Edgar Filing: AT&T INC.

q3d10q.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 September 30, 2011

		or

	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware

I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202

Telephone Number: (210) 821-4105

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated 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 October 31, 2011 there were 5,926 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 September 30,							Nine Months Ended September 30,
		2011			2010				2011			2010
Operating Revenues
Wireless service		$	14,261		$	13,675			$	42,379		$	39,711
Data			7,472			6,947				22,008			20,464
Voice			6,243			6,978				19,136			21,685
Directory			803			961				2,512			3,009
Other			2,699			3,020				8,185			8,050
Total operating revenues			31,478			31,581				94,220			92,919
Operating Expenses
Cost of services and sales (exclusive of depreciation and amortization shown separately below)			13,165			13,605				39,900			38,440
Selling, general and administrative			7,460			7,672				22,308			22,522
Depreciation and amortization			4,618			4,873				13,804			14,472
Total operating expenses			25,243			26,150				76,012			75,434
Operating Income			6,235			5,431				18,208			17,485
Other Income (Expense)
Interest expense			(889	)		(729	)			(2,583	)		(2,248	)
Equity in net income of affiliates			193			217				649			629
Other income (expense) - net			46			124				132			825
Total other income (expense)			(650	)		(388	)			(1,802	)		(794	)
Income from Continuing Operations Before Income Taxes			5,585			5,043				16,406			16,691
Income tax (benefit) expense			1,899			(6,573	)			5,594			(1,550	)
Income from Continuing Operations			3,686			11,616				10,812			18,241
Income from Discontinued Operations, net of tax			-			780				-			777
Net Income			3,686			12,396				10,812			19,018
Less: Net Income Attributable to Noncontrolling Interest			(63	)		(77	)			(190	)		(243	)
Net Income Attributable to AT&T		$	3,623		$	12,319			$	10,622		$	18,775
Basic Earnings Per Share from Continuing Operations Attributable to AT&T		$	0.61		$	1.95			$	1.79		$	3.05
Basic Earnings Per Share from Discontinued Operations Attributable to AT&T			-			0.13				-			0.13
Basic Earnings Per Share Attributable to AT&T		$	0.61		$	2.08			$	1.79		$	3.18
Diluted Earnings Per Share from Continuing Operations Attributable to AT&T		$	0.61		$	1.94			$	1.79		$	3.03
Diluted Earnings Per Share from Discontinued Operations Attributable to AT&T			-			0.13				-			0.13
Diluted Earnings Per Share Attributable to AT&T		$	0.61		$	2.07			$	1.79		$	3.16
Weighted Average Number of Common Shares Outstanding - Basic (in millions)			5,936			5,909				5,931			5,908
Weighted Average Number of Common Shares Outstanding - with Dilution (in millions)			5,954			5,938				5,950			5,937
Dividends Declared Per Common Share		$	0.43		$	0.42			$	1.29		$	1.26
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	September 30,			December 31,
	2011			2010
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	10,762		$	1,437
Accounts receivable - net of allowances for doubtful accounts of $888 and $957		13,377			13,610
Prepaid expenses		1,507			1,458
Deferred income taxes		1,101			1,170
Other current assets		1,858			2,276
Total current assets		28,605			19,951
Property, plant and equipment		256,626			243,833
Less: accumulated depreciation and amortization		(150,840	)		(140,637	)
Property, Plant and Equipment – Net		105,786			103,196
Goodwill		73,590			73,601
Licenses		50,406			50,372
Customer Lists and Relationships – Net		3,175			4,708
Other Intangible Assets – Net		5,394			5,440
Investments in Equity Affiliates		4,483			4,515
Other Assets		6,214			6,705
Total Assets	$	277,653		$	268,488

Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	8,900		$	7,196
Accounts payable and accrued liabilities		17,860			20,055
Advanced billing and customer deposits		3,794			4,086
Accrued taxes		929			72
Dividends payable		2,548			2,542
Total current liabilities		34,031			33,951
Long-Term Debt		62,326			58,971
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		26,446			22,070
Postemployment benefit obligation		28,190			28,803
Other noncurrent liabilities		12,778			12,743
Total deferred credits and other noncurrent liabilities		67,414			63,616

