att1q0910q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
 

 
(Mark One)
    

 
x
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
  
       
   
For the quarterly period ended March 31, 2009
  
       
   
or
  
       
 
o
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
  
       
For the transition period from       to     
 
Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
 
208 S. Akard St., Dallas, Texas 75202
Telephone Number:  (210) 821-4105


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]   No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
[X]
 
Accelerated filer
[   ]
Non-accelerated filer
[   ]
(Do not check if a smaller reporting company)
Smaller reporting company
[   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]   No [X]
 
At April 30, 2009, there were 5,900 million common shares outstanding
 
 
PART I - FINANCIAL INFORMATION
  
Item 1. Financial Statements
  
   
AT&T INC.
  
CONSOLIDATED STATEMENTS OF INCOME
  
Dollars in millions except per share amounts
  
(Unaudited)
  
   
      Three months ended
  
   
       March 31,
  
   
2009
    
2008
  
Operating Revenues
            
Wireless service
   $ 11,646     $ 10,605  
Voice
     8,506       9,693  
Data
     6,250       5,972  
Directory
     1,249       1,398  
Other
     2,920       3,076  
Total operating revenues
     30,571       30,744  
Operating Expenses
                
Cost of sales (exclusive of depreciation and amortization
                
   shown separately below)
     12,242       11,995  
Selling, general and administrative
     7,706       7,866  
Depreciation and amortization
     4,886       4,903  
Total operating expenses
     24,834       24,764  
Operating Income
     5,737       5,980  
Other Income (Expense)
                
Interest expense
     (849 )     (865 )
Equity in net income of affiliates
     137       243  
Other income (expense) – net
     (15 )     91  
Total other income (expense)
     (727 )     (531 )
Income Before Income Taxes
     5,010       5,449  
Income taxes
     1,809       1,930  
Net Income
     3,201       3,519  
Less: Net Income Attributable to Noncontrolling Interest
     (75 )     (58 )
Net Income Attributable to AT&T
   $ 3,126     $ 3,461  
                 
Basic Earnings Per Share Attributable to AT&T
   $ 0.53     $ 0.58  
Diluted Earnings Per Share Attributable to AT&T
   $ 0.53     $ 0.57  
Weighted Average Number of Common
                
Shares Outstanding – Basic (in millions)
     5,896       5,997  
Dividends Declared Per Common Share
   $ 0.410     $ 0.400  
See Notes to Consolidated Financial Statements.
 
2 
 
 
 
AT&T INC.
  
CONSOLIDATED BALANCE SHEETS
  
Dollars in millions except per share amounts
            
   
March 31,
    
December 31,
  
   
2009
    
2008
  
Assets
  
(Unaudited)
        
Current Assets
            
Cash and cash equivalents
   $ 3,812     $ 1,792  
Accounts receivable – net of allowances for
                
uncollectibles of $1,271 and $1,270
     14,965       16,047  
Prepaid expenses
     1,704       1,538  
Deferred income taxes
     957       1,014  
Other current assets
     2,083       2,165  
Total current assets
     23,521       22,556  
Property, plant and equipment
     219,769       218,579  
Less: accumulated depreciation and amortization
     (121,430 )     (119,491 )
Property, Plant and Equipment – Net
     98,339       99,088  
Goodwill
     71,694       71,829  
Licenses
     47,461       47,306  
Customer Lists and Relationships – Net
     9,605       10,582  
Other Intangible Assets – Net
     5,797       5,824  
Investments in Equity Affiliates
     2,413       2,332  
Other Assets
     5,528       5,728  
Total Assets
   $ 264,358     $ 265,245  
                 
Liabilities and Stockholders’ Equity
                
Current Liabilities
                
Debt maturing within one year
   $ 10,790     $ 14,119  
Accounts payable and accrued liabilities
     17,359       20,032  
Advanced billing and customer deposits
     4,065       3,849  
Accrued taxes
     2,399       1,874  
Dividends payable
     2,419       2,416  
Total current liabilities
     37,032       42,290  
Long-Term Debt
     63,560       60,872  
Deferred Credits and Other Noncurrent Liabilities
                
Deferred income taxes
     19,376       19,196  
Postemployment benefit obligation
     32,032       31,930  
Other noncurrent liabilities
     14,663       14,207  
Total deferred credits and other noncurrent liabilities
     66,071       65,333  
                 
Stockholders’ Equity
                
Common shares issued ($1 par value)
     6,495       6,495  
Capital in excess of par value
     91,638       91,728  
Retained earnings
     37,296       36,591  
Treasury shares (at cost)
     (21,283 )     (21,410 )
Accumulated other comprehensive income (loss)
     (16,855 )     (17,057 )
Noncontrolling interest
     404       403  
Total stockholders’ equity
     97,695       96,750  
Total Liabilities and Stockholders’ Equity
   $ 264,358     $ 265,245  
See Notes to Consolidated Financial Statements.

