certain other state and local fees. Plaintiffs define the class as
all persons who from April 1, 2003, until the present had a
contractual relationship with us for Internet access through a
smartphone or a wireless data card. Plaintiffs seek an unspecified
amount of damages as well as injunctive relief. We believe that an
adverse outcome having a material effect on our financial
statements in this case is unlikely.
20
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Wage and Hour Litigation Two wage and hour cases were filed in
federal court in December 2009 each asserting claims under the Fair
Labor Standards Act (Luque et al. v. AT&T Corp. et al., U.S.
District Court in the Northern District of California) (Lawson et
al. v. BellSouth Telecommunications, Inc., U.S. District Court in
the Northern District of Georgia). Luque also alleges violations of
a California wage and hour law, which varies from the federal law.
In each case, plaintiffs allege that certain groups of wireline
supervisory managers were entitled to paid overtime and seek class
action status as well as damages, attorneys' fees and/or penalties.
Plaintiffs have been granted conditional collective action status
for their federal claims and also are expected to seek class action
status for their state law claims. We are contesting the collective
and class action treatment of the claims, the merits of the claims
and the method of calculating damages for the claims. A jury
verdict recently was entered in favor of the Company in the U.S.
District Court in Connecticut on similar FLSA claims. We believe
that an adverse outcome in these cases having a material effect on
our financial statements is unlikely.
Qualcomm Spectrum Purchase In December 2011, we completed our
purchase of spectrum licenses in the Lower 700 MHz frequency band
from Qualcomm Incorporated for approximately $1,925 in cash. The
spectrum covers more than 300 million people total nationwide,
including 12 MHz of Lower 700 MHz D and E block spectrum covering
more than 70 million people in five of the top 15 metropolitan
areas and 6 MHz of Lower 700 MHz D block spectrum covering more
than 230 million people across the rest of the United States. We
plan to deploy this spectrum as supplemental downlink capacity,
using carrier aggregation technology once compatible handsets and
network equipment are developed.
T-Mobile In March 2011, we agreed to acquire from Deutsche
Telekom AG (Deutsche Telekom) all of the shares of T-Mobile for
approximately $39,000, subject to certain adjustments. In December
2011, in light of opposition to the merger from the DOJ and FCC, we
and Deutsche Telekom agreed to terminate the transaction. Pursuant
to the purchase agreement, we paid a breakup fee of $3,000, entered
into a broadband roaming agreement and, pursuant to required
regulatory approvals, are in the process of transferring to
Deutsche Telekom certain wireless spectrum. Termination of the
purchase agreement also terminated our associated credit agreement
with a group of banks, dated as of March 31, 2011, to partially
fund the purchase.
Tender of Telmex Shares In August 2011, the Board of Directors
of America Movil approved a tender offer for the remaining
outstanding shares of Telmex that were not already owned by America
Movil. The offer was for $10.50 Mexican pesos per share (payable in
cash). The tender offer was launched in October 2011, and we
tendered all of our shares for $1,197 of cash.
Labor Contracts As of January 31, 2012, we employed
approximately 256,000 persons. Approximately 55% of our employees
are represented by the Communications Workers of America, the
International Brotherhood of Electrical Workers or other unions.
Contracts covering approximately 120,000 employees will expire
during 2012. For contracts covering approximately 80,000 (mainly
wireline) employees, the union is entitled to call a work stoppage
in the absence of a new contract being reached.
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.
LIQUIDITY AND CAPITAL RESOURCES
We had $3,185 in cash and cash equivalents available at December
31, 2011. Cash and cash equivalents included cash of $1,182 and
money market funds and other cash equivalents of $2,003. Cash and
cash equivalents increased $1,748 since December 31, 2010. During
2011, cash inflows were primarily provided by cash receipts from
operations and cash received from our tender of Telmex shares.
These inflows were largely offset by cash used to meet the needs of
the business, including but not limited to, payment of operating
expenses, funding capital expenditures, dividends to stockholders
and the acquisition of wireless spectrum; a net reduction of debt,
including our redemption of approximately $3,000 of bonds
originally due in 2012; cash payments related to the abandoned
T-Mobile acquisition; and a contribution to our pension plan. We
discuss many of these factors in detail below.
21
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Cash Provided by or Used in Operating Activities
During 2011, cash provided by operating activities was $34,648,
compared to $34,993 in 2010. Our lower operating cash flows
reflected the payment of $3,000 cash to Deutsche Telekom and a
contribution to the pension plan of $1,000 partially offset by
decreased tax payments of $3,506. Current-year operating cash was
also positively affected by our decision to pay approximately
$2,500 of retiree postretirement expenses from plan assets, as
opposed to our prior-year election to pay these out of corporate
funds.
During 2010, cash provided by operating activities was $34,993
compared to $34,405 in 2009. Our higher operating cash flow
reflected 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.
Cash Used in or Provided by Investing Activities
During 2011, cash used in investing activities consisted
primarily of:
-- $20,110 in capital expenditures, excluding interest during construction.
-- $162 in interest during construction.
-- $1,925 purchase of Qualcomm spectrum licenses.
-- $320 purchase of wireless partnership noncontrolling interest.
During 2011, cash provided by investing activities consisted
primarily of:
-- $1,197 from the tender of our Telmex shares.
-- $62 from the sale of securities, net of investments.
Virtually all of our capital expenditures are spent on our
wireless and wireline networks, our U-verse services and support
systems for our communications services. Capital expenditures,
excluding interest during construction, increased $580 from 2010
and were flat when including interest during construction. The
Wireline segment, which includes U-verse services, represented 52%
of the total capital expenditures, excluding interest during
construction, and was flat in 2011. Capital spending in our
Wireless segment, excluding capitalized interest during
construction, represented 48% of our total spending and increased
6% in 2011. Wireless expenditures were primarily used for network
capacity expansion, integration and upgrades to our High-Speed
Downlink Packet Access network and the initial deployment of LTE
equipment for our recent commercial launch.
We expect that our capital expenditures during 2012 will be
approximately $20,000. This amount may change if the regulatory
environment becomes more unfavorable for investment. We expect
increases in our Wireless segment to be offset by declines in our
Wireline segment. The amount of capital investment is influenced by
demand for services and products, continued growth and regulatory
considerations.
Cash Used in or Provided by Financing Activities
We paid dividends of $10,172 in 2011, $9,916 in 2010, and $9,670
in 2009, reflecting dividend rate increases. In December 2011, our
Board of Directors approved a 2.3% increase in the quarterly
dividend from $0.43 to $0.44 per share. This follows a 2.4%
dividend increase approved by AT&T's Board in December 2010.
Dividends declared by our Board of Directors totaled $1.73 per
share in 2011, $1.69 per share in 2010, and $1.65 per share in
2009. Our dividend policy considers the expectations and
requirements of stockholders, internal requirements of AT&T and
long-term growth opportunities. It is our intent to provide the
financial flexibility to allow our Board of Directors to consider
dividend growth and to recommend an increase in dividends to be
paid in future periods. All dividends remain subject to declaration
by our Board of Directors.
During 2011, we issued debt with net proceeds of $7,936 from the
following:
-- April 2011 issuance of $1,750 of 2.95% global notes due 2016
and $1,250 of 4.45% global notes due 2021.
-- August 2011 issuance of $1,500 of 2.40% global notes due
2016, $1,500 of 3.875% global notes due 2021, and $2,000 of 5.55%
global notes due 2041.
Debt proceeds were used for general corporate purposes.
22
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
During 2011, debt repayments totaled $9,226 and consisted
of:
-- $4,543 in repayments of long-term debt with a
weighted-average interest rate of 6.58%.
-- $1,625 in repayments of commercial paper, net of issuances.
-- $1,000 for the early redemption of the SBC Communications
Inc. 5.875% global notes originally due on February 1, 2012.
-- $2,000 for the early redemption of the New Cingular Wireless
Services, Inc. 8.125% notes originally due on May 1, 2012.
-- $31 in repayments of capitalized leases.
-- $27 in repayments of short-term bank borrowings.
At December 31, 2011, we had $3,453 of debt maturing within one
year, all of which was long-term debt maturities. Debt maturing
within one year includes the following notes that may be put back
to us by the holders:
-- $1,000 of annual put reset securities issued by BellSouth
that may be put back to us each April until maturity in 2021.
-- An accreting zero-coupon note that may be redeemed each May
until maturity in 2022. If the zero-coupon note (issued for
principal of $500 in 2007) is held to maturity, the redemption
amount will be $1,030.
On February 13, 2012, we issued $1,000 of 0.875% global notes
due 2015, $1,000 of 1.60% global notes due 2017, and $1,000 of
3.00% global notes due 2022.
On January 13, 2012, we announced our intention to redeem $1,200
of outstanding 6.375% Senior Notes due February 15, 2056. The
redemption date was February 15, 2012, and the redemption amount
was 100% of the principal amount plus accrued interest.
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
started buying back stock under this program in January 2012.
We plan to fund our 2012 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, share repurchases and the repayment of debt.
Credit Facilities
T-Mobile Acquisition Financing In December 2011, we and Deutsche
Telekom agreed to terminate our agreement to purchase T-Mobile. The
termination of the purchase agreement also terminated our $20,000
associated credit agreement with a group of banks, dated as of
March 31, 2011, to partially fund the purchase.
Other Credit Facilities In December 2011, we amended and
extended for an additional one-year term our existing $5,000,
four-year revolving credit agreement (Four-Year Agreement) with a
syndicate of banks. We also entered into a new $5,000, 364-day
revolving credit agreement, with a syndicate of banks, to replace
our expiring 364-day revolving credit 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, 2011, we
had no advances outstanding under either agreement and were in
compliance with all covenants under each agreement.
In January 2012, we provided notice to permanently reduce the
outstanding commitments of the lenders under our 364-day revolving
credit agreement from $5,000 to $3,000.
The Four-Year Agreement
The amendments to the Four-Year Agreement include, but are not
limited to, (i) changing the interest rate charged for advances
from a rate based on AT&T's credit default swap spread to a
fixed spread; (ii) decreasing the amount payable as facilities
fees, and (iii) at AT&T's option, adding subsidiaries as
additional borrowers, with or without a guarantee provided by
AT&T Inc., subject to conditions provided in the agreement. The
terms of such guarantee are set forth in the agreement.
23
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
The obligations of the lenders under the Four-Year Agreement to
provide advances will terminate on December 19, 2015, unless prior
to that date either: (i) AT&T and, if applicable, a
Co-Borrower, reduces to $0 the commitments of the lenders under the
Agreement or (ii) certain events of default occur. The Agreement
also provides that AT&T and lenders representing more than 50%
of the facility amount may agree to extend their commitments under
the Agreement for an additional one year beyond the December 19,
2015, termination date, under certain circumstances. We also 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.
Advances would bear interest, at AT&T's option, either:
-- at a variable annual rate equal to the highest of: (1)(a) the
base (or prime) rate of the bank affiliate of Citibank, N.A. which
is serving as administrative agent under the Agreement, (b) 0.50%
per annum above the Federal funds rate, and (c) the London
interbank offered rate (LIBOR) applicable to U.S. Dollars for a
period of one month plus 1.00%, plus (2) an applicable margin, as
set forth in the Agreement (Applicable Margin); or
-- at a rate equal to: (i) the LIBOR for a period of one, two,
three or six months, as applicable, plus (ii) the Applicable
Margin.
The Applicable Margin will equal 0.560% if our unsecured
long-term debt is rated at least A+ by Standard & Poor's or
Fitch, Inc. or A1 by Moody's Investors Service. The Applicable
Margin will be 0.670% per annum if our unsecured long-term debt
ratings are A or A2 and will be 0.900% per annum in the event our
unsecured long-term debt ratings are A- and A3 (or below).
The Agreement continues to require us to 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 3-to-1, 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 change 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 under the Agreement.
-- 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.
-- Our bankruptcy or insolvency.
364-day Agreement
The obligations of the lenders to provide advances will
terminate on December 17, 2012, 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 17, 2012, 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 LIBOR for a period of one
month plus 1.00%, plus (2) an applicable margin as set forth in
such agreement (Applicable Margin); or
-- at a rate equal to: (i) LIBOR for a period of one, two, three
or six months, as applicable, plus (ii) the Applicable Margin.
The Applicable Margin will equal 0.595% if our unsecured
long-term debt is rated at least A+ by Standard & Poor's or
Fitch, Inc. or A1 by Moody's Investors Service. The Applicable
Margin will be 0.710% per annum if our unsecured long-term debt
ratings are A or A2 and will be 0.950% per annum in the event our
unsecured long-term debt ratings are A- and A3 (or below).
24
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
The 364-day Agreement contains a negative pledge covenant that
is identical to the negative pledge in the Four-Year Agreement. 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 applicable to the Four-Year
Agreement 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 Am rica M vil. At
December 31, 2011, our debt ratio was 38.0%, compared to 37.1% at
December 31, 2010, and 41.4% at December 31, 2009. The debt ratio
is affected by the same factors that affect total capital, and
reflects our recent debt issuances. Total capital decreased $7,567
in 2011 compared to an increase of $4,046 in 2010. The 2011 capital
decrease was primarily due to a decrease in retained earnings of
$6,339, which increased the debt ratio in 2011.
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, 2011, 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.