Stockholders’ Equity
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2011 and
December 31, 2010: issued 6,495,231,088 at September 30, 2011 and December 31, 2010		6,495			6,495
Additional paid-in capital		91,455			91,731
Retained earnings		34,758			31,792
Treasury stock (569,537,116 at September 30, 2011 and 584,144,220
at December 31, 2010, at cost)		(20,770	)		(21,083	)
Accumulated other comprehensive income		1,677			2,712
Noncontrolling interest		267			303
Total stockholders’ equity		113,882			111,950
Total Liabilities and Stockholders’ Equity	$	277,653		$	268,488
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
	Nine months ended
	September 30,
	2011			2010
Operating Activities
Net income	$	10,812		$	19,018
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,804			14,472
Undistributed earnings from investments in equity affiliates		(539	)		(531	)
Provision for uncollectible accounts		805			973
Deferred income tax expense and noncurrent unrecognized tax benefits		4,942			(4,184	)
Net gain from impairment and sale of investments		(57	)		(746	)
Income from discontinued operations		-			(777	)
Changes in operating assets and liabilities:
Accounts receivable		(573	)		266
Other current assets		439			495
Accounts payable and accrued liabilities		(1,630	)		(2,861	)
Net income attributable to noncontrolling interest		(190	)		(243	)
Other - net		(663	)		(532	)
Total adjustments		16,338			6,332
Net Cash Provided by Operating Activities		27,150			25,350

Investing Activities
Construction and capital expenditures:
Capital expenditures		(14,625	)		(13,170	)
Interest during construction		(119	)		(577	)
Acquisitions, net of cash acquired		(430	)		(2,615	)
Dispositions		76			1,821
(Purchases) and sales of securities, net		45			(437	)
Other		28			22
Net Cash Used in Investing Activities		(15,025	)		(14,956	)

Financing Activities
Net change in short-term borrowings with original maturities of three months or less		(1,620	)		(33	)
Issuance of long-term debt		7,935			2,235
Repayment of long-term debt		(1,298	)		(5,280	)
Issuance of treasury stock		216			24
Dividends paid		(7,627	)		(7,436	)
Other		(406	)		(399	)
Net Cash Used in Financing Activities		(2,800	)		(10,889	)
Net increase (decrease) in cash and cash equivalents		9,325			(495	)
Cash and cash equivalents beginning of year		1,437			3,741
Cash and Cash Equivalents End of Period	$	10,762		$	3,246
Cash paid during the nine months ended September 30 for:
Interest	$	3,066		$	3,322
Income taxes, net of refunds	$	(121	)	$	3,013
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
	September 30, 2011
	Shares			Amount
Common Stock
Balance at beginning of year		6,495		$	6,495
Balance at end of period		6,495		$	6,495

Additional Paid-In Capital
Balance at beginning of year				$	91,731
Issuance of treasury stock					127
Share-based payments					(104	)
Change related to acquisition of interests held by noncontrolling owners					(299	)
Balance at end of period				$	91,455

Retained Earnings
Balance at beginning of year				$	31,792
Net income attributable to AT&T ($1.79 per diluted share)					10,622
Dividends to stockholders ($1.29 per share)					(7,638	)
Other					(18	)
Balance at end of period				$	34,758

Treasury Stock
Balance at beginning of year		(584	)	$	(21,083	)
Issuance of treasury stock		15			313
Balance at end of period		(569	)	$	(20,770	)

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax:
Balance at beginning of year				$	2,712
Other comprehensive loss attributable to AT&T (see Note 2)					(1,035	)
Balance at end of period				$	1,677

Noncontrolling Interest:
Balance at beginning of year				$	303
Net income attributable to noncontrolling interest					190
Distributions					(167	)
Acquisition of interests held by noncontrolling owners					(59	)
Balance at end of period				$	267

Total Stockholders’ Equity at beginning of year				$	111,950
Total Stockholders’ Equity at end of period				$	113,882
See Notes to Consolidated Financial Statements.

AT&T INC.

SEPTEMBER 30, 2011

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.” We believe that these consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the presented interim periods. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

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

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

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation. See Notes 4 and 5 for a discussion of our changes in accounting and reporting for our pension and other postretirement benefit costs.

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 September 30, 2011, we had severance accruals of $391 and at December 31, 2010, we had severance accruals of $848.