3 
 
 
 
AT&T INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
Dollars in millions, increase (decrease) in cash and cash equivalents
  
(Unaudited)
  
   
Three months ended
  
   
March 31,
  
   
2009
    
2008
  
Operating Activities
            
Net income
   $ 3,201     $ 3,519  
Adjustments to reconcile net income to net cash
                
provided by operating activities:
                
Depreciation and amortization
     4,886       4,903  
Provision for uncollectible accounts
     509       480  
Deferred income tax expense (benefit)
     126       569  
Net (gain) loss from impairment and sale of investments
     82       (46 )
 Changes in operating assets and liabilities:
                
Accounts receivable
     573       (150 )
Other current assets
     (108 )     159  
Accounts payable and accrued liabilities
     (1,347 )     (4,654 )
Stock-based compensation tax benefit
     -       (7 )
Other - net
     (7 )     184  
Total adjustments
     4,714       1,438  
Net Cash Provided by Operating Activities
     7,915       4,957  
                 
Investing Activities
                
Construction and capital expenditures
                
   Capital expenditures
     (3,173 )     (4,178 )
Interest during construction
     (185 )     (70 )
Acquisitions, net of cash acquired
     -       (3,662 )
Dispositions
     181       47  
Proceeds from sale of securities, net of investments
     (10 )     131  
Other
     30       33  
Net Cash Used in Investing Activities
     (3,157 )     (7,699 )
                 
Financing Activities
                
Net change in short-term borrowings with original
                
maturities of three months or less
     (3,909 )     5,786  
Issuance of long-term debt
     5,450       3,972  
Repayment of long-term debt
     (1,261 )     (613 )
Purchase of treasury shares
     -       (4,071 )
Issuance of treasury shares
     1       103  
Dividends paid
     (2,416 )     (2,422 )
Stock-based compensation tax benefit
     -       7  
Other
     (603 )     (27 )
Net Cash Provided by (Used in) Financing Activities
     (2,738 )     2,735  
Net increase (decrease) in cash and cash equivalents
     2,020       (7 )
Cash and cash equivalents beginning of year
     1,792       1,970  
Cash and Cash Equivalents End of Period
   $ 3,812     $ 1,963  
                 
Cash paid (refunded) during the three months ended March 31 for:
                
Interest
   $ 1,276     $ 1,130  
Income taxes, net of refunds
   $ (30 )   $ 2,763  
See Notes to Consolidated Financial Statements.
4 
 
 

AT&T INC.
      
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
      
Dollars and shares in millions, except per share amounts
      
(Unaudited)
      
   
Three months ended
  
   
March 31, 2009
  
   
Shares
    
Amount
  
Common Stock
            
Balance at beginning of year
     6,495     $ 6,495  
Balance at end of period
     6,495     $ 6,495  
                 
Capital in Excess of Par Value
                
Balance at beginning of year
           $ 91,728  
Issuance of shares
             26  
Share-based payments
             (116 )
Balance at end of period
           $ 91,638  
                 
Retained Earnings
                
Balance at beginning of year
           $ 36,591  
Net income attributable to AT&T ($0.53 per diluted share)
             3,126  
Dividends to stockholders ($0.41 per share)
             (2,419 )
Other
             (2 )
Balance at end of period
           $ 37,296  
                 
Treasury Shares
                
Balance at beginning of year
     (602 )   $ (21,410 )
Purchase of shares
     -       -  
Issuance of shares
     7       127  
Balance at end of period
     (595 )   $ (21,283 )
                 
Accumulated Other Comprehensive Income (Loss), net of tax
                
Balance at beginning of year
           $ (17,057 )
Other comprehensive income (see Note 2)
             202  
Balance at end of period
           $ (16,855 )
                 
Noncontrolling interest at beginning of year
           $ 403  
Net income
             75  
Distributions
             (67 )
Translation adjustments
             (7 )
Noncontrolling interest at end of period
           $ 404  
                 
Total stockholders equity as of December 31, 2008
           $ 96,750  
Changes attributable to AT&T stockholders
             944  
Changes attributable to noncontrolling interest
             1  
Total stockholders equity as of March 31, 2009
           $ 97,695  
See Notes to Consolidated Financial Statements.
  

5 
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation Throughout this document, AT&T Inc. is referred to as “AT&T,” “we” or the “Company.” The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. We believe that these consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the interim periods shown. The results for the interim periods are not necessarily indicative of results for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2008.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates operate in the communications services industry both domestically and internationally, providing wireless and wireline communications services and equipment, managed networking, wholesale services and directory advertising and publishing services.

All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships and less than majority-owned subsidiaries where we have significant influence are accounted for under the equity method. Earnings from certain foreign equity investments accounted for using the equity method are included for periods ended within up to one month of our period end.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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.

Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157) requires disclosures for financial assets and liabilities that are remeasured at fair value at least annually. FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Substantially all of our available-for-sale securities are valued using quoted market prices (referred to as Level 1). Adjustments to fair value are recorded in other comprehensive income (OCI) until the investment is sold or experiences an other-than-temporary decline in fair value (see Note 2). The fair market value of these securities was $1,537 at March 31, 2009. All of our derivatives are Level 2 (see Note 6).

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (FAS 160). FAS 160 requires noncontrolling interests held by parties other than the parent in subsidiaries to be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. FAS 160 is effective for fiscal years beginning after December 15, 2008. We have adopted FAS 160 and its required reclassifications and disclosures have been made in our financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (FAS 161). FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities to improve the transparency of financial reporting. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We have adopted FAS 161, which has increased quarterly and annual disclosures but did not have an impact on our financial position and results of operations (see Note 6).

Valuation and Other Adjustments In accordance with Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits,” (FAS 112) we establish 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 March 31, 2009, we had severance accruals under FAS 112 of $504. At December 31, 2008, we had severance accruals of $752.

6 
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 
Dollars in millions except per share amounts

Included in the current liabilities reported on our consolidated balance sheet are accruals established prior to 2009 under Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (EITF 95-3). The liabilities include accruals for severance, lease terminations and equipment removal costs associated with our acquisitions of AT&T Corp., BellSouth Corporation (BellSouth) and Dobson Communications Corporation. Following is a summary of the accruals recorded under EITF 95-3 at December 31, 2008, cash payments made during 2009 and the adjustments thereto.