25
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
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, 2011. 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 $25,748; postemployment benefit
obligations of $34,011; and other noncurrent liabilities of
$12,694, which included deferred lease revenue from our agreement
with American Tower Corp. of $450 (see Note 14).
Payments Due By Period
------------------------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
-------------------------- --------------- -------------- -------- -------- ---------
Long-term debt
obligations1,2 $ 64,613 $ 3,453 $10,612 $ 9,437 $ 41,111
Interest payments on
long-term debt2 63,358 3,613 6,522 5,581 47,642
Operating lease
obligations 23,242 2,462 4,780 4,215 11,785
Unrecognized tax benefits3 3,345 259 - - 3,086
Purchase obligations4 10,709 3,845 4,339 2,185 340
-------------------------- ------- ------ ------ ------ -------
Total Contractual
Obligations $ 165,267 $ 13,632 $26,253 $21,418 $103,964
========================== ======= ====== ====== ====== =======
Represents principal or payoff amounts of notes and debentures at maturity or, for putable
1 debt, the next put opportunity.
2 Long-term debt obligations and interest payments on long-term debt were not adjusted to reflect
the January 13, 2012, notice to call $1,200 of debt, which was redeemed on February 15, 2012,
with an original maturity of February 15, 2056.
3 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.
4 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
$611 in 2012, $423 in the aggregate for 2013 and 2014, $62 in the aggregate for 2015 and 2016,
and $10 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.
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.
26
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Following are our interest rate derivatives subject to material
interest rate risk as of December 31, 2011. 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, 2011.
Maturity
-----------------------------------------------------------------------------------------------
Fair
Value
2012 2013 2014 2015 2016 Thereafter Total 12/31/11
--------------------- ------- ------ ------ ------ ----- ------------ ------ ---------
Interest Rate
Derivatives
--------------------- ------ ------ ------ ------ ----- ------------ ------ ---------
Interest Rate Swaps:
Receive Fixed/Pay
Variable Notional
Amount Maturing $1,800 $3,000 $1,500 $1,500 $ - $ 1,000 $8,800 $ 521
Weighted-Average
Variable Rate
Payable1 2.3% 2.5% 2.0% 2.6% 3.6% 4.1%
Weighted-Average
Fixed Rate
Receivable 4.9% 4.7% 3.9% 4.5% 5.6% 5.6%
===================== ===== ===== ===== ===== ==== ======== ===== ========
Interest payable based on current and implied forward rates for One, Three, or Six Month LIBOR
1 plus a spread ranging between approximately 4 and 388 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.
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, 2011, 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.
Issuer Equity Repurchases
On December 17, 2010, our Board of Directors authorized a new
share repurchase plan of 300 million shares with no expiration
date. This authorization represented approximately 5.0% of
AT&T's shares outstanding at December 31, 2011. During 2010 and
2011, we did not repurchase any shares under this plan. In January
2012, we started to repurchase a portion of the shares pursuant to
plans that comply with the requirements of Rule 10b5-1(c) under the
Securities Exchange Act of 1934. We will fund any share repurchases
through a combination of cash from operations, borrowings dependent
on market conditions, or cash from the disposition of certain
non-strategic investments.
27
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
STOCK PERFORMANCE GRAPH
The comparison above assumes $100 invested on December 31, 2006,
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.
28
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 United
States 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 United States, 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 Financial Accounting Standards Board (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 United States 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.
29
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 past 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
United States 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. We do not expect these
proposals to have a material adverse impact on our operating
results, and they could create increased demand for communications
services as companies seek to reduce emissions.
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 fairly allocate sufficient
spectrum to allow the wireless industry in general, and the Company
in particular, to increase its capacity or if we cannot acquire
needed spectrum or deploy the services customers desire on a timely
basis without burdensome conditions 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.
30
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
Increasing competition for wireless customers could adversely
affect our operating results.
We have multiple wireless competitors in each of our service
areas and compete for customers based principally on service/device
offerings, price, call quality, coverage area and customer service.
In addition, we are facing 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 also expect that our customers' growing demand for
data services will place constraints on our network capacity. This
competition and our capacity issues 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, network deployment and
management, and service offerings.
Increasing costs in our wireline operations could adversely
affect wireline operating margins.
We expect our operating costs, including customer acquisition
and retention costs will continue to put pressure on pricing,
margins and customer retention levels. 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
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).
Over time these cost disparities could require us to evaluate the
strategic worth of various wireline operations. We believe our cost
disadvantages could 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.
Equipment failures, natural disasters, computer hacking and
terrorist attacks may materially adversely affect our
operations.
Major equipment failures or natural disasters, including severe
weather, computer hacking, 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, or our customer account
support and information systems, 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, wireless or
customer-related support systems, even for a limited time period,
may result in significant expenses, potential legal liability, 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 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.
Telecommunications technology has shifted 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 have deployed a new broadband
network to offer IP-based voice, data and video services. Should
regulatory requirements change, our deployment could be 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.
31
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Dollars in millions except per share amounts
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 United States
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.
A majority of our workforce is represented by labor unions.
Absent the successful negotiation of agreements scheduled to expire
during 2012, we could experience lengthy work stoppages.
A majority of our employees are represented by labor unions as
of year-end 2011. Labor contracts covering many of the employees
will expire during 2012. We experienced a work stoppage in 2004
when the contracts involving our wireline employees expired, and we
may experience additional work stoppages in 2012. A work stoppage
could adversely affect our business operations, including a loss of
revenue and strained relationships with customers, and we cannot
predict the length of any such strike. We cannot predict the new
contract provisions or the impact of any new contract on our
financial condition.
32
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 at
favorable rates.
-- Changes in available technology and the effects of such
changes, including product substitutions and deployment costs.
-- Increases in our benefit plans' costs, including increases
due to adverse changes in the U.S. and foreign securities markets,
resulting in worse-than-assumed investment returns and discount
rates and adverse medical cost trends and unfavorable healthcare
legislation and regulations.
-- The final outcome of FCC and other federal agency proceedings
and reopenings of such proceedings and judicial reviews, if any, of
such proceedings, including issues relating to access charges,
universal service, broadband deployment, E911 services,
competition, net neutrality, unbundled loop and transport elements,
availability of new spectrum from the FCC on fair and balanced
terms, wireless license awards and renewals and wireless services,
including data roaming agreements.
-- The final outcome of regulatory proceedings in the states in
which we operate and reopenings of such proceedings and judicial
reviews, if any, of such proceedings, including proceedings
relating to Interconnection terms, access charges, universal
service, unbundled network elements and resale and wholesale rates;
broadband deployment including our U-verse services; net
neutrality; performance measurement plans; service standards; and
traffic compensation.
-- Enactment of additional state, federal and/or foreign
regulatory and tax laws and regulations pertaining to our
subsidiaries and foreign investments, including laws and
regulations that reduce our incentive to invest in our networks,
resulting in lower revenue growth and/or higher operating
costs.
-- Our ability to absorb revenue losses caused by increasing
competition, including offerings that use alternative technologies
(e.g., cable, wireless and VoIP) and our ability to maintain
capital expenditures.
-- The extent of competition and the resulting pressure on
customer and access line totals and wireline and wireless operating
margins.
-- Our ability to develop attractive and profitable
product/service offerings to offset increasing competition in our
wireless and wireline markets.
-- The ability of our competitors to offer product/service
offerings at lower prices due to lower cost structures and
regulatory and legislative actions adverse to us, including state
regulatory proceedings relating to unbundled network elements and
nonregulation of comparable alternative technologies (e.g.,
VoIP).
-- The development of attractive and profitable U-verse service
offerings; the extent to which regulatory, franchise fees and
build-out requirements apply to this initiative; and the
availability, cost and/or reliability of the various technologies
and/or content required to provide such offerings.
-- Our continued ability to attract and offer a diverse
portfolio of wireless devices, some on an exclusive basis.
-- The availability and cost of additional wireless spectrum and
regulations and conditions relating to spectrum use, licensing and
technical standards and deployment and usage, including network
management rules.
-- Our ability to manage growth in wireless data services,
including network quality and acquisition of adequate spectrum at
reasonable costs and terms.
-- The outcome of pending, threatened or potential litigation,
including patent and product safety claims by or against third
parties.
-- The impact on our networks and business from major equipment
failures; security breaches related to the network or customer
information; our inability to obtain handsets, equipment/software
or have handsets, equipment/software serviced in a timely and
cost-effective manner from suppliers; or severe weather conditions,
natural disasters, pandemics, energy shortages, wars or terrorist
attacks.
-- The issuance by the Financial Accounting Standards Board or
other accounting oversight bodies of new accounting standards or
changes to existing standards.
-- The issuance by the Internal Revenue Service and/or state tax
authorities of new tax regulations or changes to existing standards
and actions by federal, state or local tax agencies and judicial
authorities with respect to applying applicable tax laws and
regulations and the resolution of disputes with any taxing
jurisdictions.
-- Our ability to adequately fund our wireless operations,
including payment for additional spectrum network upgrades and
technological advancements.
-- Changes in our corporate strategies, such as changing network
requirements or acquisitions and dispositions, which may require
significant amounts of cash or stock, to respond to competition and
regulatory, legislative and technological developments.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
33
AT&T Inc.
Consolidated Statements of Income
Dollars in millions except per share amounts
============================================================================================
2011 2010 2009
------------------------------------------------------------ -------- -------- --------
Operating Revenues
Wireless service $ 56,726 $ 53,510 $ 48,563
Data 29,606 27,555 25,644
Voice 25,131 28,332 32,345
Directory 3,293 3,935 4,724
Other 11,967 10,948 11,237
------------------------------------------------------------ ------- ------- -------
Total operating revenues 126,723 124,280 122,513
------------------------------------------------------------ ------- ------- -------
Operating Expenses
Cost of services and sales (exclusive of depreciation
and amortization shown separately below) 57,374 52,379 50,639
Selling, general and administrative 38,844 32,864 31,359
Impairment of intangible assets 2,910 85 -
Depreciation and amortization 18,377 19,379 19,515
------------------------------------------------------------ ------- ------- -------
Total operating expenses 117,505 104,707 101,513
------------------------------------------------------------ ------- ------- -------
Operating Income 9,218 19,573 21,000
------------------------------------------------------------ ------- ------- -------
Other Income (Expense)
Interest expense (3,535) (2,994) (3,368)
Equity in net income of affiliates 784 762 734
Other income (expense) - net 249 897 152
------------------------------------------------------------ ------- ------- -------
Total other income (expense) (2,502) (1,335) (2,482)
------------------------------------------------------------ ------- ------- -------
Income from Continuing Operations Before Income Taxes 6,716 18,238 18,518
Income tax (benefit) expense 2,532 (1,162) 6,091
------------------------------------------------------------ ------- ------- -------
Income from Continuing Operations 4,184 19,400 12,427
------------------------------------------------------------ ------- ------- -------
Income from Discontinued Operations, net of tax - 779 20
------------------------------------------------------------ ------- ------- -------
Net Income 4,184 20,179 12,447
------------------------------------------------------------ ------- ------- -------
Less: Net Income Attributable to Noncontrolling Interest (240) (315) (309)
------------------------------------------------------------ ------- ------- -------
Net Income Attributable to AT&T $ 3,944 $ 19,864 $ 12,138
============================================================ ======= ======= =======
Basic Earnings Per Share from Continuing Operations
Attributable to AT&T $ 0.66 $ 3.23 $ 2.06
Basic Earnings Per Share from Discontinued Operations
Attributable to AT&T - 0.13 -
------------------------------------------------------------ ------- ------- -------
Basic Earnings Per Share Attributable to AT&T $ 0.66 $ 3.36 $ 2.06
============================================================ ======= ======= =======
Diluted Earnings Per Share from Continuing Operations
Attributable to AT&T $ 0.66 $ 3.22 $ 2.05
Diluted Earnings Per Share from Discontinued Operations
Attributable to AT&T - 0.13 -
------------------------------------------------------------ ------- ------- -------
Diluted Earnings Per Share Attributable to AT&T $ 0.66 $ 3.35 $ 2.05
============================================================ ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
34
AT&T Inc.