Income Taxes

Healthcare Legislation In March 2010, the President of the United States signed into law comprehensive healthcare reform legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which included a change in the tax treatment related to Medicare Part D subsidies. As a result, during the first quarter of 2010, we recorded a $995 charge to income tax expense in our consolidated statement of income.

Internal Revenue Service Settlement 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 to our net noncurrent deferred income tax liabilities and other net tax liabilities to reflect the tax benefits of the settlement.

Our effective tax rates were 34.0% for the third quarter and 34.1% for the nine months ended September 30, 2011, compared to (130.3)% and (9.3)% for the same periods in 2010. The IRS settlement, partially offset by the effects of the healthcare legislation, caused the lower effective tax rates in 2010.

AT&T INC.

SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 2. COMPREHENSIVE INCOME

The components of our comprehensive income for the three and nine months ended September 30, 2011 and 2010 are included in the table below. Prior-year results have been adjusted to reflect our change in method of recognizing actuarial gains and losses for pension and other postretirement benefits (see Note 5).

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Net income	$	3,686		$	12,396		$	10,812		$	19,018
Other comprehensive income, net of tax:
Foreign currency translation adjustments (includes $0, $6, $0 and $4 attributable to noncontrolling interest), net of taxes of $(280), $54, $(157) and $116		(519	)		100			(291	)		215
Net unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses), net of taxes of $(88), $31, $(59) and $17		(165	)		58			(110	)		33
Reclassification adjustment realized in net income, net of taxes of $(2), $(1), $(23) and $(30)		(2	)		(1	)		(43	)		(56	)
Net unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses), net of taxes of $(135), $(108), $(143) and $(380)		(249	)		(205	)		(263	)		(706	)
Reclassification adjustment for losses included in net income, net of taxes of $1, $5, $4 and $11		2			4			7			9
Defined benefit postretirement plans:
Amortization of net prior service cost (benefit) included in net income, net of taxes of $(69), $(61), $(206) and $(183)		(112	)		(99	)		(336	)		(297	)
Other		2			-			1			-
Other comprehensive loss		(1,043	)		(143	)		(1,035	)		(802	)
Total comprehensive income		2,643			12,253			9,777			18,216
Less: Total comprehensive income attributable to
noncontrolling interest		(63	)		(83	)		(190	)		(247	)
Total Comprehensive Income Attributable to AT&T	$	2,580		$	12,170		$	9,587		$	17,969

AT&T INC.

SEPTEMBER 30, 2011

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 three and nine months ended September 30, 2011 and 2010, are shown in the table below:

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Numerators
Numerator for basic earnings per share:
Income from continuing operations	$	3,686		$	11,616		$	10,812		$	18,241
Net income attributable to noncontrolling interest		(63	)		(77	)		(190	)		(243	)
Income from continuing operations attributable to AT&T		3,623			11,539			10,622			17,998
Dilutive potential common shares:
Other share-based payment		3			3			8			8
Numerator for diluted earnings per share	$	3,626		$	11,542		$	10,630		$	18,006
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding		5,936			5,909			5,931			5,908
Dilutive potential common shares:
Stock options		3			3			4			3
Other share-based payment		15			26			15			26
Denominator for diluted earnings per share		5,954			5,938			5,950			5,937
Basic earnings per share from continuing operations attributable to AT&T	$	0.61		$	1.95		$	1.79		$	3.05
Basic earnings per share from discontinued operations attributable to AT&T		-			0.13			-			0.13
Basic earnings per share attributable to AT&T	$	0.61		$	2.08		$	1.79		$	3.18
Diluted earnings per share from continuing operations attributable to AT&T	$	0.61		$	1.94		$	1.79		$	3.03
Diluted earnings per share from discontinued operations attributable to AT&T		-			0.13			-			0.13
Diluted earnings per share attributable to AT&T	$	0.61		$	2.07		$	1.79		$	3.16

At September 30, 2011 and 2010, we had issued and outstanding options to purchase approximately 85 million and 136 million shares of AT&T common stock. For quarter ended September 30, 2011 and 2010, the exercise prices of 58 million and 109 million shares were above the market price of AT&T stock for the respective periods. Accordingly, we did not include these amounts in determining the dilutive potential common shares. At September 30, 2011 and 2010, the exercise prices of 24 million and 22 million vested stock options were below market price.

AT&T INC.

SEPTEMBER 30, 2011

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. We make our capital allocations decisions primarily based on the network (wireless or wireline) providing services. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. 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® 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.