   
12/31/08
    
Cash
    
Adjustments
    
3/31/09
  
   
Balance
    
Payments
    
and Accruals
    
Balance
  
Severance accruals paid from:
                        
Company funds
  
$
 140    
$
 (84 )  
$
 (24 )  
$
 32  
Pension and postemployment
benefit plans
     103       (2 )     -       101  
Lease terminations
     387       (19 )     (5 )     363  
Equipment removal and other related costs
     88       (32 )     (9 )     47  
Total
  
$
 718    
$
 (137 )  
$
 (38 )  
$
 543  

New Accounting Standards

FSP FAS 141(R)-1  In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP FAS 141(R)-1). FSP FAS 141(R)-1 amends and clarifies FASB Statement No. 141 (revised 2007), “Business Combinations,” to address application issues raised on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This FASB Staff Position is effective immediately, and its impact will vary with each future acquisition.

In April 2009, the FASB issued three staff positions on fair value:

FSP FAS 107-1 and APB 28-1  FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1) amends Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments” (FAS 107), and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” (APB 28), to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.

FSP FAS 157-4  FASB Staff Position FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4) provides additional guidance for estimating fair value in accordance with FAS 157 for lightly-traded investments. This FSP also includes guidance on identifying circumstances that indicate apparently comparable market transactions do not represent independent fair value.

FSP FAS 115-2 and FAS 124-2  FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2) amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and changes the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.

All three of these FSPs will be effective for interim and annual reporting periods ending after June 15, 2009, with early adoption being permitted for periods ending after March 15, 2009. We are currently evaluating the impact these FASB Staff Positions will have on our financial position and results of operations.


7 
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 
Dollars in millions except per share amounts

NOTE 2. COMPREHENSIVE INCOME

The components of our comprehensive income for the three months ended March 31, 2009 and 2008 include net income, adjustments to stockholders’ equity for the foreign currency translation adjustment, net unrealized gain (loss) on available-for-sale securities, net unrealized gain (loss) on cash flow hedges and defined benefit postretirement plans. The foreign currency translation adjustment was due to exchange rate fluctuations in our foreign affiliates’ local currencies and the reclassification adjustment on cash flow hedges was due to the amortization of losses from our interest rate forward contracts.

Following is our comprehensive income:

 
   
Three months ended
  
   
March 31,
  
   
2009
    
2008
  
Net income
   $ 3,201     $ 3,519  
Other comprehensive income, net of tax:
                
Foreign currency translation adjustment (includes $7 and $(12) attributable to noncontrolling interest), net of taxes of $(20) and $43
     (35 )     78  
Net unrealized gains (losses) on securities:
                
 Unrealized gains (losses), net of taxes of $(51) and $(49)
     (90 )     (90 )
Less reclassification adjustment realized in net income, net of taxes of $44 and $(27)
     77       (50 )
Net unrealized gains (losses) on cash flow hedges:
                
 Unrealized gains (losses), net of taxes of $74 and $(43)
     146       (78 )
Unrealized gain (loss) on rate locks, net of taxes of $22
     38       -  
Reclassification adjustment for losses on cash flow hedges
included in net income, net of taxes of $3 and $2
     3       4  
Defined benefit postretirement plans:
                
Amortization of net actuarial (gain) loss and prior service
   benefit included in net income, net of taxes of $32 and $(15)
     57       (28 )
Other
     (1 )     -  
Other comprehensive income (loss)
     195       (164 )
Less: Total comprehensive income attributable to the noncontrolling interest
     (68 )     (70 )
Total Comprehensive Income Attributable to AT&T
   $ 3,328     $ 3,285  


8 
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 
Dollars in millions except per share amounts

NOTE 3. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for net income attributable to AT&T for the first quarter 2009 and 2008 are shown in the table below:

   
          Three months ended
  
   
 March 31,
  
   
2009
    
2008
  
Numerators
            
Numerator for basic earnings per share:
            
Net income attributable to AT&T
   $ 3,126     $ 3,461  
Dilutive potential common shares:
                
Other stock-based compensation
     3       2  
Numerator for diluted earnings per share
   $ 3,129     $ 3,463  
Denominators (000,000)
                
Denominator for basic earnings per share:
                
Weighted-average number of common
                
shares outstanding
     5,896       5,997  
Dilutive potential common shares:
                
Stock options
     2       14  
Other stock-based compensation
     24       22  
Denominator for diluted earnings per share
     5,922       6,033  
Basic earnings per share
   $ 0.53     $ 0.58  
Diluted earnings per share
   $ 0.53     $ 0.57  

At March 31, 2009 and 2008, we had issued and outstanding options to purchase approximately 193 and 223 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 178 and 116 million shares exceeded the average market price of AT&T stock for the first quarter 2009 and 2008. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective periods. At March 31, 2009, the exercise price of 16 million share options was below market price.


9 
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 
Dollars in millions except per share amounts

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our various operating segments based on segment income before income taxes, reviewing operating revenues, operating expenses (depreciation or non-depreciation) and equity income for each segment. Interest expense and other income (expense) – net are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in the calculation of each segment’s percentage of our consolidated results. We have four reportable segments: (1) wireless, (2) wireline, (3) advertising solutions and (4) other.

The wireless segment provides wireless voice and advanced data communications services.

The wireline segment provides landline voice and data communications services, managed networking to business customers, AT&T U-verseSM TV, high-speed broadband and voice services (U-verse) and satellite television services through our agency arrangements.