Consolidated Balance Sheets
Dollars in millions except per share amounts
-----------------------------------------------------------------------------------------------------------
December 31,
2011 2010
-------------------------------------------------------------------------------------- -------- --------
Assets
Current Assets
Cash and cash equivalents $ 3,185 $ 1,437
Accounts receivable - net of allowances for doubtful accounts of $878 and $957 13,606 13,610
Prepaid expenses 1,155 1,458
Deferred income taxes 1,470 1,170
Other current assets 3,611 3,179
-------------------------------------------------------------------------------------- ------- -------
Total current assets 23,027 20,854
-------------------------------------------------------------------------------------- ------- -------
Property, Plant and Equipment - Net 107,087 103,196
Goodwill 70,842 73,601
Licenses 51,374 50,372
Customer Lists and Relationships - Net 2,757 4,708
Other Intangible Assets - Net 5,212 5,440
Investments in Equity Affiliates 3,718 4,515
Other Assets 6,327 6,705
-------------------------------------------------------------------------------------- ------- -------
Total Assets $270,344 $269,391
====================================================================================== ======= =======
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 3,453 $ 7,196
Accounts payable and accrued liabilities 19,858 20,055
Advanced billing and customer deposits 3,872 4,086
Accrued taxes 1,003 975
Dividends payable 2,608 2,542
-------------------------------------------------------------------------------------- ------- -------
Total current liabilities 30,794 34,854
-------------------------------------------------------------------------------------- ------- -------
Long-Term Debt 61,300 58,971
-------------------------------------------------------------------------------------- ------- -------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 25,748 22,070
Postemployment benefit obligation 34,011 28,803
Other noncurrent liabilities 12,694 12,743
-------------------------------------------------------------------------------------- ------- -------
Total deferred credits and other noncurrent liabilities 72,453 63,616
-------------------------------------------------------------------------------------- ------- -------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2011
and 2010: issued 6,495,231,088 at December 31, 2011 and 2010) 6,495 6,495
Additional paid-in capital 91,156 91,731
Retained earnings 25,453 31,792
Treasury stock (568,719,202 at December 31, 2011 and 584,144,220
at December 31, 2010, at cost) (20,750) (21,083)
Accumulated other comprehensive income 3,180 2,712
Noncontrolling interest 263 303
-------------------------------------------------------------------------------------- ------- -------
Total stockholders' equity 105,797 111,950
-------------------------------------------------------------------------------------- ------- -------
Total Liabilities and Stockholders' Equity $270,344 $269,391
====================================================================================== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
35
AT&T Inc.
Consolidated Statements of Cash Flows
Dollars in millions
---------------------------------------------------------------------------------------------------------
2011 2010 2009
------------------------------------------------------------------------- --------- --------- -----------
Operating Activities
Net income $ 4,184 $ 20,179 $ 12,447
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 18,377 19,379 19,515
Undistributed earnings from investments in equity affiliates (623) (603) (419)
Provision for uncollectible accounts 1,136 1,334 1,762
Deferred income tax expense (benefit) and noncurrent
unrecognized tax benefits 2,937 (3,280) 1,885
Net gain from impairment and sale of investments (89) (802) -
Impairment of intangible assets 2,910 85 -
Actuarial loss on pension and postretirement benefits 6,280 2,521 215
Income from discontinued operations - (779) (20)
Changes in operating assets and liabilities:
Accounts receivable (1,133) (99) (490)
Other current assets (428) (187) (617)
Accounts payable and accrued liabilities (383) (1,508) 943
Retirement benefit funding (1,000) - -
Other - net 2,480 (1,247) (816)
------------------------------------------------------------------------- ------- ------- -------
Total adjustments 30,464 14,814 21,958
------------------------------------------------------------------------- ------- ------- -------
Net Cash Provided by Operating Activities 34,648 34,993 34,405
------------------------------------------------------------------------- ------- ------- -------
Investing Activities
Construction and capital expenditures:
Capital expenditures (20,110) (19,530) (16,554)
Interest during construction (162) (772) (740)
Acquisitions, net of cash acquired (2,368) (2,906) (983)
Dispositions 1,301 1,830 287
(Purchases) and sales of securities, net 62 (100) 55
Other 27 29 52
------------------------------------------------------------------------- ------- ------- -------
Net Cash Used in Investing Activities (21,250) (21,449) (17,883)
------------------------------------------------------------------------- ------- ------- -------
Financing Activities
Net change in short-term borrowings with original maturities of
three months or less (1,625) 1,592 (3,910)
Issuance of long-term debt 7,936 2,235 8,161
Repayment of long-term debt (7,574) (9,294) (8,652)
Issuance of treasury stock 237 50 28
Dividends paid (10,172) (9,916) (9,670)
Other (452) (515) (465)
------------------------------------------------------------------------- ------- ------- -------
Net Cash Used in Financing Activities (11,650) (15,848) (14,508)
------------------------------------------------------------------------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,748 (2,304) 2,014
Cash and cash equivalents beginning of year 1,437 3,741 1,727
------------------------------------------------------------------------- ------- ------- -------
Cash and Cash Equivalents End of Year $ 3,185 $ 1,437 $ 3,741
========================================================================= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
36
1.
AT&T Inc.
Consolidated Statements of Changes in Stockholders' Equity
Dollars and shares in millions except per share amounts
========================================================= ====== ======== ====== ========
2011 2010 2009
------------------ ------------------ ---------------------
Shares Amount Shares Amount Shares Amount
------------------------------------- ------ --------- ------ --------- ------- ------------
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 $ 91,731 $ 91,707 $ 91,728
Issuance of treasury stock 132 159 29
Share-based payments (118) (130) (50)
Share of equity method investee
capital
transactions (290) - -
Change related to acquisition of
interests
held by noncontrolling owners (299) (5) -
------------------------------------- ------ -------- ------ -------- ------ --------
Balance at end of year $ 91,156 $ 91,731 $ 91,707
===================================== ====== ======== ====== ======== ====== ========
Retained Earnings
Balance at beginning of year $ 31,792 $ 21,944 $ 19,566
Net income attributable to AT&T
($0.66, $3.35 and $2.05 per diluted
share) 3,944 19,864 12,138
Dividends to stockholders
($1.73, $1.69 and $1.65 per share) (10,244) (9,985) (9,733)
Other (39) (31) (27)
------------------------------------- ------ -------- ------ -------- ------ --------
Balance at end of year $ 25,453 $ 31,792 $ 21,944
===================================== ====== ======== ====== ======== ====== ========
Treasury Stock
Balance at beginning of year (584) $ (21,083) (593) $ (21,260) (602) $ (21,410)
Issuance of treasury stock 16 333 9 177 9 150
------------------------------------- ------ -------- ------ -------- ------ --------
Balance at end of year (568) $ (20,750) (584) $ (21,083) (593) $ (21,260)
===================================== ====== ======== ====== ======== ====== ========
The accompanying notes are an integral part of the consolidated financial statements.
37
AT&T Inc.
Consolidated Statements of Changes in Stockholders' Equity (continued)
Dollars and shares in millions except per share amounts
--------------------------------------------------------------------------------- -------- --------
2011 2010 2009
------------ ------------ --------
Amount Amount Amount
------------------------------------------------------------------- ------------ ------------ ---------
Accumulated Other Comprehensive Income
Attributable to AT&T, net of tax:
Balance at beginning of year $ 2,712 $ 2,678 $ (418)
Foreign currency translation adjustments, net of
taxes of $66, $146 and $70 123 271 147
Net unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses), net of taxes of $(21), $(12) and $84 (41) (22) 176
Less reclassification adjustment realized in net
income, net of taxes of $(29), $7 and $23 (54) 14 48
Net unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses), net of taxes of $(140),
$(182) and $329 (256) (334) 610
Less reclassification adjustment realized in net
income, net of taxes of $8, $7 and $8 15 12 15
Defined benefit postretirement plans (see Note 11):
Net prior service credit arising from
period, net of taxes of $699, $298 and $1,383 1,140 487 2,257
Amortization of net prior service credit,
net of taxes of $(282), $(243) and $(96) (460) (396) (156)
Other 1 2 (1)
------------------------------------------------------------------- -------- -------- --------
Other comprehensive income attributable to AT&T 468 34 3,096
------------------------------------------------------------------- -------- -------- --------
Balance at end of year $ 3,180 $ 2,712 $ 2,678
=================================================================== ======== ======== ========
Noncontrolling Interest:
Balance at beginning of year $ 303 $ 425 $ 403
Net income attributable to noncontrolling interest 240 315 309
Distributions (220) (278) (286)
Acquisition of interests held by noncontrolling owners (59) (162) -
Translation adjustments attributable to
noncontrolling interest, net of taxes (1) 3 (1)
------------------------------------------------------------------- -------- -------- --------
Balance at end of year $ 263 $ 303 $ 425
=================================================================== ======== ======== ========
Total Stockholders' Equity at beginning of year $ 111,950 $ 101,989 $ 96,364
=================================================================== ======== ======== ========
Total Stockholders' Equity at end of year $ 105,797 $ 111,950 $ 101,989
=================================================================== ======== ======== ========
Total Comprehensive Income, net of tax:
Net income attributable to AT&T $ 3,944 $ 19,864 $ 12,138
Other comprehensive income attributable to AT&T per above 468 34 3,096
------------------------------------------------------------------- -------- -------- --------
Comprehensive income attributable to AT&T $ 4,412 $ 19,898 $ 15,234
=================================================================== ======== ======== ========
Net income attributable to noncontrolling interest 240 315 309
Other comprehensive income (loss) attributable to
noncontrolling interest per above (1) 3 (1)
------------------------------------------------------------------- -------- -------- --------
Comprehensive income attributable to
noncontrolling interest $ 239 $ 318 $ 308
=================================================================== ======== ======== ========
Total comprehensive income $ 4,651 $ 20,216 $ 15,542
=================================================================== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
38
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. On the consolidated balance sheets, income
taxes receivable has been reclassified from "Accrued taxes" to
"Other current assets."
New Accounting Standards In June 2011, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU)
2011-05, "Presentation of Comprehensive Income," which will no
longer allow the presentation of the components of other
comprehensive income in the consolidated statements of changes in
stockholders' equity or footnotes for interim reporting. For
reporting periods beginning after December 31, 2011, ASU 2011-05
requires presentation of other comprehensive income in combination
with, or directly following the consolidated statements of income.
In December 2011, ASU 2011-05 was amended to delay the proposed
identification of reclassification adjustments in the consolidated
statements of income. We are currently evaluating the allowable
disclosure alternatives under the new guidance.
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, 2011, we had severance accruals of $335 and at
December 31, 2010, we had severance accruals of $848. The decline
was primarily due to payments during the year.
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 is based on amounts that meet the recognition threshold
and are measured in accordance with 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.
Certain reclassifications have been made to prior periods to
conform with current reporting. On the consolidated balance sheet,
income taxes receivable has been reclassified from "Accrued taxes"
to "Other current assets."
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, 2011, we held $1,182 in cash and $2,003 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.
39
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
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 selling price,
subject to the requirement that revenue recognized is limited to
the amounts already received from the customer that are not
contingent upon the delivery of additional products or services to
the customer in the future. 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.
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 and
volumes by product, formulated from historical data and adjusted
for known rate changes. 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 within three 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 record an expense to 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 $1,188 at December
31, 2011, and $1,303 at December 31, 2010. Wireless handsets and
accessories, which are valued at the lower of cost or market
(determined using current replacement cost) were $1,082 as of
December 31, 2011, and $1,185 as of December 31, 2010. 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, or specific costs 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, and
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. We recognize an impairment
loss when 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.
40
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
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, we recognize period-to-period changes in the
liability resulting from the passage of time and revisions to
either the timing or the amount of the original estimate. 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 upon incurring them.
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 brand, 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 period of 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 principal
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. We perform our test of the fair values of FCC licenses using
a discounted cash flow model. 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. The fair value measurements used are
considered Level 3 under the Fair Value and Disclosure framework
(see Note 9).
Intangible assets that have finite useful lives are amortized
over their useful lives, a weighted average of 8.3 years (7.9 years
for customer lists and relationships and 11.2 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
other comprehensive income (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).
41
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Pension and Other Postretirement Benefits See Note 11 for a
comprehensive discussion of our pension and postretirement benefit
expense, including a discussion of the actuarial assumptions and
our policy for recognizing the associated gains and losses.
NOTE 2. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Qualcomm Spectrum Purchase In December 2011, we completed our
purchase of 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 United
States. We plan to deploy this spectrum as supplemental downlink
capacity, using carrier aggregation technology once compatible
handsets and network equipment are developed.
Purchase of Wireless Partnership Minority Interest In July 2011,
we completed the acquisition of Convergys Corporation's minority
interests in the Cincinnati SMSA Limited Partnership and an
associated cell tower holding company for approximately $320 in
cash.
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.
Centennial In December 2010, we completed our acquisition
accounting of Centennial Communications Corporation (Centennial),
which included net assets of $1,518 in goodwill, $655 in FCC
licenses, and $449 in customer lists and other intangible
assets.
Other Acquisitions We acquired $33 of wireless spectrum in 2011
and $265 in 2010 from various companies, primarily in support of
our ongoing network enhancement efforts. In 2010, we also acquired
a home monitoring platform developer and other entities for $86 in
cash.
Dispositions
Tender of Telmex Shares In August 2011, the Board of Directors
of America Movil, S.A. de C.V. (America Movil) approved a tender
offer for the remaining outstanding shares of Telefonos de Mexico,
S.A. de C.V. (Telmex) that were not already owned by America Movil.
We tendered all of our shares of Telmex for $1,197 of cash. Telmex
was accounted for as an equity method investment (see Note 7).
Sale of Sterling Operations In May 2010, we entered into an
agreement to sell our Sterling Commerce Inc. (Sterling) subsidiary
and changed our reporting for Sterling to discontinued operations.
In August 2010, we completed the sale and received net proceeds of
approximately $1,400.
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 historic
periods, to income from discontinued operations in the accompanying
consolidated statements of income.