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 January 2011, we announced a change in our method of recognizing actuarial gains and losses for pension and other postretirement benefits as well as the attribution of those benefit costs to our segments. Historically, the total benefit costs were attributed to our various segments. As part of the benefit accounting change, the service cost and the amortization of prior service costs, which represent the benefits earned by active employees during the period, will continue to be attributed to the segment in which the employee is employed, while interest cost and expected return on assets are recorded in the Other segment as those financing activities are managed on a corporate level. Actuarial gains and losses resulting from the remeasurement of our pension and postretirement benefit plans, which generally occurs in the fourth quarter, will be reflected in AT&T’s consolidated results only. We have adjusted prior-period segment information to conform to the current period’s presentation.

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.

AT&T INC.

SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2011
	Wireless			Wireline		Advertising Solutions		Other			Consolidations			Consolidated Results
Total segment operating revenues	$	15,606		$	14,961	$	803	$	108		$	-		$	31,478
Operations and support expenses		9,367			10,259		553		446			-			20,625
Depreciation and amortization expenses		1,619			2,892		94		13			-			4,618
Total segment operating expenses		10,986			13,151		647		459			-			25,243
Segment operating income (loss)		4,620			1,810		156		(351	)		-			6,235
Interest expense		-			-		-		-			889			889
Equity in net income (loss) of affiliates		(7	)		-		-		200			-			193
Other income (expense) – net		-			-		-		-			46			46
Segment income before income taxes	$	4,613		$	1,810	$	156	$	(151	)	$	(843	)	$	5,585

At September 30, 2011 or for the nine months ended
	Wireless			Wireline		Advertising Solutions		Other			Consolidations			Consolidated Results
Total segment operating revenues	$	46,517		$	44,846	$	2,512	$	345		$	-		$	94,220
Operations and support expenses		29,007			30,629		1,706		866			-			62,208
Depreciation and amortization expenses		4,737			8,726		301		40			-			13,804
Total segment operating expenses		33,744			39,355		2,007		906			-			76,012
Segment operating income (loss)		12,773			5,491		505		(561	)		-			18,208
Interest expense		-			-		-		-			2,583			2,583
Equity in net income (loss) of affiliates		(19	)		-		-		668			-			649
Other income (expense) – net		-			-		-		-			132			132
Segment income before income taxes	$	12,754		$	5,491	$	505	$	107		$	(2,451	)	$	16,406
Segment assets	$	124,785		$	133,502	$	7,711	$	17,339		$	(5,684	)	$	277,653
Investments in equity method affiliates		17			-		-		4,466			-			4,483
Expenditures for additions to long-lived assets	$	6,901		$	7,820	$	21	$	2		$	-		$	14,744

AT&T INC.

SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2010
	Wireless			Wireline		Advertising Solutions		Other			Consolidations			Consolidated Results
Total segment operating revenues	$	15,180		$	15,304	$	961	$	136		$	-		$	31,581
Operations and support expenses		10,032			10,220		631		394			-			21,277
Depreciation and amortization expenses		1,640			3,099		123		11			-			4,873
Total segment operating expenses		11,672			13,319		754		405			-			26,150
Segment operating income (loss)		3,508			1,985		207		(269	)		-			5,431
Interest expense		-			-		-		-			729			729
Equity in net income of affiliates		(6	)		2		-		221			-			217
Other income (expense) – net		-			-		-		-			124			124
Segment income before income taxes	$	3,502		$	1,987	$	207	$	(48	)	$	(605	)	$	5,043

For the nine months ended September 30, 2010
	Wireless			Wireline		Advertising Solutions		Other			Consolidations			Consolidated Results
Total segment operating revenues	$	43,319		$	46,172	$	3,009	$	419		$	-		$	92,919
Operations and support expenses		26,758			31,021		1,957		1,226			-			60,962
Depreciation and amortization expenses		4,776			9,280		393		23			-			14,472
Total segment operating expenses		31,534			40,301		2,350		1,249			-			75,434
Segment operating income (loss)		11,785			5,871		659		(830	)		-			17,485
Interest expense		-			-		-		-			2,248			2,248
Equity in net income of affiliates		14			7		-		608			-			629
Other income (expense) – net		-			-		-		-			825			825
Segment income before income taxes	$	11,799		$	5,878	$	659	$	(222	)	$	(1,423	)	$	16,691

AT&T INC.