The advertising solutions segment publishes Yellow and White Pages directories and sells advertising in various media, including directory and Internet-based advertising, and local search. Results for this segment are shown under the amortization method, which means that revenues and direct expenses are recognized ratably over the life of the directory title, typically 12 months.

The other segment includes results from Sterling Commerce Inc., customer information services and all corporate and other operations. This segment includes our portion of the results from our international equity investments. Also included in the other segment are impacts of management decisions affecting the company for which management does not evaluate the individual operating segments.

In the following tables, we show how our segment results are reconciled to our consolidated results reported in accordance with GAAP. The Wireless, Wireline, Advertising Solutions and Other columns represent the segment results of each operating segment. The Consolidation and Elimination column adds in those line items that we manage on a consolidated basis only: interest expense and other income (expense) – net. This column also eliminates any intercompany transactions included in each segment’s results.

Segment assets for the three months ended March 31, 2009 are materially unchanged from the year ended December 31, 2008 with the exception of other segment assets. Our other segment assets totaled $10,734, which increased $2,032, or 23.4%, primarily due to an increase in cash.

10 
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 
Dollars in millions except per share amounts

For the three months ended March 31, 2009
                                
               
Advertising
          
Consolidation
    
Consolidated
  
   
Wireless
    
Wireline
    
Solutions
    
Other
    
and Elimination
    
Results
  
Revenues from external customers
   $ 12,838     $ 16,114     $ 1,249     $ 370     $ -     $ 30,571  
Intersegment revenues
     22       564       20       67       (673 )     -  
Total segment operating revenues
     12,860       16,678       1,269       437       (673 )     30,571  
Operations and support expenses
     8,085       11,297       749       490       (673 )     19,948  
Depreciation and amortization expenses
     1,434       3,240       176       36       -       4,886  
Total segment operating expenses
     9,519       14,537       925       526       (673 )     24,834  
Segment operating income (loss)
     3,341       2,141       344       (89 )     -       5,737  
Interest expense
     -       -       -       -       849       849  
Equity in net income of affiliates
     -       4       -       133       -       137  
Other income (expense) – net
     -       -       -       -       (15 )     (15 )
Segment income before income taxes
   $ 3,341     $ 2,145     $ 344     $ 44     $ (864 )   $ 5,010  

For the three months ended March 31, 2008
                                
               
Advertising
          
Consolidation
    
Consolidated
  
   
Wireless
    
Wireline
    
Solutions
    
Other
    
and Elimination
    
Results
  
Revenues from external customers
   $ 11,785     $ 17,087     $ 1,398     $ 474     $ -     $ 30,744  
Intersegment revenues
     40       537       19       70       (666 )     -  
Total segment operating revenues
     11,825       17,624       1,417       544       (666 )     30,744  
Operations and support expenses
     7,389       11,493       787       859       (667 )     19,861  
Depreciation and amortization expenses
     1,480       3,181       212       29       1       4,903  
Total segment operating expenses
     8,869       14,674       999       888       (666 )     24,764  
Segment operating income (loss)
     2,956       2,950       418       (344 )     -       5,980  
Interest expense
     -       -       -       -       865       865  
Equity in net income of affiliates
     2       6       -       235       -       243  
Other income (expense) – net
     -       -       -       -       91       91  
Segment income before income taxes
   $ 2,958     $ 2,956     $ 418     $ (109 )   $ (774 )   $ 5,449  
 
11
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 
Dollars in millions except per share amounts

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of various noncontributory pension and death benefit plans. We also provide certain medical, dental and life insurance benefits to substantially all retired employees under various plans and accrue actuarially determined postretirement benefit costs as active employees earn these benefits. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to meet the plans’ obligations to provide benefits to employees upon their retirement. No significant cash contributions are required under ERISA regulations during 2009.

The following details pension and postretirement benefit costs included in operating expenses (in cost of sales and selling, general and administrative expenses) in the accompanying Consolidated Statements of Income. We account for these costs in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” In the following table, gains are denoted with parentheses and losses are not. A portion of these expenses are effectively capitalized as part of the benefit load on internal construction and capital expenditures, historically averaging approximately 10%.

   
Three months ended
  
   
March 31,
  
   
2009
    
2008
  
Pension (benefit) cost:
            
Service cost – benefits earned during the period
   $ 272     $ 293  
Interest cost on projected benefit obligation
     845       830  
Expected return on assets
     (1,140 )     (1,400 )
Amortization of prior service cost
     27       33  
Recognized actuarial loss
     166       2  
Net pension (benefit) cost
   $ 170     $ (242 )
                 
Postretirement benefits cost:
                
Service cost – benefits earned during the period
   $ 88     $ 107  
Interest cost on accumulated postretirement
                
  benefit obligation
     630       636  
Expected return on assets
     (239 )     (332 )
  Amortization of prior service benefit
     (90 )     (90 )
Postretirement benefits cost
   $ 389     $ 321  
                 
Combined net pension and postretirement cost
   $ 559     $ 79  

Our combined net pension and postretirement cost increased $480 in the first quarter of 2009. The increase was due to lower expected return on assets and an increase in amortization of unrecognized actuarial losses, both primarily from investment losses in 2008. As allowed under GAAP, we use a method in which gains and losses are amortized only when the net gains or losses exceed 10 percent of the greater of the projected benefit obligation or the market-related value of assets (MRVA). Under GAAP, the expected long-term rate of return is calculated on the MRVA. GAAP requires that actual gains and losses on pension and postretirement plan assets be recognized in the MRVA equally over a period of up to five years. However, we use a methodology, allowed under GAAP, under which we hold the MRVA to within 20% of the actual fair value of plan assets, which can have the effect of accelerating the recognition of excess actual gains and losses in the MRVA in less than five years. The use of this policy increased pre-capitalization pension and postretirement cost by approximately $400 in the first quarter of 2009. This methodology did not have a significant effect on our 2008 combined net pension and postretirement benefits.