42
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
The following table includes Sterling's operating results, which
are presented in the "Income From Discontinued Operations, net of
tax" line item on the consolidated statements of income. Prior to
the reclassification, these operating results were reported in our
Other segment:
Aug. 27, Dec. 31,
2010 2009
------------------------------------------------------------ ---------- ----------
Operating revenues $ 349 $ 563
Operating expenses 327 523
------------------------------------------------------------ ------ ------
Operating income 22 40
------------------------------------------------------------ ------ ------
Income before income taxes 18 29
Income tax expense 8 9
------------------------------------------------------------ ------ ------
Income from discontinued operations during phase-out period 10 20
Gain on disposal of discontinued operations 769 -
------------------------------------------------------------ ------ ------
Income from discontinued operations, net of tax $ 779 $ 20
============================================================ ====== ======
Centennial In August 2010, we sold operations in eight service
areas in Louisiana and Mississippi, as required by the Department
of Justice (DOJ), 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.
Other Adjustments
T-Mobile In March 2011, we agreed to acquire from Deutsche
Telekom AG (Deutsche Telekom) all shares of T-Mobile USA, Inc.
(T-Mobile) for approximately $39,000, subject to certain
adjustments. In December 2011, in light of opposition to the merger
from the DOJ and FCC, we and Deutsche Telekom agreed to terminate
the transaction. Pursuant to the purchase agreement, we paid a
breakup fee of $3,000, entered into a broadband roaming agreement
and, pursuant to regulatory approvals, will transfer certain
wireless spectrum with a book value of $962. These agreement
termination charges were included in "Selling, general and
administrative" expenses in our Other segment. Termination of the
purchase agreement also terminated our associated credit agreement
with a group of banks, dated as of March 31, 2011, to partially
fund the purchase.
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.
43
Notes to Consolidated Financial Statements
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, 2011, 2010
and 2009, are shown in the table below:
Year Ended December 31, 2011 2010 2009
----------------------------------------------------------------------------- ------ ------- -------
Numerators
Numerator for basic earnings per share:
Income from continuing operations $4,184 $19,400 $12,427
Income attributable to noncontrolling interest (240) (315) (309)
----------------------------------------------------------------------------- ----- ------ ------
Income from continuing operations attributable to AT&T 3,944 19,085 12,118
Dilutive potential common shares:
Other share-based payment 11 11 10
----------------------------------------------------------------------------- ----- ------ ------
Numerator for diluted earnings per share $3,955 $19,096 $12,128
============================================================================= ===== ====== ======
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common shares outstanding 5,928 5,913 5,900
Dilutive potential common shares:
Stock options 4 3 3
Other share-based payment (in shares) 18 22 21
----------------------------------------------------------------------------- ----- ------ ------
Denominator for diluted earnings per share 5,950 5,938 5,924
============================================================================= ===== ====== ======
Basic earnings per share from continuing operations attributable to AT&T $ 0.66 $ 3.23 $ 2.06
Basic earnings per share from discontinued operations attributable to AT&T - 0.13 -
----------------------------------------------------------------------------- ----- ------ ------
Basic earnings per share attributable to AT&T $ 0.66 $ 3.36 $ 2.06
============================================================================= ===== ====== ======
Diluted earnings per share from continuing operations attributable to AT&T $ 0.66 $ 3.22 $ 2.05
Diluted earnings per share from discontinued operations attributable to AT&T - 0.13 -
----------------------------------------------------------------------------- ----- ------ ------
Diluted earnings per share attributable to AT&T $ 0.66 $ 3.35 $ 2.05
============================================================================= ===== ====== ======
At December 31, 2011, 2010 and 2009, we had issued and
outstanding options to purchase approximately 66 million, 130
million, and 178 million shares of AT&T common stock. The
exercise prices of 40 million, 100 million, and 163 million shares
in 2011, 2010, and 2009 were above the average market price of
AT&T stock for the respective periods. Accordingly, we did not
include these amounts in determining the dilutive potential common
shares. At December 31, 2011, the exercise prices of 24 million
vested stock options were below market price.
44
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer different
products and services over various technology platforms and are
managed accordingly. We analyze our various operating segments
based on segment income before income taxes. We make our capital
allocations decisions based on our strategic direction of the
business, needs of the network (wireless or wireline) providing
services and other assets needed to provide emerging services to
our customers. Actuarial gains and losses from pension and other
postretirement benefits, interest expense and other income
(expense) - net, are managed only on a total company basis and are,
accordingly, reflected only in consolidated results. Therefore,
these items are not included in the calculation of each segment's
percentage of our total segment income. The customers and
long-lived assets of our reportable segments are predominantly in
the United States. We have four reportable segments: (1) Wireless,
(2) Wireline, (3) Advertising Solutions and (4) Other.
The Wireless segment uses our nationwide network to provide
consumer and business customers with wireless voice and advanced
data communications services.
The Wireline segment uses our regional, national and global
network to provide consumer and business customers with landline
voice and data communications services, AT&T U-verse(R) TV,
high-speed broadband and voice services and managed networking to
business customers. Additionally, we receive commissions on sales
of satellite television services offered through our agency
arrangements.
The Advertising Solutions segment includes our directory
operations, which publish Yellow and White Pages directories and
sell directory advertising and Internet-based advertising and local
search. In 2011, we moved $1,927 of goodwill from the Advertising
Solutions segment to the Wireline segment based on a change in how
we managed the U-verse related advertising business (see Note
6).
The Other segment includes results from customer information
services, our portion of the results from our international equity
investments and all corporate and other operations. Also included
in the Other segment are impacts of corporate-wide decisions for
which the individual operating segments are not being evaluated,
including interest cost and expected return on plan assets for our
pension and postretirement benefit plans.
In 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.
45
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Segment Results, including a reconciliation to AT&T
consolidated results, for 2011, 2010, and 2009 are as follows:
At December 31,
2011 and for the
year ended
Advertising
Wireless Wireline Solutions Other Consolidations Consolidated Results
---------------- --------- -------- -------------- -------- ----------------- --------------------
Total segment
operating
revenues $ 63,212 $ 59,765 $ 3,293 $ 453 $ - $ 126,723
---------------- ------- ------- --------- ------ ------------ --- ---------------
Operations and
support
expenses 41,581 40,879 5,174 5,214 6,280 99,128
Depreciation and
amortization
expenses 6,324 11,615 386 52 - 18,377
---------------- ------- ------- --------- ------ ------------ --- ---------------
Total segment
operating
expenses 47,905 52,494 5,560 5,266 6,280 117,505
---------------- ------- ------- --------- ------ ------------ --- ---------------
Segment
operating
income (loss) 15,307 7,271 (2,267) (4,813) (6,280) 9,218
Interest expense - - - - 3,535 3,535
Equity in net
income (loss)
of affiliates (29) - - 813 - 784
Other income
(expense) - net - - - - 249 249
---------------- ------- ------- --------- ------ ------------ --- ---------------
Segment income
(loss) before
income taxes $ 15,278 $ 7,271 $ (2,267) $(4,000) $ (9,566) $ 6,716
================ ======= ======= ========= ====== ============ === ===============
Segment assets $127,401 $135,563 $ 3,011 $10,432 $ (6,063) $ 270,344
Investments in
equity method
affiliates 20 - - 3,698 - 3,718
Expenditures for
additions
to long-lived
assets 9,759 10,455 29 29 - 20,272
================ ======= ======= ========= ====== ============ === ===============
At December 31, 2010 and
for the year ended
---
Advertising
Wireless Wireline Solutions Other Consolidations Consolidated Results
---------------- -------- -------- ------------- ------- ---------------- --------------------
Total segment
operating
revenues $ 58,500 $ 61,300 $ 3,935 $ 545 $ - $ 124,280
---------------- ------- ------- --------- ------ ------------ --- ---------------
Operations and
support
expenses 36,746 41,096 2,583 2,382 2,521 85,328
Depreciation and
amortization
expenses 6,497 12,371 497 14 - 19,379
---------------- ------- ------- --------- ------ ------------ --- ---------------
Total segment
operating
expenses 43,243 53,467 3,080 2,396 2,521 104,707
---------------- ------- ------- --------- ------ ------------ --- ---------------
Segment
operating
income (loss) 15,257 7,833 855 (1,851) (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 $ 7,844 $ 855 $(1,109) $ (4,618) $ 18,238
================ ======= ======= ========= ====== ============ === ===============
Segment assets $122,016 $134,900 $ 8,369 $ 9,113 $ (5,007) $ 269,391
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
================ ======= ======= ========= ====== ============ === ===============
For the year ended
December 31, 2009
---
Advertising
Wireless Wireline Solutions Other Consolidations Consolidated Results
---------------- --------- -------- -------------- -------- ----------------- --------------------
Total segment
operating
revenues $ 53,504 $ 63,621 $ 4,724 $ 664 $ - $ 122,513
---------------- ------- ------- --------- ------ ------------ --- ---------------
Operations and
support
expenses 33,631 42,439 2,743 2,970 215 81,998
Depreciation and
amortization
expenses 6,043 12,743 650 79 - 19,515
---------------- ------- ------- --------- ------ ------------ --- ---------------
Total segment
operating
expenses 39,674 55,182 3,393 3,049 215 101,513
---------------- ------- ------- --------- ------ ------------ --- ---------------
Segment
operating
income (loss) 13,830 8,439 1,331 (2,385) (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 $ 8,456 $ 1,331 $(1,677) $ (3,431) $ 18,518
================ ======= ======= ========= ====== ============ === ===============
46
Notes to Consolidated Financial Statements
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) 2011 2010
------------------------------------------ -------------- -------- --------
Land - $ 1,689 $ 1,694
Buildings and improvements 10-45 28,054 25,979
Central office equipment1 3-10 83,824 79,607
Cable, wiring and conduit 10-50 78,431 75,732
Other equipment 5-20 53,104 46,622
Software 3-5 10,041 9,219
Under construction - 5,136 4,980
------------------------------------------- ------------- ------- -------
260,279 243,833
------------------------------------------ ------------- ------- -------
Accumulated depreciation and amortization 153,192 140,637
------------------------------------------- ------------- ------- -------
Property, plant and equipment - net $107,087 $103,196
=========================================== ============= ======= =======
1 Includes certain network software.
Our depreciation expense was $16,368 in 2011, $16,402 in 2010
and $15,849 in 2009. Depreciation expense included amortization of
software totaling $2,243 in 2011, $2,515 in 2010 and $1,731 in
2009.
Certain facilities and equipment used in operations are leased
under operating or capital leases. Rental expenses under operating
leases were $3,610 for 2011, $3,060 for 2010, and $2,889 for 2009.
At December 31, 2011, the future minimum rental payments under
noncancelable operating leases for the years 2012 through 2016 were
$2,462, $2,459, $2,321, $2,183, and $2,032, with $11,785 due
thereafter. Certain real estate operating leases contain renewal
options that may be exercised. Capital leases are not
significant.
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, 2011 and
2010, were as follows:
Advertising
Wireless Wireline Solutions Other Total
-------------------------------- ---------- ---------- ------------- ------- -------
Balance as of January 1, 2010 $ 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
Goodwill acquired 5 - - - 5
Impairments - - (2,745) - (2,745)
Other (5) 1,968 (1,927) (55) (19)
-------------------------------- ------ ------ --------- --- ------
Balance as of December 31, 2011 $ 35,755 $ 33,638 $ 1,059 $ 390 $70,842
================================ ====== ====== ========= === ======
Goodwill acquisitions in 2010 related primarily to the
acquisition of certain wireless properties from Verizon Wireless
(see Note 2). In 2011, we recorded a $2,745 impairment in the
Advertising Solutions segment, triggered by declining revenues in
our directory business and the directory industry as a whole.
Changes to goodwill during 2011 also included a $1,927
reclassification of goodwill from the Advertising Solutions segment
to the Wireline segment to align certain advertising operations
with our U-verse business, which operates the media platform for
those advertising operations. Changes to goodwill during 2010
included adjustments totaling $(219) related to wireless business
combinations and $62 due primarily to adjustments relating to a
wireline business combination (see Note 2).
47
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Our other intangible assets are summarized as follows:
December 31, 2011 December 31, 2010
-------------------- ------------------------------------------- ------------------------------------------
Other Intangible Gross Carrying Accumulated Gross Carrying Accumulated
Assets Amount Amortization Amount Amortization
-------------------- -------------------- ------------------- -------------------- -------------------
Amortized intangible
assets:
Customer lists
and
relationships:
AT&T Mobility
LLC $ 6,845 $ 5,906 $ 6,987 $ 5,240
BellSouth 9,205 7,686 9,215 6,807
AT&T Corp. 2,483 2,205 3,134 2,647
Other 350 329 350 284
-------------------- -------------------- ------------------- -------------------- -------------------
Subtotal 18,883 16,126 19,686 14,978
Other 485 258 525 239
-------------------- -------------------- ------------------- -------------------- -------------------
Total $ 19,368 $ 16,384 $ 20,211 $ 15,217
==================== ==================== =================== ==================== ===================
Indefinite-lived intangible assets not subject to amortization:
Licenses $ 51,374 $ 50,372
Trade names 4,985 5,154
------------------------------------------ -------------------- -------
Total $ 56,359 $ 55,526
========================================== ==================== =======
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 $2,009
for the year ended December 31, 2011, $2,977 for the year ended
December 31, 2010, and $3,666 for the year ended December 31, 2009.
Amortization expense is estimated to be $1,335 in 2012, $744 in
2013, $347 in 2014, $217 in 2015, and $123 in 2016. In 2011, we
wrote off approximately $1,130 in fully amortized intangible assets
(primarily customer lists). We review other amortizing intangible
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.