SEPTEMBER 30, 2011

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 certain retired employees under various plans and accrue actuarially determined postretirement benefit costs as active employees earn these benefits. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to meet the plans’ obligations to provide benefits to employees upon their retirement. No significant cash contributions are required under ERISA regulations during 2011.

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. In the following table, gains are denoted with parentheses. A portion of these expenses is capitalized as part of the benefit load on internal construction and capital expenditures, providing a small reduction in the net expense recorded.

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Pension cost:
Service cost – benefits earned during the period	$	297		$	269		$	890		$	807
Interest cost on projected benefit obligation		740			787			2,219			2,362
Expected return on assets		(923	)		(943	)		(2,767	)		(2,830	)
Amortization of prior service benefit		(4	)		(4	)		(12	)		(12	)
Net pension cost	$	110		$	109		$	330		$	327

Postretirement cost:
Service cost – benefits earned during the period	$	90		$	87		$	271		$	261
Interest cost on accumulated postretirement benefit obligation		513			564			1,538			1,693
Expected return on assets		(260	)		(236	)		(780	)		(709	)
Amortization of prior service benefit		(173	)		(156	)		(520	)		(468	)
Net postretirement cost	$	170		$	259		$	509		$	777

Combined net pension and postretirement cost	$	280		$	368		$	839		$	1,104

Our combined net pension and postretirement cost decreased $88 in the third quarter and $265 for the first nine months of 2011. The decrease was primarily related to lower interest costs due to our reduction in the discount rate from 6.50% in 2010 to 5.80% in 2011.

In January 2011, we announced a change in our method of recognizing actuarial gains and losses for pension and other postretirement benefits for all benefit plans. Historically, we recognized the actuarial gains and losses as a component of “Stockholders’ Equity” on our consolidated balance sheets on an annual basis and amortized them into our operating results over the average future service period of the active employees of these plans, to the extent such gains and losses were outside of a corridor. We have elected to immediately recognize actuarial gains and losses in our operating results, noting that it is generally preferable to accelerate the recognition of deferred gains and losses into income rather than to delay such recognition. Generally, these gains and losses are measured annually as of December 31 and accordingly will be recorded during the fourth quarter.

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 $35 in the third quarter of 2011, of which $31 was interest cost and $106 for the first nine months, of which $94 was interest cost. In 2010, net supplemental retirement pension benefits cost was $37 in the third quarter, of which $34 was interest cost and $113 for the first nine months, of which $102 was interest cost.

AT&T INC.

SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 6. 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.

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:

	September 30, 2011						December 31, 2010
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Notes and debentures		$	70,993		$	78,414		$	64,256		$	69,313
Commercial paper			-			-			1,625			1,625
Bank borrowings			5			5			27			27
Investment securities			2,007			2,007			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 other comprehensive income (accumulated OCI). Unrealized losses that are considered other than temporary are recorded in “Other income (expense) – net” with the corresponding reduction to the carrying basis of the investment. Fixed income investments have maturities of $257 less than one year, $68 within one to three years, $55 within three to five years, and $257 for five or more years.

AT&T INC.

SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Our short-term investments, other short- and long-term held-to-maturity investments (including money market securities) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values.

Our investment securities maturing within one year are recorded in “Other current assets,” and instruments with maturities of more than one year are recorded in “Other Assets” on the consolidated balance sheets.

Following is the fair value leveling for available-for-sale securities and derivatives as of September 30, 2011 and December 31, 2010:


	September 30, 2011
	Level 1			Level 2				Level 3			Total
Available-for-Sale Securities
Domestic equities		$	830		$	-			$	-		$	830
International equities			441			-				-			441
Fixed income bonds			-			637				-			637
Asset Derivatives1
Interest rate swaps			-			595				-			595
Cross-currency swaps			-			88				-			88
Foreign exchange contracts			-			1				-			1
Liability Derivatives1
Cross-currency swaps			-			(836	)			-			(836	)
Interest rate locks			-			(159	)			-			(159	)
Foreign exchange contracts			-			(5	)			-			(5	)

	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	)
1 Derivatives designated as hedging instruments are reflected as other assets, other liabilities and, for a portion of interest rate swaps, accounts receivable.

AT&T INC.

SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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 nine months ended September 30, 2011 and September 30, 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.

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 nine months ended September 30, 2011 and September 30, 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. No ineffectiveness was measured in the nine months ended September 30, 2011. Over the next 12 months, we expect to reclassify $33 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.

We hedge a large portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Some of these instruments are designated as cash flow hedges while others remain non-designated, largely based on size and duration. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income 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 nine months ended September 30, 2011 and September 30, 2010, no ineffectiveness was measured.

AT&T INC.

SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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 September 30, 2011, we had posted collateral of $112 (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 September, we would have been required to post additional collateral of $147. 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:

	September 30,		December 31,
	2011		2010
Interest rate swaps	$	11,800	$	11,050
Cross-currency swaps		7,502		7,502
Interest rate locks		800		3,400
Foreign exchange contracts		210		221
Total	$	20,312	$	22,173

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	Three months ended								Nine months ended
Fair Value Hedging Relationships	September 30, 2011				September 30, 2010				September 30, 2011				September 30, 2010
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps		$	92			$	100			$	81			$	294
Gain (Loss) on long-term debt			(92	)			(100	)			(81	)			(294	)

AT&T INC.

SEPTEMBER 30, 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

In addition, the net swap settlements that accrued and settled in the quarter ended September 30 were also reported as reductions of interest expense.

	Three months ended						Nine months ended
Cash Flow Hedging Relationships	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	(266	)	$	(119	)	$	(415	)	$	(443	)

Interest rate locks:
Gain (Loss) recognized in accumulated OCI		(105	)		(217	)		17			(650	)
Interest income (expense) reclassified from
accumulated OCI into income		(3	)		(5	)		(11	)		(16	)

Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI		(13	)		23			(8	)		7
Other income (expense) reclassified from accumulated OCI into income		-			(4	)		-			(4	)

The balance of the unrealized derivative gain (loss) in accumulated OCI was $(436) at September 30, 2011 and $(180) at December 31, 2010.

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

Purchase of Wireless Partnership Minority Interest In July 2011, we completed the acquisition of Convergys’ minority interests in the Cincinnati SMSA Limited Partnership and an associated cell tower holding company for approximately $320 in cash.

Pending Acquisitions

T-Mobile In March 2011, we agreed to acquire from Deutsche Telekom AG (Deutsche Telekom) all of the issued and outstanding shares of T-Mobile USA, Inc. (T-Mobile) in exchange for approximately $39,000, consisting of $25,000 cash and approximately $14,000 of our common stock, subject to certain adjustments. T-Mobile serves approximately 34 million wireless subscribers, and we anticipate this transaction will strengthen and expand our U.S. mobile broadband infrastructure and make Long Term Evolution network technology available to more wireless broadband users in the United States, including those in rural areas. The transaction is subject to regulatory approvals and other customary closing conditions. In March 2011, we filed with the U.S. Department of Justice (DOJ) notice of the transaction as required under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act). In April 2011, we filed our application for approval of the merger with the Federal Communications Commission (FCC). We also filed applications or notices in five states (Arizona, California, Hawaii, Louisiana and West Virginia), and have received approvals from Arizona, Louisiana and West Virginia. On August 31, 2011, the DOJ filed a lawsuit against us alleging that the proposed acquisition would impact pricing and competition. We dispute the allegations and intend to vigorously contest the matter. A trial date has been set for February 13, 2012. We anticipate closing the transaction in the first half of 2012. In the event this transaction does not close, we could be required to pay a breakup fee of $3,000, enter into a broadband roaming agreement and transfer to Deutsche Telekom certain wireless spectrum.

In March 2011, we entered into a credit agreement with certain banks to provide unsecured bridge financing of up to $20,000 in connection with the T-Mobile acquisition. The lenders’ obligations to provide advances will terminate on September 20, 2012, unless prior to that date: (i) we reduce to $0 the commitments of the lenders to provide advances, (ii) the T-Mobile purchase agreement is terminated prior to the date the advances are made, or (iii) certain events of default occur. The agreement contains certain representations and warranties and covenants, including covenants related to liens, mergers and accounting changes, and a debt-to-EBITDA (earnings before interest, income taxes, depreciation and amortization, and other modifications described in the agreement) financial ratio covenant that upon closing of the acquisition, AT&T will maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.0 to 1.0.

AT&T INC.