We have varying types of pension programs providing benefits for substantially all of certain non-U.S. operations. In addition to the pension and postretirement costs above, we recorded net pension cost for non-U.S. plans of $1 in the first quarter of 2009 and $4 in the first quarter of 2008.

12
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 
Dollars in millions except per share amounts

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental retirement pension benefits cost, which is not included in the table above, was $42 in the first quarter of 2009 and $45 in the first quarter of 2008, of which $35 was interest cost and $3 was service cost for both quarters.

NOTE 6. FAIR VALUE OF DERIVATIVE INSTRUMENTS

We use interest rate swaps, interest rate forward contracts and foreign currency exchange contracts to manage our market risk changes in interest rates and foreign exchange rates. We do not use financial instruments for trading or speculative purposes. The majority of our derivatives are designated as fair value hedges or cash flow hedges. Certain of our foreign exchange contracts are not designated as hedging instruments under FAS 133.

Fair Value Hedging  We designate our fixed-to-floating interest rates swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. Changes in the fair value of the interest rate swap offset changes in the fair value of the fixed-rate notes payable due to changes in the designated benchmark interest rate and are recognized in interest expense. This agreement involves the receipt of fixed rate amounts for floating interest rate payments over the life of the agreement without exchange of the underlying principal amount.

Cash Flow Hedging  For designated derivative instruments, the effective portion is reported as a component of OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on ineffective portion is recognized in earnings in each current period.

We designate our combined interest rate foreign currency swap agreements (cross-currency swaps). We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro- and British pound sterling-denominated debt. These agreements include initial and final exchanges of principal from fixed foreign denominations to fixed U.S.-denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed foreign-denominated rate to a fixed U.S.-denominated interest rate. We evaluate the effectiveness of our cross-currency swaps each period. In the period ending March 31, 2009, no material ineffectiveness was measured.

Periodically we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to changes in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. As of March 31, 2009, we had utilized all outstanding interest rate locks. Gains and losses at the time we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to income. In the period ending March 31, 2009, no material ineffectiveness was measured. Over the next 12 months, we expect to reclassify $21 from OCI to interest expense due to the amortization of net losses on historical rate locks.
 
The balance of the derivative loss in accumulated other comprehensive income was $296 at March 31, 2009 and $483 at December 31, 2008.

Derivatives not Designated as Hedging Instruments  We enter into foreign exchange contracts to manage our exposure to changes in currency exchange rates related to foreign currency-denominated transactions. We choose not to designate these derivatives as hedging instruments under FAS 133 primarily because of their relative size (individually and in the aggregate), frequency in occurrence, and duration (usually less than one year).

Collateral and Credit-Risk Contingency  We have entered into agreements with most of our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31, 2009 we had $127 net collateral posted ($137 deposit asset on derivatives with fair value of $(708) less $10 receipt liability). Under the agreements, if our credit rating had been downgraded one rating level, we would have been required to post an additional $200.

13
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 
Dollars in millions except per share amounts

Following is the size and value of our outstanding derivative positions:

Volume of Derivative Activity
   
3/31/09
  
   
Notional
Value
    
Fair
Value
  
             
Interest rate swaps
   $ 5,750     $ $505  
Cross-currency swaps
     4,774     $ (913 )
Foreign exchange contracts
     225     $ 5  

Following are our derivative instruments and their related hedged items affecting our financial position and performance:

Fair Value of Derivatives in Consolidated Balance Sheet
 
3/31/09
  
Asset Derivatives
      
Derivatives designated as hedging instruments under Statement 133
    
       
Other assets & accounts receivable – interest rate swaps
   $ 505  
Total
   $ 505  
         
Derivatives not designated as hedging instruments under Statement 133
        
         
Other current assets – foreign exchange contracts
   $ 5  
         
Liability Derivatives
        
Derivatives designated as hedging instruments under Statement 133
        
         
Other Non-current liabilities
     913  
Total
   $ 913  
         
Derivatives not designated as hedging instruments under Statement 133
        
         
Other current liabilities – foreign exchange contracts
   $ -  


14 
 
 
AT&T INC.
MARCH 31, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

Effect of Derivatives on the Income Statement
   
3/31/09
  
Derivatives in Statement 133 Fair Value Hedging Relationships
      
       
Interest income (expense)
      
Gain/(Loss) on swap – interest rate swaps
   $ (59 )
Gain/(Loss) on long-term debt – interest rate swaps
     59  
         
Derivatives in Statement 133 Cash Flows Value Hedging Relationships
Interest Rate Swaps (Effective Portion)
        
         
Interest rate locks
        
Interest income (expense) recognized in OCI
   $ 60  
Interest income (expense) reclassified from OCI into income
     (6 )
         
Cross-currency swaps
        
Other income (expense) recognized in OCI
     220  
Gain/(Loss) reclassified from OCI into Income
     -  
         
Derivatives not designated as hedging instruments under Statement 133
        
         
Other income – foreign exchange contracts
   $ 10  


15
 
 
AT&T INC.
MARCH 31, 2009

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts
 
RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T,” or the “Company” throughout this document and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry in both the United States and internationally providing telecommunications services and equipment as well as directory advertising and publishing services. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2008. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.