We review indefinite-lived intangible assets for impairment
annually (see Note 1). Licenses include wireless FCC licenses of
$51,358 at December 31, 2011 and $50,356 at December 31, 2010, that
provide us with the exclusive right to utilize certain radio
frequency spectrum to provide wireless communications services. In
2011, we completed our acquisition of spectrum from Qualcomm of
$1,925, and recorded the intended transfer upon regulatory approval
of $962 of spectrum licenses to Deutsche Telekom in conjunction
with the termination of the T-Mobile merger agreement (see Note
2).
We recorded a $165 impairment in 2011 and an $85 impairment in
2010 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, 2011, our investments
in equity affiliates included a 9.39% interest in Am rica M vil,
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 Am rica M
vil stock, representing voting control of the company. Another
member of the consortium has the right to appoint a majority of the
directors of Am rica M vil.
Telmex Transaction During 2011, the Board of Directors of
America Movil approved and completed a tender offer for the
remaining outstanding shares of Telmex that were not already owned
by America Movil. In conjunction with the tender of our shares, we
have recorded our portion of America Movil's resulting equity
adjustments.
Telmex Internacional 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. (Telmex Internacional) 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.
48
Notes to Consolidated Financial Statements
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:
2011 2010
----------------------------------- ------ ------
Beginning of year $4,515 $2,921
Additional investments 35 220
Equity in net income of affiliates 784 762
Dividends received (161) (159)
Dispositions (660) (204)
Currency translation adjustments (515) 203
Am rica M vil equity adjustments (171) -
Telmex Internacional exchange - 658
Other adjustments (109) 114
----------------------------------- ----- -----
End of year $3,718 $4,515
=================================== ===== =====
Undistributed earnings from equity affiliates were $5,760 and
$5,137 at December 31, 2011 and 2010. The currency translation
adjustment for 2011 and 2010 reflects the effect of exchange rate
fluctuations on our investments in Telmex and Am rica M vil.
The fair value of our investment in Am rica M vil, based on the
equivalent value of Am rica M vil L shares at December 31, 2011,
was $8,185.
NOTE 8. DEBT
Long-term debt of AT&T and its subsidiaries, including
interest rates and maturities, is summarized as follows at December
31:
2011 2010
------------------------------------------------------------------------------ ------------- ---------
Notes and debentures
Interest Rates Maturities1
------------------------------ ------ ------------------------------
0.35% - 2.99 % 2011 - 2016 $ 5,500 $ 2,250
3.00% - 4.99 % 2011 - 2021 8,659 5,880
5.00% - 6.99 % 2011 - 2095 41,390 43,506
7.00% - 9.10 % 2011 - 2097 8,471 11,986
Other 3 14
Fair value of interest rate swaps recorded in debt 445 435
------------------------------------------------------------------------------ --------- --------
64,468 64,071
Unamortized premium, net of discount 46 185
------------------------------------------------------------------------------ --------- --------
Total notes and debentures 64,514 64,256
Capitalized leases 239 259
------------------------------------------------------------------------------ --------- --------
Total long-term debt, including current maturities 64,753 64,515
Current maturities of long-term debt2 (3,453) (5,544)
------------------------------------------------------------------------------ --------- --------
Total long-term debt $ 61,300 $ 58,971
============================================================================== ========= ========
1 Maturities assume putable debt is redeemed by the holders at the next opportunity.
Current maturities of long-term debt does not include $1,200 of long-term debt, which was
2 called on January 13, 2012, and redeemed on February 15, 2012.
Current maturities of long-term debt include debt that may be
put back to us by the holders in 2012. We have $1,000 of annual put
reset securities 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, 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.
49
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Debt maturing within one year consisted of the following at
December 31:
2011 2010
------------------------------- ---------------------------------------- ----------------------------------------
Current maturities of long-term
debt1 $ 3,453 $ 5,544
Commercial paper - 1,625
Bank borrowings2 - 27
-------------------------------- -------- ------------------------------ ------- -------------------------------
Total $ 3,453 $ 7,196
================================ ======== ============================== ======= ===============================
Current maturities of long-term debt does not include $1,200 of long-term debt,
which was
1 called on January 13, 2012, and redeemed on February 15, 2012.
2 Outstanding balance of short-term credit facility of a foreign subsidiary.
During 2011, we issued debt with net proceeds of $7,936 from the
following:
-- April 2011 issuance of $1,750 of 2.95% global notes due 2016
and $1,250 of 4.45% global notes due 2021.
-- August 2011 issuance of $1,500 of 2.40% global notes due
2016, $1,500 of 3.875% global notes due 2021, and $2,000 of 5.55%
global notes due 2041.
Debt proceeds were used for general corporate purposes.
During 2011, debt repayments totaled $9,226 and consisted
of:
-- $4,543 in repayments of long-term debt with a
weighted-average interest rate of 6.58%.
-- $1,625 in repayments of commercial paper, net of issuances.
-- $1,000 for the early redemption of the SBC Communications
Inc. 5.875% global notes originally due on February 1, 2012.
-- $2,000 for the early redemption of the New Cingular Wireless
Services, Inc. 8.125% notes originally due on May 1, 2012.
-- $31 in repayments of capitalized leases.
-- $27 in repayments of short-term bank borrowings.
On February 13, 2012, we issued $1,000 of 0.875% global notes
due 2015, $1,000 of 1.60% global notes due 2017, and $1,000 of
3.00% global notes due 2022.
As of December 31, 2011 and 2010, 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, 2011, and the corresponding weighted-average interest
rate scheduled for repayment are as follows:
2012 2013 2014 2015 2016 Thereafter
-------------- -------------- ---------- ------- ------- ------- ------- ------------
Debt repayments1,2 $3,453 $5,824 $4,788 $4,514 $4,923 $ 41,111
Weighted-average interest rate 5.0% 5.6% 5.1% 4.3% 3.7% 6.2%
============================== ===== ===== ===== ===== ===== =======
1 Debt repayments assume putable debt is redeemed by the holders at the next opportunity.
2 Long-term debt obligations and interest payments on long-term debt were not adjusted to reflect
the January 13, 2012, notice to call $1,200 of debt, which was completed on February 15, 2012,
with an original maturity of February 15, 2056.
Credit Facilities
T-Mobile Acquisition Financing In December 2011, we and Deutsche
Telekom agreed to terminate our agreement to purchase T-Mobile. The
termination of the purchase agreement also terminated our $20,000
associated credit agreement with a group of banks, dated as of
March 31, 2011, to partially fund the purchase.
Other Credit Facilities In December 2011, we amended and
extended for an additional one-year term our existing $5,000,
four-year revolving credit agreement (Four-Year Agreement) with a
syndicate of banks. We also entered into a new $5,000, 364-day
revolving credit agreement, with a syndicate of banks, to replace
our expiring 364-day revolving credit 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, 2011, we
had no advances outstanding under either agreement and were in
compliance with all covenants under each agreement.
50
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
In January 2012, we provided notice to permanently reduce the
outstanding commitments of the lenders under our 364-day revolving
credit agreement from $5,000 to $3,000.
The Four-Year Agreement
The amendments to the Four-Year Agreement include, but are not
limited to, (i) changing the interest rate charged for advances
from a rate based on AT&T's credit default swap spread to a
fixed spread; (ii) decreasing the amount payable as facilities
fees, and (iii) at AT&T's option, adding subsidiaries as
additional borrowers, with or without a guarantee provided by
AT&T Inc., subject to conditions provided in the agreement. The
terms of such guarantee are set forth in the agreement.
The obligations of the lenders under the Four-Year Agreement to
provide advances will terminate on December 19, 2015, unless prior
to that date either: (i) AT&T and, if applicable, a
Co-Borrower, reduces to $0 the commitments of the lenders under the
Agreement or (ii) certain events of default occur. The Agreement
also provides that AT&T and lenders representing more than 50%
of the facility amount may agree to extend their commitments under
the Agreement for an additional one year beyond the December 19,
2015, termination date, under certain circumstances. We also 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.
Advances would bear interest, at AT&T's option, either:
-- at a variable annual rate equal to the highest of: (1)(a) the
base (or prime) rate of the bank affiliate of Citibank, N.A. which
is serving as administrative agent under the Agreement, (b) 0.50%
per annum above the Federal funds rate, and (c) the London
interbank offered rate (LIBOR) applicable to U.S. Dollars for a
period of one month plus 1.00%, plus (2) an applicable margin, as
set forth in the Agreement (Applicable Margin); or
-- at a rate equal to: (i) the LIBOR for a period of one, two,
three or six months, as applicable, plus (ii) the Applicable
Margin.
The Applicable Margin will equal 0.560% if our unsecured
long-term debt is rated at least A+ by Standard & Poor's or
Fitch, Inc. or A1 by Moody's Investors Service. The Applicable
Margin will be 0.670% per annum if our unsecured long-term debt
ratings are A or A2 and will be 0.900% per annum in the event our
unsecured long-term debt ratings are A- and A3 (or below).
The Agreement continues to require us to 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 3-to-1, 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 change 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 under the Agreement.
-- 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 1974, as amended
(ERISA).
-- Our bankruptcy or insolvency.
51
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
364-day Agreement
The obligations of the lenders to provide advances will
terminate on December 17, 2012, 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 17, 2012, 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 LIBOR for a period of one
month plus 1.00%, plus (2) an applicable margin as set forth in
such agreement (Applicable Margin); or
-- at a rate equal to: (i) LIBOR for a period of one, two, three
or six months, as applicable, plus (ii) the Applicable Margin.
The Applicable Margin will equal 0.595% if our unsecured
long-term debt is rated at least A+ by Standard & Poor's or
Fitch, Inc. or A1 by Moody's Investors Service. The Applicable
Margin will be 0.710% per annum if our unsecured long-term debt
ratings are A or A2 and will be 0.950% per annum in the event our
unsecured long-term debt ratings are A- and A3 (or below).
The 364-day Agreement contains a negative pledge covenant that
is identical to the negative pledge in the Four-Year Agreement. 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 applicable to the Four-Year
Agreement also apply to the 364-day Agreement.
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 we have the ability to access.
Level 2 Inputs to the valuation methodology include:
-- Quoted prices for similar assets and liabilities in active markets.
-- Quoted prices for identical or similar assets or liabilities in inactive markets.
-- Inputs other than quoted market prices that are observable for the asset or liability.
-- Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
-- Fair value is often based on developed models in which there are few, if any, external observations.
The asset's or liability's fair value measurement level within
the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. Valuation
techniques used should maximize the use of observable inputs and
minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair
value calculation that may not be indicative of future net
realizable value or reflective of future fair values. We believe
our valuation methods are appropriate and consistent with other
market participants. The use of different methodologies or
assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at
the reporting date. There have been no changes in the methodologies
used since December 31, 2010.
52
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
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, 2011 December 31, 2010
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------- ------------- ------- ------------ -------
Notes and debentures $ 64,514 $73,738 $ 64,256 $69,313
Commercial paper - - 1,625 1,625
Bank borrowings - - 27 27
Investment securities 2,092 2,092 2,185 2,185
======================= === ======= ====== === ======= ======
The fair values of our notes and debentures were estimated based
on quoted market prices, where available. The carrying value of
debt with an original maturity of less than one year approximates
market value.
Investment Securities
Our investment securities consist of primarily
available-for-sale instruments, which include equities, fixed
income bonds and other securities. Substantially all the fair
values of our available-for-sale securities were estimated based on
quoted market prices. Investments in securities not traded on a
national securities exchange are valued using pricing models,
quoted prices of securities with similar characteristics or
discounted cash flows. Realized gains and losses on securities are
included in "Other income (expense) - net" in the consolidated
statements of income using the specific identification method.
Unrealized gains and losses, net of tax, on available-for-sale
securities are recorded in accumulated 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 $149 less than one year, $228 within one to three years, $103
within three to five years, and $82 for five or more years.
Our short-term investments, other short- and long-term
held-to-maturity investments (including money market securities)
and customer deposits are recorded at amortized cost, and the
respective carrying amounts approximate fair values.
Our investment securities maturing within one year are recorded
in "Other current assets," and instruments with maturities of more
than one year are recorded in "Other Assets" on the consolidated
balance sheets.
53
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Following is the fair value leveling for available-for-sale
securities and derivatives as of December 31, 2011, and December
31, 2010:
December 31, 2011
---------------------------------------------------------
Level 1 Level 2 Level 3 Total
---------------------------------------------------- ------------- ------------- --------- ------------
Available-for-Sale Securities
Domestic equities $ 947 $ - $ - $ 947
International equities 495 - - 495
Fixed income bonds - 562 - 562
Asset Derivatives1
Interest rate swaps - 521 - 521
Cross-currency swaps - 144 - 144
Foreign exchange contracts - 2 - 2
Liability Derivatives1
Cross-currency swaps - (820) - (820)
Interest rate locks - (173) - (173)
Foreign exchange contracts - (9) - (9)
==================================================== ========= ========= ======== ========
December 31, 2010
---------------------------------------------------------
Level 1 Level 2 Level 3 Total
---- ----------------------------------------------- ------------- ------------- --------- ------------
Available-for-Sale Securities
Domestic equities $ 976 $ - $ - $ 976
International equities 513 - - 513
Fixed income bonds - 639 - 639
Asset Derivatives1
Interest rate swaps - 537 - 537
Cross-currency swaps - 327 - 327
Interest rate locks - 11 - 11
Foreign exchange contracts - 6 - 6
Liability Derivatives1
Cross-currency swaps - (675) - (675)
Interest rate locks - (187) - (187)
Foreign exchange contracts - (2) - (2)
===================================================== ========= ========= ======== ========
Derivatives designated as hedging instruments are reflected as other assets, other liabilities
1 and, for a portion of interest rate swaps, accounts receivable.
