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TIDM58KM
RNS Number : 6543R
AT & T Inc.
07 November 2011
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Hot Features
Premium
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 [X] Accelerated filer [ filer ] Non-accelerated [ (Do not check if a smaller Smaller reporting [ filer ] reporting company) 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 Nine months ended
September 30, 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 December
30, 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.
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.
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
======================================================== ======== ======= ======== ======
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.
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(R) TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements.
The Advertising Solutions segment includes our directory operations, which publish Yellow and White Pages directories and sell directory advertising and Internet-based advertising and local search.
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.
For the three months ended
September 30, 2011
----------- ------------
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations 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
----------- ------------
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations 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
============================ ======== ======== =========== ======= ============== ============
For the three months ended
September 30, 2010
----------- ------------
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations 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
----------- ------------
Advertising Consolidated
Wireless Wireline Solutions Other Consolidations 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
============================= ======== ======== =========== ====== ============== ============
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.
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.
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 Derivatives(1)
Interest rate swaps - 595 - 595
Cross-currency swaps - 88 - 88
Foreign exchange contracts - 1 - 1
Liability Derivatives(1)
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 Derivatives(1)
Interest rate swaps - 537 - 537
Cross-currency swaps - 327 - 327
Interest rate locks - 11 - 11
Foreign exchange contracts - 6 - 6
Liability Derivatives(1)
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.
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.
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 December
30, 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
-------------------------------------------------------- --- ------ --- ------- -------
Three months ended Nine months ended
------------------------------------------ ------------------------- -------------------------
September September September September
Fair Value Hedging Relationships 30, 2011 30, 2010 30, 2011 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)
========================================== ==== ====== === ====== === ======= =======
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
--------------------------------------- -------------------------- -------------------------
September September September September
Cash Flow Hedging Relationships 30, 2011 30, 2010 30, 2011 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.
We must repay all advances no later than the first anniversary of the date on which advances are made. The agreement also provides that in the event of certain asset sales or certain debt or stock offerings, we must use the net proceeds to prepay any outstanding advances or to reduce the amount of the lenders' commitments.
Qualcomm Spectrum Purchase In December 2010, we agreed to purchase spectrum licenses in the Lower 700 MHz frequency band from Qualcomm Incorporated for approximately $1,925 in cash. The purchase agreement expires on January 13, 2012, although either party may extend the agreement for an additional 90 days if regulatory approval by the FCC is still pending on that date. The spectrum covers more than 300 million people total nationwide, including 12 MHz of Lower 700 MHz D and E block spectrum covering more than 70 million people in five of the top 15 metropolitan areas and 6 MHz of Lower 700 MHz D block spectrum covering more than 230 million people across the rest of the United States. We plan to deploy this spectrum as supplemental downlink capacity, using carrier aggregation technology once compatible handsets and network equipment are developed. The transaction is subject to regulatory approvals and other customary closing conditions. In February 2011, the waiting period under the HSR Act expired without the DOJ requesting additional information. We are awaiting approval from the FCC to complete the transaction. We anticipate closing the purchase by the end of the first quarter of 2012.
Dispositions
Sale of Sterling Operations In May 2010, we entered into an agreement to sell our Sterling Commerce Inc. (Sterling) subsidiary and changed our reporting for Sterling to discontinued operations. In August 2010, we completed the sale and received net proceeds of approximately $1,400.
The following table includes Sterling's operating results, which are presented in the "Income From Discontinued Operations, net of tax" line item on the consolidated statements of income. Prior to the reclassification, these results were reported in our Other segment:
Three months Nine months
ended ended
September 30, September 30,
2010 2010
-------------------------------------------- --------------- ---------------
Operating revenues $ 81 $ 349
Operating expenses 72 327
-------------------------------------------- ---- --------- ---- ---------
Operating income 9 22
-------------------------------------------- ---- --------- ---- ---------
Income before income taxes 8 18
Income tax expense (benefit) (5) 8
Income from discontinued operations during
phase-out period 13 10
Gain on disposal of discontinued operations 767 767
-------------------------------------------- ---- --------- ---- ---------
Income from discontinued operations, net
of tax $ 780 $ 777
============================================ ==== ========= ==== =========
Pending Dispositions
Tender of Telmex Shares In August 2011, the Board of Directors of America Movil, S.A. de C.V. (America Movil) approved a tender offer for the remaining outstanding shares of Telefonos de Mexico, S.A. de C.V. (Telmex) that were not already owned by America Movil. The offer was for $10.50 Mexican pesos per share (payable in cash). The tender offer was launched in October 2011. We have announced our intent to tender all of our shares of Telmex for approximately $1,200 of cash.
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 wireless and wireline telecommunications services and equipment as well as advertising services. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.