Consolidated Results  Our financial results in the first quarter of 2009 and 2008 are summarized as follows:

   
First Quarter
  
               
    Percent
  
   
2009
    
2008
    
     Change
  
Operating Revenues
   $ 30,571     $ 30,744       (0.6 )%
Operating expenses
                        
Cost of sales
     12,242       11,995       2.1  
Selling, general and administrative
     7,706       7,866       (2.0 )
Depreciation and amortization
     4,886       4,903       (0.3 )
Total Operating Expenses
     24,834       24,764       0.3  
Operating income
     5,737       5,980       (4.1 )
Income before income taxes
     5,010       5,449       (8.1 )
Net Income Attributable to AT&T
   $ 3,126     $ 3,461       (9.7 )%

Overview
Operating income Our operating income decreased $243, or 4.1%, in the first quarter of 2009, primarily due to the continued decline in voice revenues along with an increase in pension and other postemployment benefits (OPEB) expense, partially offset by growth in wireless service revenues. Operating income also decreased in part due to higher cost of sales in our wireless segment mainly attributed to the sales of the Apple iPhone 3G introduced in the middle of 2008. These factors resulted in a decrease in our operating income margin from 19.5% to 18.8% in the first quarter 2009 as compared to the same period last year.

Operating revenues  Our operating revenues decreased $173, or 0.6%, in the first quarter of 2009, primarily due to a decline in voice revenues of $1,187 along with declines in directory and other revenue of $149 and $156, respectively. These declines were largely offset by an increase in wireless service revenue of $1,041 due to continuing growth in wireless subscribers, and an increase in data revenues of $278 largely due to U-verse and broadband growth.

The decline in our voice revenues reflects continuing economic pressures on our consumer and business wireline customers. Our retail access lines continued to decline as customers disconnected both primary and additional landlines and switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data. While we lose the voice revenues, we have the opportunity to increase wireless service revenues should the customer choose us as their wireless provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.

Cost of sales expenses increased $247, or 2.1%, in the first quarter of 2009, reflecting higher wireless equipment costs driven by the continued success of the Apple iPhone 3G. Also contributing to the higher cost of sales was an increase in pension and OPEB expense due to lower expected return on assets and an increase in amortization of unrecognized actuarial losses, both primarily from investment losses in 2008. These increases were partially offset by force reductions, lower equipment sales costs for traditional equipment sales as well as a decrease in expenses due to the renegotiation of our agreement with Yahoo! and lower volumes for usage-based services.

16
 
 
AT&T INC.
MARCH 31, 2009

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Selling, general and administrative expenses decreased $160, or 2.0%, in the first quarter of 2009, primarily due to a charge in first quarter 2008 associated with an announced workforce reduction. Expenses also decreased due to force reductions in 2009. This decline was mostly offset by an increase in Pension/OPEB expense and higher residuals and upgrade commissions expenses associated with the Apple iPhone 3G. Also offsetting the decline were higher customer service costs due to wireless subscriber growth along with increased support for data services and integrated devices.

Depreciation and amortization expense decreased $17, or 0.3%, in the first quarter of 2009. Depreciation and amortization remained relatively stable as the declining amortization of identifiable intangible assets, primarily customer relationships, was offset by increased depreciation resulting from capital additions.

Interest expense decreased $16, or 1.8%, in the first quarter of 2009. Interest expense remained relatively unchanged with a decrease in our weighted average interest rate and higher interest charged during construction offset by an increase in our average debt balances. Future interest expense will continue to reflect increased interest during construction related to preparing wireless spectrum for advanced services.

Equity in net income of affiliates decreased $106, or 43.6%, in the first quarter of 2009 primarily due to foreign currency translation losses at América Móvil, S.A. de C.V. (América Móvil), Télefonos de Mexico, S.A. de C.V. (Telmex) and Telmex Internacional, S.A.B. de C.V. (Telmex Internacional).

Other income (expense) – net  We had other expense of $15 in the first quarter of 2009 and $91 income for the first quarter of 2008. Results primarily included expenses of $102 related to asset impairment of investments under independent management that support certain benefit plans, partially offset by $58 gains on sales of a professional services business and Yahoo! shares, $13 interest income and $12 dividend and leveraged lease income. Results in the first quarter of 2008 consisted of a net gain on the sale of cost investments, interest income and other non-strategic investment activity.

Income taxes decreased $121, or 6.3%, in the first quarter of 2009. The decrease in income taxes in the first quarter was primarily due to lower income before income taxes. Our effective tax rate was 36.1% compared to 35.4% for the same period in 2008. The increase in our effective tax rate in 2009 was due to nonrecurring state income tax benefits and adjustments recorded in first quarter 2008.

Selected Financial and Operating Data
   
March 31
  
   
2009
    
2008
  
Wireless customers (000)
     78,232       71,367  
Consumer revenue connections (000) 1,2
     46,847       49,340  
Network access lines in service (000) 2
     53,992       60,415  
Broadband connections (000) 2,3,7
     16,736       15,419  
Video connections (000) 4
     3,534       2,611  
Debt ratio 5,7
     43.2 %     39.5 %
Ratio of earnings to fixed charges 6,7
     4.7       5.6  
Number of AT&T employees
     294,600       310,070  
1 Consumer revenue connections includes retail access lines, U-verse voice over IP connections, broadband and video. 
2  Represents services by AT&T’s local exchange companies (ILECs) and affiliates.
3 Broadband connections include DSL (including U-verse high-speed Internet access), satellite broadband and 3G LaptopConnect cards.
4
 Video connections include customers that have satellite service under our agency arrangements and U-verse video connections of 1,329 in 2009 and 379 in 2008.
5 See our “Liquidity and Capital Resources” section for discussion.
6 See Exhibit 12.
7
Prior year amounts restated to conform to current period reporting methodology.