Derivative Financial Instruments
We employ derivatives to manage certain market risks, primarily
interest rate risk and foreign currency exchange risk. This
includes the use of interest rate swaps, interest rate locks,
foreign exchange forward contracts and combined interest rate
foreign exchange contracts (cross-currency swaps). We do not use
derivatives for trading or speculative purposes. We record
derivatives on our consolidated balance sheets at fair value that
is derived from observable market data, including yield curves and
foreign exchange rates (all of our derivatives are Level 2). Cash
flows associated with derivative instruments are presented in the
same category on the consolidated statements of cash flows as the
item being hedged.
The majority of our derivatives are designated either as a hedge
of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), or as a hedge of a
forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability (cash
flow hedge).
Fair Value Hedging We designate our fixed-to-floating interest
rate swaps as fair value hedges. The purpose of these swaps is to
manage interest rate risk by managing our mix of fixed-rate and
floating-rate debt. These swaps involve the receipt of fixed-rate
amounts for floating interest rate payments over the life of the
swaps without exchange of the underlying principal amount. Accrued
and realized gains or losses from interest rate swaps impact
interest expense on the consolidated statements of income.
Unrealized gains on interest rate swaps are recorded at fair market
value as assets, and unrealized losses on interest rate swaps are
recorded at fair market value as liabilities. Changes in the fair
value of the interest rate swaps offset changes in the fair value
of the fixed-rate notes payable they hedge due to changes in the
designated benchmark interest rate and are recognized in interest
expense. Gains or losses realized upon early termination of our
fair value hedges are recognized in interest expense. In the years
ended December 31, 2011, and December 31, 2010, no ineffectiveness
was measured.
Cash Flow Hedging Unrealized gains on derivatives designated as
cash flow hedges are recorded at fair value as assets, and
unrealized losses on derivatives designated as cash flow hedges are
recorded at fair value as liabilities, both for the period they are
outstanding. For derivative instruments designated as cash flow
hedges, the effective portion is reported as a component of
accumulated OCI until reclassified into interest expense in the
same period the hedged transaction affects earnings. The gain or
loss on the ineffective portion is recognized as other income or
expense in each period.
54
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
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,
2011, and December 31, 2010, no ineffectiveness was measured.
Periodically, we enter into and designate interest rate locks to
partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during the
period leading up to the probable issuance of fixed-rate debt. We
designate our interest rate locks as cash flow hedges. Gains and
losses when we settle our interest rate locks are amortized into
income over the life of the related debt, except where a material
amount is deemed to be ineffective, which would be immediately
reclassified to income. In the years ended December 31, 2011, and
December 31, 2010, no ineffectiveness was measured. Over the next
12 months, we expect to reclassify $28 from accumulated OCI to
interest expense due to the amortization of net losses on
historical interest rate locks. Our unutilized interest rate locks
carry mandatory early terminations, the latest occurring in April
2012. In April 2011, we utilized $2,600 notional value of interest
rate locks related to our April 2011 debt issuance. In February
2012, we utilized $800 notional value of interest rate locks
related to our February 2012 debt issuance (see Note 8). Over the
next 12 months, we expect to reclassify an additional $15 from
accumulated OCI to interest expense due to the amortization of net
losses on the interest rate locks associated with this debt
issuance.
We hedge a large portion of the exchange risk involved in
anticipation of highly probable foreign currency-denominated
transactions. In anticipation of these transactions, we often enter
into foreign exchange contracts to provide currency at a fixed
rate. Some of these instruments are designated as cash flow hedges
while others remain nondesignated, largely based on size and
duration. Gains and losses at the time we settle or take delivery
on our designated foreign exchange contracts are amortized into
income in the same period the hedged transaction affects earnings,
except where an amount is deemed to be ineffective, which would be
immediately reclassified to income. In the years ended December 31,
2011, and December 31, 2010, no ineffectiveness was measured.
Collateral and Credit-Risk Contingency We have entered into
agreements with our derivative counterparties establishing
collateral thresholds based on respective credit ratings and
netting agreements. At December 31, 2011, we had posted collateral
of $98 (a deposit asset) and had no held collateral (a receipt
liability). Under the agreements, if our credit rating had been
downgraded one rating level by Moody's Investors Service and Fitch,
Inc. before the final collateral exchange in December, we would
have been required to post additional collateral of $161. At
December 31, 2010, we had posted collateral of $82 and held
collateral of $26. We do not offset the fair value of collateral,
whether the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable), against the fair
value of the derivative instruments.
Following is the notional amount of our outstanding derivative
positions at December 31:
2011 2010
--------------------------- ------- -------
Interest rate swaps $ 8,800 $11,050
Cross-currency swaps 7,502 7,502
Interest rate locks 800 3,400
Foreign exchange contracts 207 221
--------------------------- ------ ------
Total $17,309 $22,173
=========================== ====== ======
55
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
Following is the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income
----------------------------------------------------------------------- ------- ----- -----
Fair Value Hedging Relationships
For the years ended December 31, 2011 2010 2009
----------------------------------------------------------------------- -------- ----- -----
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 10 $ 125 $(216)
Gain (Loss) on long-term debt (10) (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, 2011 2010 2009
------------------------------------------------------------------------ ----- ----- ----
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $(219) $(201) $738
Interest rate locks:
Gain (Loss) recognized in accumulated OCI (167) (320) 203
Interest income (expense) reclassified from accumulated OCI into income (23) (19) (23)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI (10) 5 (2)
======================================================================== ==== ==== ===
The balance of the unrealized derivative gain (loss) in
accumulated OCI was $(421) at December 31, 2011, $(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:
2011 2010
------------------------------------------- -------- --------
Depreciation and amortization $ 39,367 $ 34,172
Intangibles (nonamortizable) 1,897 1,958
Employee benefits (14,950) (13,612)
Net operating loss and other carryforwards (1,502) (1,552)
Other - net (1,451) (1,015)
------------------------------------------- ------- -------
Subtotal 23,361 19,951
Deferred tax assets valuation allowance 917 949
------------------------------------------- ------- -------
Net deferred tax liabilities $ 24,278 $ 20,900
=========================================== ======= =======
Net long-term deferred tax liabilities $ 25,748 $ 22,070
Less: Net current deferred tax assets (1,470) (1,170)
------------------------------------------- ------- -------
Net deferred tax liabilities $ 24,278 $ 20,900
=========================================== ======= =======
In March 2010, comprehensive healthcare reform legislation,
which included a change in the tax treatment related to Medicare
Part D subsidies, was enacted. We recorded a $995 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.
56
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
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
resolved the uncertainty regarding the amount and timing of
amortization deductions related to certain of our wireless assets.
We recorded an $8,300 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, 2011, we had combined net operating and capital
loss carryforwards (tax effected) for federal income tax purposes
of $114 and for state and foreign income tax purposes of $917,
expiring through 2030. Additionally, we had federal credit
carryforwards of $73 and state credit carryforwards of $398,
expiring primarily through 2028.
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, 2011 and 2010, 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 2011 and 2010 is as follows:
Federal, State and Foreign Tax 2011 2010
-------------------------------------------------------- ------- -------
Balance at beginning of year $ 4,360 $ 5,969
Increases for tax positions related to the current year 217 324
Increases for tax positions related to prior years 848 562
Decreases for tax positions related to prior years (1,066) (1,989)
Lapse of statute of limitations - (44)
Settlements 182 (462)
-------------------------------------------------------- ------ ------
Balance at end of year 4,541 4,360
Accrued interest and penalties 1,312 1,329
-------------------------------------------------------- ------ ------
Gross unrecognized income tax benefits 5,853 5,689
Less: Deferred federal and state income tax benefits (797) (817)
Less: Tax attributable to timing items included above (2,331) (2,073)
-------------------------------------------------------- ------ ------
Total UTB that, if recognized, would impact the
effective income tax rate as of the end of the year $ 2,725 $ 2,799
======================================================== ====== ======
Periodically we make deposits to taxing jurisdictions which
reduce our UTB balance but are not included in the reconciliation
above. The amount of deposits that reduced our UTB balance was
$2,508 at December 31, 2011, and $2,548 at December 31, 2010.
We record interest and penalties related to federal, state and
foreign UTBs in income tax expense. Accrued interest and penalties
included in UTBs were $1,312 as of December 31, 2011, and $1,329 as
of December 31, 2010. Interest and penalties included in our
consolidated statements of income were $(65) for 2011, $(194) for
2010, and $(216) for 2009.
We file income tax returns in the U.S. federal jurisdiction and
various state, local and foreign jurisdictions. As a large
taxpayer, our income tax returns are regularly audited by the IRS
and other taxing authorities. The IRS has completed field
examinations of our tax returns through 2005 and expects to
complete the field examination of our 2006 through 2008 returns
during 2012. All audit periods prior to 2000 are closed for federal
purposes. We are engaged with the IRS Appeals Division in resolving
issues related to our 2000 through 2005 returns; we are unable to
estimate the impact the resolution of these issues may have on our
UTBs. In October, the U.S. Supreme Court denied our request to
review a lower court decision denying our refund suit regarding the
tax treatment of Universal Service Fund receipts. The Supreme Court
action had no impact on our financial statements.
57
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
The components of income tax (benefit) expense are as
follows:
2011 2010 2009
-------------------------- ----- ------- -----
Federal:
Current $(420) $ 307 $2,849
Deferred - net 2,555 (2,105) 2,149
-------------------------- ----- ------- -----
2,135 (1,798) 4,998
-------------------------- ----- ------- -----
State, local and foreign:
Current 23 141 1,193
Deferred - net 374 495 (100)
-------------------------- ----- ------- -----
397 636 1,093
-------------------------- ----- ------- -----
Total $2,532 $(1,162) $6,091
========================== ===== ======= =====
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:
2011 2010 2009
-------------------------------------------------------------------- ------ ------- --- ------
Taxes computed at federal statutory rate $2,351 $ 6,383 $6,481
Increases (decreases) in income taxes resulting from:
State and local income taxes - net of federal income tax benefit 210 441 554
Goodwill Impairment 961 - -
Healthcare Reform Legislation - 917 -
IRS Settlement - 2008 Wireless Restructuring - (8,300) -
Other - net (990) (603) (944)
-------------------------------------------------------------------- ----- ------ -----
Total $2,532 $(1,162) $6,091
==================================================================== ===== ====== =====
Effective Tax Rate 37.7% (6.4 ) % 32.9%
==================================================================== ===== ====== === =====
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. Our newly
hired management employees participate in a cash balance pension
program, while longer-service management employees participate in a
pension program that has a traditional pension formula (i.e., a
stated percentage of employees' adjusted career income) and a
frozen cash balance, or a program that has a defined lump sum
formula. 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.
Beginning in 2013, as a result of federal healthcare reform, we
will begin contracting with a Medicare Part D plan on a group basis
to provide prescription drug benefits to certain Medicare eligible
retirees. This plan change resulted in the adoption of plan
amendments during the fourth quarter of 2011, and will allow the
Company to be eligible for greater Medicare Part D plan subsidies
over time.
58
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
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.
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:
Pension Benefits Postretirement Benefits
------------------ -------------------------------
2011 2010 2011 2010
------------------------------------------------- ------- ------- ------------- ---------
Benefit obligation at beginning of year $53,917 $50,850 $ 36,638 $ 36,225
Service cost - benefits earned during the period 1,186 1,075 362 348
Interest cost on projected benefit obligation 2,958 3,150 2,051 2,257
Amendments - 2 (1,830) (742)
Actuarial loss 2,972 4,224 478 1,046
Special termination benefits 27 101 4 7
Benefits paid (4,950) (5,485) (2,750) (2,536)
Other - - - 33
------------------------------------------------- ------ ------ --------- --------
Benefit obligation at end of year $56,110 $53,917 $ 34,953 $ 36,638
================================================= ====== ====== ========= ========
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
------------------- ---------------------------
2011 2010 2011 2010
------------------------------------------ --------- ------- -------- ----------------
Fair value of plan assets at beginning of
year $ 47,621 $46,873 $ 12,747 $ 11,513
Actual return on plan assets 2,238 6,230 (224) 1,472
Benefits paid1 (4,950) (5,485) (2,633) (244)
Contributions 1,000 - - -
Other (2) 3 - 6
------------------------------------------ ------- ------ ------- ------------
Fair value of plan assets at end of year 45,907 47,621 9,890 12,747
------------------------------------------ ------- ------ ------- ------------
Unfunded status at end of year2 $(10,203) $(6,296) $(25,063) $ (23,891)
========================================== ======= ====== ======= ============
1 At our discretion, certain postretirement
benefits may be paid from AT&T cash accounts,
which
does 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
-------------------- -----------------------
2011 2010 2011 2010
--------------- ---------- ------------ -------- ------- -------- --------
Current portion of employee benefit
obligation1 $ - $ - $ (2,288) $ (2,394)
Employee benefit obligation2 (10,203) (6,296) (22,775) (21,497)
-----------------------------------------
Net amount recognized $(10,203) $(6,296) $(25,063) $(23,891)
Included in "Accounts payable and accrued
1 liabilities."