Consolidated Results Our financial results in the third quarter and for the first nine months of 2011 and 2010 are summarized as follows:
Third Quarter Nine-Month Period
------------------------- -------------------------
Percent Percent
2011 2010 Change 2011 2010 Change
------------------------------------ ------- ------- ------- ------- ------- -------
Operating Revenues $31,478 $31,581 (0.3)% $94,220 $92,919 1.4%
------------------------------------ ------ ------ ------ ------
Operating expenses
Cost of services and sales 13,165 13,605 (3.2) 39,900 38,440 3.8
Selling, general and administrative 7,460 7,672 (2.8) 22,308 22,522 (1.0)
Depreciation and amortization 4,618 4,873 (5.2) 13,804 14,472 (4.6)
------------------------------------ ------ ------ ------ ------
Total Operating Expenses 25,243 26,150 (3.5) 76,012 75,434 0.8
------------------------------------ ------ ------ ------ ------
Operating Income 6,235 5,431 14.8 18,208 17,485 4.1
Income from Continuing
Operations
Before Income Taxes 5,585 5,043 10.7 16,406 16,691 (1.7)
Income from Continuing
Operations 3,686 11,616 - 10,812 18,241 (40.7)
Net Income Attributable
to AT&T $3,623 $12,319 - $10,622 $18,775 (43.4)%
==================================== ====== ====== ======= ====== ====== =======
Overview
Operating income increased $804, or 14.8%, in the third quarter and $723, or 4.1%, for the first nine months of 2011. Operating income in the third quarter and for the first nine months reflects continued growth in wireless service revenue, driven mostly by our subscriber and data revenue growth, along with increased revenues from AT&T U-verse(R) (U-verse) services and Internet Protocol (IP) based business services. Also contributing to the positive operating income growth in the third quarter were lower wireless handset costs, lower employee-related charges and lower amortization expenses associated with the accelerated amortization of customer lists acquired in acquisitions. Partially offsetting the increase in the third quarter and for the first nine months were continued declines in voice and print directory revenues. Our operating income margin in the third quarter increased from 17.2% in 2010 to 19.8% in 2011, and for the first nine months increased from 18.8% in 2010 to 19.3% in 2011.
Operating revenues decreased $103, or 0.3%, in the third quarter and increased $1,301, or 1.4%, for the first nine months. The decrease in the third quarter reflects continued declines in wireline voice and print advertising revenues. Wireless handset sales also decreased in the third quarter of 2011 due to the late second-quarter 2010 iPhone 4 release and a later release of the newest iPhone model in October 2011. These decreases were mostly offset by wireless service revenue growth and higher revenues from IP-based wireline services.
The increase for the first nine months was primarily due to the continued growth in wireless service revenue, driven mostly by our increase in subscribers and data revenue, stemming from higher smartphone sales. Also contributing to the increase was higher wireline data revenue largely due to IP data growth, driven by U-verse subscriber growth and strategic business services. These increases were partially offset by lower wireline voice and print directory revenues.
Revenue growth continues to be tempered by declines in our voice revenues. For the first nine months of 2011, total switched access lines decreased 12.3%. Customers disconnecting access lines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data or terminated service permanently as businesses closed or consumers left residences. While we lose wireline voice revenues, we have the opportunity to increase wireless service or wireline data revenues should the customer choose us as their wireless or VoIP provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.
Cost of services and sales expenses decreased $440, or 3.2%, in the third quarter and increased $1,460, or 3.8%, for the first nine months of 2011. Decreased costs in the third quarter were primarily due to lower wireless handset costs resulting from the timing of iPhone release dates and lower employee-related charges. Increased costs for the first nine months were related to strong sales of wireless smartphones to new subscribers, a high number of customers upgrading their wireless handset and costs associated with transferring primarily former Alltel Wireless (Alltel) customers to our network. Lower employee-related charges during the first nine months partially offset these increases.
Selling, general and administrative expenses decreased $212, or 2.8%, in the third quarter and $214, or 1.0%, for the first nine months of 2011. These decreases were primarily due to lower financing-related costs associated with our pension and postretirement benefits (referred to as Pension/OPEB expenses) and decreases in other employee-related expenses partially offset by expenses related to our pending acquisition of T-Mobile USA, Inc. (T-Mobile). The decrease for the first nine months was partially offset by higher wireless commission and sales related expenses.
Depreciation and amortization expense decreased $255, or 5.2%, in the third quarter and $668, or 4.6%, for the first nine months of 2011. The third quarter and year-to-date decrease is primarily related to lower amortization of intangibles for customer lists related to acquisitions.