17
 
 
AT&T INC.
MARCH 31, 2009

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Segment Results

Our segments represent strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes, reviewing operating revenues, expenses (depreciation or non-depreciation) and equity income for each segment. Interest expense and other income (expense) – net are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have four reportable segments: (1) wireless, (2) wireline, (3) advertising solutions and (4) other.

The wireless segment provides wireless voice and advanced data communications services.

The wireline segment provides landline voice and data communications services, managed networking to business customers, AT&T U-verseSM TV, high-speed broadband and voice services (U-verse) and satellite television services through our agency arrangements.

The advertising solutions segment publishes Yellow and White Pages directories and sells advertising in various media, including directory and Internet-based advertising, and local search.

The other segment includes results from Sterling Commerce Inc. (Sterling), customer information services and all corporate and other operations. The other segment includes our portion of the results from our international equity investments. Also included in the other segment are impacts of management decisions affecting the company for which management does not evaluate the individual operating segments.

The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”

Wireless
Segment Results
   
First Quarter
  
               
Percent
  
   
2009
    
2008
    
Change
  
Segment operating revenues
                  
Service
   $ 11,668     $ 10,645       9.6 %
Equipment
     1,192       1,180       1.0  
Total Segment Operating Revenues
     12,860       11,825       8.8  
Segment operating expenses
                        
Operations and support
     8,085       7,389       9.4  
Depreciation and amortization
     1,434       1,480       (3.1 )
Total Segment Operating Expenses
     9,519       8,869       7.3  
Segment Operating Income
     3,341       2,956       13.0  
Equity in Net Income of Affiliates
     -       2       -  
Segment Income
   $ 3,341     $ 2,958       12.9 %

Operating Income and Margin Trends
Our wireless segment operating income increased $385, or 13.0%, in the first quarter of 2009, reflecting an increase in our customer base. With regard to our postpaid customer base in particular, we are continuing to realize the benefits from our Apple iPhone 3G customers in the form of higher average customer revenues.

Our wireless segment operating income margin was 26.0% in the first quarter of 2009, compared to 25.0% in 2008. The higher margin was primarily due to revenue growth of $1,035, or 8.8%, partially offset by increased operating expenses of $650, or 7.3%. The majority of the improvement in our results was due to the increase in our customer base of 6.9 million since March 31, 2008. This increase includes 182,000 related to our acquisition of Edge Wireless, LLC in April 2008. As of March 31, 2009, we served 78.2 million wireless customers. Contributing to our customer base increase was improvement in the customer turnover (churn) rate. Wireless operating margins were pressured by higher costs of equipment, selling, general and administrative expenses due in part to strong sales of advanced integrated devices including the Apple iPhone 3G.

18
 
 
AT&T INC.
MARCH 31, 2009

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Average service revenue per user/customer (ARPU) in the first quarter of 2009 remained consistent with the first quarter of 2008. Data services ARPU grew 26.3% in the first quarter of 2009, offset by a decline in voice service ARPU of 7.4%. We expect continued growth from data services as more customers purchase advanced integrated devices, such as the Apple iPhone 3G, and laptop cards and as our third-generation network continues to expand. The decline in voice service ARPU is the result of a decrease in postpaid voice overage charges and international long distance; increases in our reseller customers, which have lower ARPU than traditional postpaid customers; lower roaming revenues due to in part acquisitions and ongoing rate negotiations as part of roaming cost savings initiatives as well as overall lower roaming volumes; slowing international growth and lower regulatory cost recovery charges. We expect continued pressure on voice service ARPU.

Our total churn rate decreased to 1.6% in the first quarter of 2009 from 1.7% in the first quarter of 2008. Our postpaid churn rate remained stable at 1.2% for both periods.

Operating Results
Service revenues are comprised of voice, data and other revenue. Service revenues increased $1,023, or 9.6%, in the first quarter of 2009. The increase in service revenues primarily consisted of:
·  
Data revenue increases of $884, or 38.6%, primarily due to the increased number of data users and an increase in data ARPU of 26.3%. Data revenue growth was primarily driven by strong increases in wireless internet access, messaging, e-mail and data access revenues. This primarily resulted from increased use of more advanced integrated devices, including the Apple iPhone 3G, which can provide for the data services previously mentioned. Data service revenues represented 27.2% of wireless service revenues, up from 21.5% in the first quarter of 2008.
·  
Voice and other revenue increases of $139, or 1.7%, primarily due to an increase in the average number of wireless customers of 9.8%, partially offset by a decline in voice ARPU of 7.4%.

Equipment revenues increased $12, or 1.0%, in the first quarter of 2009. The marginal increase was due to higher handset revenues reflecting a greater proportion of customer gross additions and upgrades to more advanced integrated devices than in prior periods.

Operations and support expenses increased $696 or 9.4%, in the first quarter of 2009. The $696 increase is primarily due to higher equipment costs of $250, Interconnect, USF and network systems expenses of $160, upgrade commission and residual expenses of $147 due to higher handset upgrade activity and customer service costs of $131. Total equipment costs continue to be higher than equipment revenues due to the sale of discounted handsets to customers.