Included in "Postemployment benefit
2 obligation."
59
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Prior service credits included in our accumulated OCI that have
not yet been recognized in net periodic benefit cost were $149 for
pension and $5,896 for postretirement benefits at December 31,
2011, and $164 for pension and $4,760 for postretirement benefits
at December 31, 2010.
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 $53,640 at
December 31, 2011, and $51,915 at December 31, 2010.
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 $7,288, $3,750 and $2,253
for the years ended December 31, 2011, 2010 and 2009. A portion of
pension and postretirement benefit costs is 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
------- ------- -------- ------- ------- --------
Pension Benefits Postretirement Benefits
2011 2010 2009 2011 2010 2009
-------- ------- -------- ------- ------- --------
Service cost - benefits
earned
during the period $ 1,186 $ 1,075 $ 1,070 $ 362 $ 348 $ 334
Interest cost on projected
benefit
obligation 2,958 3,150 3,355 2,051 2,257 2,434
Expected return on assets (3,690) (3,775) (3,766) (1,040) (943) (784 )
Amortization of prior
service
cost (credit) (15) (16) 58 (694) (624) (469 )
Actuarial (gain) loss 4,498 1,768 (103) 1,672 510 124
------ ------ ------- ------ ------ -------
Net pension and
postretirement
cost1 $ 4,937 $ 2,202 $ 614 $ 2,351 $ 1,548 $ 1,639
====== ====== ======= ====== ====== =======
1 During 2011, 2010 and 2009, the Medicare Prescription Drug, Improvement, and
Modernization
Act of 2003 reduced postretirement benefit cost by $280, $237 and $255. This
effect is included
in several line items above.
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
---------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
2011 2010 2009 2011 2010 2009
---------- --------- ----- ---------- ------ -------
Prior service (cost)
credit $ - $ - $ 394 $ 1,134 $ 459 $ 1,863
Amortization of prior
service cost
(credit) (10) (10) 67 (430) (388) (223)
----- ----- ---- ------ ----- ------
Total recognized in other
comprehensive (income)
loss
(net of tax) $ (10) $ (10) $ 461 $ 704 $ 71 $ 1,640
===== ===== ==== ====== ===== ======
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 $846 for postretirement benefits.
60
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Assumptions
In determining the projected benefit obligation and the net
pension and postemployment benefit cost, we used the following
significant weighted-average assumptions:
2011 2010 2009
----- ---- ----
Discount rate for determining projected benefit obligation at December 31 5.30% 5.80% 6.50%
Discount rate in effect for determining net cost 5.80% 6.50% 7.00%
Long-term rate of return on plan assets 8.25% 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.
Our expected return on plan assets is calculated using the
actual fair value of plan assets. We recognize actual gains and
losses on pension and postretirement plan assets immediately in our
operating results. These gains and losses are measured annually as
of December 31 and accordingly will be recorded during the fourth
quarter, unless earlier remeasurements are required.
Discount Rate Our assumed discount rate of 5.30% at December 31,
2011, 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, 2011,
we decreased our discount rate by 0.50%, resulting in an increase
in our pension plan benefit obligation of $3,384 and an increase in
our postretirement benefit obligation of $2,114. 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
$3,995 and an increase in our postretirement benefit obligation of
$2,817.
Expected Long-Term Rate of Return Our expected long-term rate of
return on plan assets of 8.25% for 2012 and 2011 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 1.00% decrease
in the actual long-term rate of return would cause 2012 combined
pension and postretirement cost to increase $525. 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. In 2012, we have decided to maintain 8.25%
for our expected long-term rate of return, based on future market
performance and lower economic growth in the near term.
Composite Rate of Compensation Increase Our expected composite
rate of compensation increase of 4.00% 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 3.00% growth in
administrative expenses and an annual 3.00% 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, resulting in an actuarial gain of $1,432 in 2011 and
$1,263 in 2010. Our assumed annual healthcare cost trend rate for
2012 and 2011 is 5.00%.
61
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
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 $ 303 $ (243)
Increase (decrease) in accumulated postretirement benefit obligation 3,383 (2,788)
===================================================================== === ============ === ============
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. Our required contributions to our
pension plan for 2012 are not considered significant. 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.
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 2011.
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:
Pension Assets Postretirement (VEBA) Assets
Target 2011 2010 Target 2011 2010
Equity Securities:
Domestic 25% -35% 24% 29% 34% -44% 39% 42%
International 10% -20% 15 15 26% -36% 31 34
Fixed income securities 30% -40% 34 34 16% -26% 21 14
Real assets 6% -16% 11 9 0% - 6% 1 1
Private equity 4% -14% 13 12 0% -10% 5 4
Other 0% - 5% 3 1 0% - 8% 3 5
Total 100% 100% 100% 100%
At December 31, 2011, AT&T securities represented less than
0.5% of assets held by our pension plans and less than 1.5% of
assets held by our 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.
62
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
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.
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.
63
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, 2011:
Pension Assets and Liabilities at Fair Value as of December 31, 2011
Level 1 Level 2 Level 3 Total
-------- -------- -------- --------
Non-interest bearing cash $ 64 $ 1 $ - $ 65
Interest bearing cash 1 - - 1
Foreign currency contracts - 6 - 6
Equity securities:
Domestic equities:
Large cap 4,745 - - 4,745
Small and mid cap 3,554 5 - 3,559
International equities:
Developed markets 4,890 56 3 4,949
Emerging markets 983 6 1 990
Fixed income securities:
Asset-backed securities - 413 8 421
Mortgage-backed securities - 3,038 - 3,038
Collateralized mortgage-backed securities - 316 - 316
Collateralized mortgage obligations/REMICS - 490 - 490
Other Corporate and other bonds and notes:
Core - 2,758 72 2,830
Long duration - 2,421 - 2,421
U.S. Government and governmental agencies 71 4,414 - 4,485
Municipal bonds - 281 - 281
Convertible and preferred securities 105 207 1 313
Fixed income funds - - 347 347
Private equity funds - 1 5,931 5,932
Real assets:
Real assets - 4 2,551 2,555
Real estate funds - 6 2,662 2,668
Commingled funds:
Interest bearing investments - 3,087 - 3,087
Hedge funds - 945 9 954
Equities - 1,117 - 1,117
Fixed income - 943 384 1,327
Securities lending collateral 1,295 2,879 3 4,177
------- ------- ------- -------
Assets at fair value 15,708 23,394 11,972 51,074
------- ------- ------- -------
Overdrafts 59 - - 59
Unrealized depreciation on foreign currency contracts - 6 - 6
Investments sold short 537 - - 537
Payable for variation margin 4 - - 4
------- ------- ------- -------
Liabilities at fair value 600 6 - 606
------- ------- ------- -------
Total plan net assets at fair value $ 15,108 $ 23,388 $ 11,972 $ 50,468
------- ------- ------- -------
Other assets (liabilities)1 (4,561 )
------- ------- ------- -------
Total Plan Net Assets $ 45,907
======= ======= ======= =======
Other assets (liabilities) include amounts receivable, accounts payable and net adjustment
1 for securities lending payable.
64
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
Postretirement Assets and Liabilities at Fair Value as of December 31, 2011
Level 1 Level 2 Level 3 Total
------------ ----------- -------- --------
Interest bearing cash $ 30 $ 340 $ - $ 370
Equity securities:
Domestic equities:
Large cap 1,785 - - 1,785
Small and mid cap 1,179 1 - 1,180
International equities:
Developed markets 1,938 1 - 1,939
Emerging markets 641 - - 641
Fixed income securities:
Asset-backed securities - 51 - 51
Collateralized mortgage-backed securities - 60 - 60
Collateralized mortgage obligations - 28 - 28
Other Corporate and other bonds and notes:
Core - 281 19 300
Long duration - 53 - 53
Municipal bonds - 12 - 12
U.S. Government and governmental agencies 48 607 - 655
Commingled funds:
Interest bearing investments - 153 - 153
Hedge funds - 81 5 86
Equities 136 1,045 - 1,181
Fixed income 39 966 - 1,005
Private equity assets - 3 437 440
Real assets - - 124 124
Securities lending collateral 780 108 - 888
Receivable for foreign exchange contracts 3 - - 3
-------- ------- ------- -------
Assets at fair value 6,579 3,790 585 10,954
-------- ------- ------- -------
Foreign exchange contracts payable 3 - - 3
-------- ------- ------- -------
Liabilities at fair value 3 - - 3
-------- ------- ------- -------
Total plan net assets at fair value $ 6,576 $ 3,790 $ 585 $ 10,951
-------- ------- ------- -------
Other assets (liabilities)1 (1,061 )
-------- ------- ------- -------
Total Plan Net Assets $ 9,890
======== ======= ======= =======
Other assets (liabilities) include amounts receivable, accounts payable and net adjustment
1 for securities lending payable.
65
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The tables below set forth a summary of changes in the fair
value of the Level 3 pension and postretirement assets for the year
ended December 31, 2011:
Pension Fixed Income Private Equity
Assets Equities Funds Hedge Funds Funds Real Assets Total
---------- ------------- -------
Balance at
beginning
of year $ - $ 391 $ 50 $ 5,617 $ 4,570 $10,628
Realized
gains
(losses) (1) 17 - 164 2 182
Unrealized
gains
(losses) 1 (6) - 448 666 1,109
Transfers
in 3 393 - - - 396
Purchases 1 95 - 844 859 1,799
Sales - (75) (41) (1,142) (884) (2,142)
--- ----- ----- --- --- --------- ------
Balance at
end of
year $ 4 $ 815 $ 9 $ 5,931 $ 5,213 $11,972
=== ===== ===== === === ========= ======
Postretirement
Assets Fixed Income Funds Hedge Funds Private Equity Funds Real Assets Total
-------------------- ------------- ---------------------- ------------- -----
Balance at
beginning of year $ 19 $ 26 $ 496 $ 157 $ 698
Realized gains
(losses) - - 70 (28) 42
Unrealized gains
(losses) - - (23) 31 8
Purchases 8 - 175 53 236
Sales (8) (21) (281) (89) (399)
------ --- ---- --- -------- ----
Balance at end of
year $ 19 $ 5 $ 437 $ 124 $ 585
====== === ==== === ======== ====
66
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, 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 - 22 - 22
Foreign currency contracts - 57 - 57
Equity securities:
Domestic equities:
Large cap 6,698 - - 6,698
Small and mid cap 4,786 7 - 4,793
International equities:
Developed markets 5,398 2 - 5,400
Emerging markets 708 32 - 740
Fixed income securities:
Asset-backed securities - 709 3 712
Mortgage-backed securities - 2,727 - 2,727
Collateralized mortgage-backed securities - 414 - 414
Collateralized mortgage obligations/REMICS - 657 - 657
Other Corporate and other bonds and notes:
Core - 2,877 11 2,888
Long duration - 2,168 - 2,168
U.S. Government and governmental agencies 270 3,841 - 4,111
Municipal bonds - 230 - 230
Convertible and preferred securities 63 228 - 291
Fixed income funds - - 377 377
Registered investment companies 1 - - 1
Private equity funds - 1 5,617 5,618
Real assets:
Real assets - - 2,314 2,314
Real estate funds - - 2,256 2,256
Commingled funds:
Interest bearing investments 2 2,351 - 2,353
Hedge funds - 831 50 881
Equities - 1,769 - 1,769
Fixed income - 1,253 - 1,253
Securities lending collateral 2,740 2,904 - 5,644
Variation margin receivable 3 - - 3
------- ------- ------- -------
Assets at fair value 20,769 23,080 10,628 54,477
------- ------- ------- -------
Overdrafts 3 - - 3
Unrealized depreciation on foreign currency contracts 57 - - 57
Investments sold short 573 - - 573
Written options payable 1 - - 1
------- ------- ------- -------
Liabilities at fair value 634 - - 634
------- ------- ------- -------
Total plan net assets at fair value $ 20,135 $ 23,080 $ 10,628 $ 53,843
------- ------- ------- -------
Other assets (liabilities)1 (6,222 )
------- ------- ------- -------
Total Plan Net Assets $ 47,621
================================================================= ======= ======= ======= =======
Other assets (liabilities) include amounts receivable, accounts payable and net adjustment
1 for securities lending payable.
67
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 cash $ 19 $ 524 $ - $ 543
Equity securities:
Domestic equities:
Large cap 2,298 - - 2,298
Small and mid cap 1,452 - - 1,452
International equities:
Developed markets 2,779 - - 2,779
Emerging markets 843 - - 843
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:
Core - 239 19 258
Long duration - 83 - 83
Municipal bonds - 6 - 6
U.S. Government and governmental agencies 11 620 - 631
Registered investment companies 14 - - 14
Commingled funds:
Interest bearing investments - 295 - 295
Hedge funds - 77 26 103
Equities 153 1,168 - 1,321
Fixed income 35 1,572 - 1,607
Private equity assets 6 3 496 505
Real assets - - 157 157
Securities lending collateral 636 71 - 707
Receivable for foreign exchange contracts 2 - - 2
-------- ------- ------- -------
Assets at fair value 8,248 4,789 698 13,735
-------- ------- ------- -------
Foreign exchange contracts payable 2 - - 2
-------- ------- ------- -------
Liabilities at fair value 2 - - 2
-------- ------- ------- -------
Total plan net assets at fair value $ 8,246 $ 4,789 $ 698 $ 13,733
-------- ------- ------- -------
Other assets (liabilities)1 (986 )
-------- ------- ------- -------
Total Plan Net Assets $ 12,747
============================================================== ======== ======= ======= =======
Other assets (liabilities) include amounts receivable, accounts payable and net adjustment
1 for securities lending payable.
68
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
The tables below set 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
Income Hedge Equity Real
Pension Assets Equities Funds Funds Funds Assets Total
---------- --------- -------- --------- --------- -------
Balance at beginning of year $ 1 $ 337 $ 102 $ 4,714 $ 3,457 $ 8,611
Realized gains (losses) (2) 40 - 434 135 607
Unrealized gains (losses) (1) 15 (52) 942 636 1,540
Purchases, sales, issuances and
settlements (net) 2 (1) - (473) 342 (130)
--- ----- ----- ---- ----- ----- ------
Balance at end of year $ - $ 391 $ 50 $ 5,617 $ 4,570 $10,628
=== ===== ===== ==== ===== ===== ======
Fixed Private
Income Hedge Equity Real
Postretirement Assets Funds Funds Funds Assets Total
--------- -------- --------- --------- -----
Balance at beginning of year $ 19 $ 72 $ 479 $ 172 $ 742
Realized gains (losses) - - 49 14 63
Unrealized gains (losses) - - 28 (14) 14
Purchases, sales, issuances and
settlements (net) - (46) (60) (15) (121)
--- ---- ---- ----- ----- ----
Balance at end of year $ 19 $ 26 $ 496 $ 157 $ 698
=== ==== ==== ===== ===== ====
Estimated Future Benefit Payments
Expected benefit payments are estimated using the same
assumptions used in determining our benefit obligation at December
31, 2011. 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:
Pension Benefits Postretirement Benefits Medicare Subsidy Receipts
-------------------------
2012 $ 6,629 $ 2,500 $ (119)
2013 4,213 2,341 (19)
2014 4,174 2,292 (23)
2015 4,170 2,235 (26)
2016 4,160 2,210 (30)
Years 2017 - 2021 20,711 10,770 (201)
=== =====
69
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
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, 2011, was $2,294 and
$2,270 at December 31, 2010.
The following table provides information for our supplemental
retirement plans with accumulated benefit obligations in excess of
plan assets:
2011 2010
------------------------------- ------- -------
Projected benefit obligation $(2,294) $(2,270)
Accumulated benefit obligation (2,223) (2,154)
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 2011 2010 2009
------------------------------------------------------------------- ---- ---- ----
Service cost - benefits earned during the period $ 14 $ 12 $ 11
Interest cost on projected benefit obligation 126 134 140
Amortization of prior service cost 2 2 5
Actuarial (gain) loss 81 186 82
-------------------------------------------------------------------- --- --- ---
Net supplemental retirement pension cost $223 $334 $238
==================================================================== === === ===
Other Changes Recognized in Other Comprehensive Income 2011 2010 2009
------------------------------------------------------------------- ----- ---- ----
Prior service (cost) credit $ 6 $ (5) $ (5)
Amortization of prior service cost (credit) 1 (2) (3)
-------------------------------------------------------------------- --- --- ---
Total recognized in other comprehensive (income) loss (net of tax) 7 (7) (8)
==================================================================== === === ===
The estimated prior service credit for our supplemental
retirement plan benefits that will be amortized from accumulated
OCI into net periodic benefit cost over the next fiscal year is
less than $1.
Deferred compensation expense was $96 in 2011, $96 in 2010 and
$95 in 2009. Our deferred compensation liability, included in
"Other noncurrent liabilities," was $1,020 at December 31, 2011,
and $1,003 at December 31, 2010.
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 $636, $607
and $586 for the years ended December 31, 2011, 2010 and 2009.
70
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
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, 2011, 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 $187 for 2011,
compared to $196 for 2010 and $121 for 2009.
Under our various plans, senior and other management employees
and nonemployee directors have received stock options, performance
stock units, and other nonvested stock and stock units. Stock
options issued through December 31, 2011, 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 and 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, 2011,
we were authorized to issue up to 121 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:
2011 2010 2009
------------------------ ---- ---- ----
Performance stock units $392 $421 $289
Restricted stock 91 85 21
Stock options 6 6 8
Other - 1 (2)
------------------------ --- --- ---
Total $489 $513 $316
======================== === === ===
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:
2011 2010 2009
------ ----- -----
Risk-free interest rate 2.91% 3.06% 3.17%
Dividend yield 5.96% 6.61% 6.82%
Expected volatility factor 14.74% 15.75% 19.65%
Expected option life in years 7.00 7.00 7.00
===== ===== =====
71
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
A summary of option activity as of December 31, 2011, and
changes during the year then ended, is presented below (shares in
millions):
Weighted-Average
Weighted- Average Remaining Contractual Aggregate
Options Shares Exercise Price Term (Years) Intrinsic Value1
Outstanding at January 1, 2011 130 $ 34.60 1.69 $ 150
Granted 2 28.90
Exercised (9) 26.24
Forfeited or expired (57) 40.37
---------
Outstanding at December 31,
2011 66 30.62 1.99 148
---------
Exercisable at December 31,
2011 64 $ 30.68 1.72 $ 145
=========
Aggregate intrinsic value includes only those options with intrinsic value (options where
1 the exercise price is below the market price).
The weighted-average fair value of each option granted during
the period was $1.57 for 2011, compared to $1.34 for 2010 and $1.84
for 2009. The total intrinsic value of options exercised during
2011 was $40, compared to $13 for 2010, and $5 for 2009.
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
2011, compared to $0 for 2010 and $0 for 2009.
A summary of the status of our nonvested stock units, which
includes performance stock units as of December 31, 2011, and
changes during the year then ended is presented as follows (shares
in millions):
Nonvested Stock Units Shares Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2011 29 $ 25.30
Granted 13 28.17
Vested (14) 25.30
Forfeited (1) 25.93
------ -------
Nonvested at December 31, 2011 27 $ 26.53
====== =======
As of December 31, 2011, there was $329 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 1.88 years. The total fair value of
shares vested during the year was $426 for 2011, compared to $331
for 2010 and $369 for 2009.
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, 2011, we had repurchased no shares under
this program. We began buying back stock under this program in
January 2012.
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, 2011 and 2010, no preferred shares were
outstanding.
In December 2011, the Company declared its quarterly dividend,
which reflected an increase in the amount per share of common stock
to $0.44. In December 2010, the Company declared its quarterly
dividend, increasing the amount per share of common stock from
$0.42 to $0.43.
72
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
NOTE 14. ADDITIONAL FINANCIAL INFORMATION
December 31,
----------------
Consolidated Balance Sheets 2011 2010
----------------------------------------------------------------- ------- -------
Accounts payable and accrued liabilities:
Accounts payable $ 8,593 $ 7,437
Accrued expenses 2,004 2,761
Accrued payroll and commissions 2,170 2,225
Deferred directory revenue 904 1,278
Accrued interest 1,576 1,601
Compensated future absences 525 538
Current portion of employee benefit obligation 2,288 2,394
Other 1,798 1,821
----------------------------------------------------------------- ------ ------
Total accounts payable and accrued liabilities $19,858 $20,055
================================================================= ====== ======
Deferred compensation (included in Other noncurrent liabilities) $ 1,020 $ 1,003
================================================================= ====== ======
Consolidated Statements of Income 2011 2010 2009
---------------------------------- ------ ------ ------
Advertising expense $2,359 $2,982 $2,787
===== ===== =====
Interest expense incurred $3,697 $3,766 $4,108
Capitalized interest (162) (772) (740)
---------------------------------- ----- ----- -----
Total interest expense $3,535 $2,994 $3,368
================================== ===== ===== =====
Consolidated Statements of Cash Flows 2011 2010 2009
-------------------------------------- ------ ------ ------
Cash paid during the year for:
Interest $3,722 $3,882 $3,862
Income taxes, net of refunds 32 3,538 4,471
====================================== ===== ===== =====
Consolidated Statements of Changes in
Stockholders' Equity 2011 2010 2009
-------------------------------------------------- ------ ------ ------
Foreign currency translation adjustment $ (371) $ (494) $ (765)
Unrealized gains on available-for-sale securities 222 316 324
Unrealized gains (losses) on cash flow hedges (421) (180) 142
Defined benefit postretirement plans 3,750 3,070 2,979
Other - - (2)
-------------------------------------------------- ----- ----- -----
Accumulated other comprehensive income $3,180 $2,712 $2,678
================================================== ===== ===== =====
Labor Contracts As of January 31, 2012, we employed
approximately 256,000 persons. Approximately 55% of our employees
are represented by the Communications Workers of America, the
International Brotherhood of Electrical Workers or other unions.
Contracts covering approximately 120,000 employees will expire
during 2012. For contracts covering approximately 80,000 (mainly
wireline) employees, the union is entitled to call a work stoppage
in the absence of a new contract being reached.
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 $450 in 2011, $480 in 2010, and $509 in
2009.
No customer accounted for more than 10% of consolidated revenues
in 2011, 2010 or 2009.
73
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
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 $3,845 in 2012, $4,339 in total for
2013 and 2014, $2,185 in total for 2015 and 2016 and $340 in total
for years thereafter.
See Note 9 for a discussion of collateral and credit-risk
contingencies.
NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables represent our quarterly financial
results:
2011 Calendar Quarter
First Second Third Fourth2 Annual
Total Operating Revenues $31,247 $31,495 $31,478 $ 32,503 $126,723
Operating Income 5,808 6,165 6,235 (8,990) 9,218
Net Income 3,468 3,658 3,686 (6,628) 4,184
Net Income Attributable to AT&T 3,408 3,591 3,623 (6,678) 3,944
Basic Earnings Per Share
Attributable
to AT&T1 $ 0.57 $ 0.60 $ 0.61 $ (1.12) $ 0.66
Diluted Earnings Per Share
Attributable
to AT&T1 $ 0.57 $ 0.60 $ 0.61 $ (1.12) $ 0.66
Stock Price
High $ 30.97 $ 31.94 $ 31.78 $ 30.30
Low 27.20 29.91 27.29 27.41
Close 30.61 31.41 28.52 30.24
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.
Includes an actuarial loss on pension and postretirement benefit plans (Note 11),
T-Mobile
2 breakup fee (Note 2) and impairment of intangible assets (Note 6).
74
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
2010 Calendar Quarter
First2 Second3 Third4 Fourth5 Annual
Total Operating Revenues $30,530 $30,808 $31,581 $31,361 $124,280
Operating Income 5,971 6,083 5,431 2,088 19,573
Income (Loss) from Discontinued
Operations 2 (5) 780 2 779
Net Income 2,540 4,082 12,396 1,161 20,179
Income from Continuing Operations
Attributable to AT&T 2,451 4,008 11,539 1,087 19,085
Net Income Attributable to AT&T 2,453 4,003 12,319 1,089 19,864
Basic Earnings Per Share from
Continuing
Operations Attributable to AT&T1 $ 0.42 $ 0.68 $ 1.95 $ 0.18 $ 3.23
Basic Earnings Per Share from
Discontinued
Operations Attributable to AT&T1 - - 0.13 - 0.13
Basic Earnings Per Share
Attributable
to AT&T1 $ 0.42 $ 0.68 $ 2.08 $ 0.18 $ 3.36
Diluted Earnings Per Share from
Continuing
Operations Attributable to AT&T1 $ 0.41 $ 0.67 $ 1.94 $ 0.18 $ 3.22
Diluted Earnings Per Share from
Discontinued
Operations Attributable to AT&T1 - - 0.13 - 0.13
Diluted Earnings Per Share
Attributable
to AT&T1 $ 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 Includes a charge to income tax expense related to Medicare Part D subsidies (Note 10).
3 Includes a gain on our TI exchange (Note 7).
4 Includes an IRS tax settlement (Note 10).
Includes an actuarial loss on pension and postretirement benefit plans (Note 11) and
severance
5 (Note 1).
75
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, 2011.
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,
2011, 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/ John J. Stephens
Randall Stephenson John J. Stephens
Chairman of the Board, Senior Executive Vice President and
Chief Executive Officer and President Chief Financial
Officer
76
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, 2011 and 2010, 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, 2011. 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, 2011 and 2010,
and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2011,
in conformity with U.S. generally accepted accounting
principles.
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, 2011, 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 24, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
February 24, 2012
77
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
The Board of Directors and Stockholders of AT&T Inc.
We have audited AT&T Inc.'s (the Company) internal control
over financial reporting as of December 31, 2011, 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, 2011, 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, 2011
and 2010, 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, 2011 and our report
dated February 24, 2012 expressed an unqualified opinion
thereon.
/ s/ Ernst & Young LLP
Dallas, Texas
February 24, 2012
78
This information is provided by RNS
The company news service from the London Stock Exchange
END
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