Depreciation and amortization expenses decreased $46, or 3.1%, in the first quarter of 2009. Amortization expense decreased $124 or 21.8%, in the first quarter primarily due to lower amortization of intangibles related to our acquisition of BellSouth’s 40% ownership interest in AT&T Mobility due to the use of accelerated amortization methods, which result in lower expense each year as the remaining useful life of the asset decreases. These decreases in amortization were slightly offset by the amortization of intangibles related to our acquisition of Dobson Communications Corporation and other 2008 acquisitions.

Depreciation expense increased $78, or 8.6%, in the first quarter of 2009 primarily due to increased expense related to ongoing capital spending for network upgrades and expansion, partially offset by certain network assets becoming fully depreciated.


19
 
 
AT&T INC.
MARCH 31, 2009

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Wireline
Segment Results
   
First Quarter
  
               
Percent
  
   
2009
    
2008
    
Change
  
Segment operating revenues
                  
Voice
   $ 8,708     $ 9,919       (12.2 )%
Data
     6,536       6,205       5.3  
Other
     1,434       1,500       (4.4 )
Total Segment Operating Revenues
     16,678       17,624       (5.4 )
Segment operating expenses
                        
Operations and support
     11,297       11,493       (1.7 )
Depreciation and amortization
     3,240       3,181       1.9  
Total Segment Operating Expenses
     14,537       14,674       (0.9 )
Segment Operating Income
     2,141       2,950       (27.4 )
Equity in Net Income of Affiliates
     4       6       (33.3 )
Segment Income
   $ 2,145     $ 2,956       (27.4 )%

Operating Income and Margin Trends
Our wireline segment operating income decreased $809, or 27.4%, in the first quarter of 2009. Our wireline segment operating income margin decreased in the first quarter from 16.7% in 2008 to 12.8% in 2009. Operating income continued to be pressured by access line declines due to economic pressures on our consumer and business wireline customers and increased competition, as customers either reduced usage or disconnected traditional landline services and switched to alternative technologies such as wireless and VoIP. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, including VoIP and video. Additionally, we have the opportunity to increase wireless segment revenues if customers choose AT&T Mobility as an alternative provider. The decline in segment voice revenue was partially offset by continued growth in data revenue. Also contributing to pressure on our operating margins was increased Pension/OPEB expenses in 2009.

Operating Results
Voice revenues decreased $1,211, or 12.2%, in the first quarter of 2009 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 $632, or 10.8%. The decrease was driven primarily by a decline of $501 attributable to a decline in access lines and by a decline in revenues from AT&T Corp. (ATTC) mass-market customers of approximately $40. We expect our local voice revenue to continue to be negatively affected by the slowing economy and increased competition from alternative technologies.
·  
Long-distance revenues decreased $517, or 14.2%. The decrease was primarily due to lower demand for long-distance service from global and consumer customers which decreased revenues $369 and expected declines in the number of ATTC’s mass-market customers, which decreased revenues $148.
·  
Local wholesale revenues decreased $62, or 15.4%. The decrease was primarily due to declining number of Unbundled Network Element-Platform (UNE-P) lines sold to competitive providers.


20
 
 
AT&T INC.
MARCH 31, 2009

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Data revenues increased $331, or 5.3%, in the first quarter of 2009. Data revenues accounted for approximately 39% of wireline operating revenues in the first quarter of 2009 and 35% in the first quarter of 2008. Data revenues include transport, IP and packet-switched data services.
·  
IP data revenues increased $430, or 16.4%, primarily due to growth in consumer and business broadband, virtual private networks (VPN) and managed Internet services. IP data services, such as U-verse video and Managed Internet Services, increased approximately $230. VPN increased approximately $119. Broadband high-speed Internet access increased IP data revenues approximately $76 primarily due to increased connections. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based services.
·  
Traditional circuit-based services which include frame relay, asynchronous transfer mode and managed packet services, decreased $119, or 17.4%. This decrease is primarily due to lower demand as customers continue to shift to IP-based technology such as VPN, DSL and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.

Other operating revenues decreased $66, or 4.4%, in the first quarter of 2009. Integration services and customer premises equipment (CPE), government-related services and managed services account for more than 58% of total other revenue for both periods. Managed services increased $69 due to ongoing agreements. Revenue from equipment sales and related network integration decreased by $117 primarily related to CPE.

Operation and support expenses decreased $196, or 1.7%, in the first quarter of 2009. Operation and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as salary, wage and bonus accruals. Costs in this category include our repair technicians and repair services, certain network planning and engineering expenses, operator services, information technology and property taxes. Operation and support expenses also include provision for uncollectible accounts; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees.

The major decrease was due to a $306 decline in expenses primarily due to the renegotiation of our agreement with Yahoo!, international long-distance costs related to lower international long-distance revenues, and lower volume of calls from ATTC’s declining national mass-market customer base. Other cost decreases included CPE of $150, force decreases (net of wage increases), of $135, contract services of $95 and overtime reduction of $66.

Partially offsetting these decreases was an increase in Pension/OPEB of $439 due to lower expected return on assets and an increase in amortization of unrecognized actuarial losses, both primarily from investment losses.

Depreciation and amortization expenses increased $59, or 1.9%, in the first quarter. Depreciation increased $99 partially offset by a $40 decrease in intangible amortization.


21
 
 
AT&T INC.
MARCH 31, 2009

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Supplemental Information

Telephone, Wired Broadband and Video Connections Summary
Our switched access lines and other services provided by our local exchange telephone subsidiaries at March 31, 2009 and 2008 are shown below and access line trends are addressed throughout this segment discussion.

 (in 000s)
                  
   
Actual
    
Actual
        
   
March 31,