Interest expense increased $160, or 21.9%, in the third quarter and $335, or 14.9%, for the first nine months of 2011. Increased interest expense was primarily due to no longer capitalizing interest on spectrum that will be used to support our Long Term Evolution (LTE) technology, partially offset by a decrease in our average debt balances for the first nine months. Effective January 1, 2011, we ceased capitalization of interest on spectrum for LTE as this spectrum was determined to be ready for its intended use.
Equity in net income of affiliates decreased $24, or 11.1%, in the third quarter and increased $20, or 3.2%, for the first nine months of 2011. Decreased equity in net income of affiliates in the third quarter is due to lower operating results at Telefonos de Mexico, S.A. de C.V. (Telmex). Increased equity in net income of affiliates for the first nine months was primarily due to improved operating results at America Movil, S.A. de C.V. (America Movil).
Other income (expense) - net We had other income of $46 in the third quarter and $132 for the first nine months of 2011, compared to other income of $124 in the third quarter and $825 for the first nine months of 2010. Results for 2011 included interest, dividend and leveraged lease income of $17 in the third quarter and $71 for the first nine months. In addition, third quarter 2011 results included an $8 gain on the sale of nonstrategic assets along with foreign exchange gains of $7, while results for the first nine months of 2011 included a net gain of $66 from the sale of investments.
Results in the third quarter of 2010 included gains from the sale of investments of $121. In addition, results for the first nine months of 2010 included a $647 gain on the exchange of Telmex Internacional, S.A.B. de C.V. (Telmex Internacional) shares for America Movil shares.
Income taxes increased $8,472 in the third quarter and $7,144 for the first nine months of 2011. The increase in income taxes for the third quarter and for the first nine months of 2011 was due to a settlement with the Internal Revenue Service (IRS) that occurred in the third quarter of 2010 related to a restructuring of our wireless operations, which lowered our income taxes in 2010 by $8,300. The tax benefit of the IRS settlement for the first nine months of 2010 was partially offset by a $995 charge to income tax expense recorded during the first quarter of 2010 to reflect the deferred tax impact of enacted U.S. healthcare legislation (See Note 1). Our effective tax rate was 34.0% for the third quarter and 34.1% for the first nine months of 2011, as compared to (130.3)% for third quarter and (9.3)% for the first nine months of 2010.
In July 2009, in the case regarding the tax treatment of Universal Service Fund (USF) receipts on our 1998 and 1999 tax returns, the U.S. District Court granted the Government's motion for summary judgment and entered final judgment for the Government. We appealed the final judgment to the U.S. Court of Appeals for the Fifth Circuit who affirmed the judgment of the District Court in January 2011. In October 2011, the U.S. Supreme Court denied our request to review the decision of the Fifth Circuit. The decision has no impact on our financial statements.
Income (loss) from discontinued operations, net of tax decreased $780 in the third quarter and $777 for the first nine months of 2011 due to our third-quarter 2010 sale of our subsidiary Sterling Commerce Inc., which resulted in a gain of $767.
Selected Financial and Operating Data
--------------------------------------------- ------- -------
September 30,
2011 2010
--------------------------------------------- ------- -------
Wireless customers (000) 100,738 92,761
Postpaid wireless customers (000) 68,614 67,688
Prepaid wireless customers (000) 7,059 6,209
Reseller wireless customers (000) 13,028 11,021
Connected device customers (000) 12,037 7,843
Wireline consumer revenue connections
(000)(1,2) 41,852 43,733
Network access lines in service (000)(2,7,8) 37,956 43,302
Broadband connections (000)(2,3,7) 16,476 16,100
Video connections (000)(4) 5,392 4,735
Debt ratio(5,7) 38.5% 37.9%
Ratio of earnings to fixed charges(6,7) 5.41 5.38
Number of AT&T employees 256,210 267,720
============================================= ======= =======
(1) Wireline consumer revenue connections includes retail access lines, U-verse VoIP connections, broadband and video.
(2) Represents services provided by AT&T's Incumbent Local Exchange Carriers (ILECs) and affiliates.
(3) Broadband connections include DSL, U-verse High Speed Internet and satellite broadband.
(4) Video connections include customers that have satellite service under our agency arrangements and U-verse video connections (of 3,583 in 2011 and 2,741 in 2010).
(5) Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and does not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.
(6) See Exhibit 12.
(7) Prior-year amounts restated to conform to current-period reporting methodology.
(8) At September 30, 2011, total switched access lines were 37,956, retail business switched access lines totaled 15,951 and wholesale and coin switched access lines totaled 2,206.
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes. We make our capital allocations decisions primarily based on the network (wireless or wireline) providing services. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) - net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. 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, 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 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.
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
------------------------------ ------ ------ ------- ------ ------ -------
Third Quarter Nine-Month Period
------------------------- -------------------------
Percent Percent
2011 2010 Change 2011 2010 Change
------------------------------ ------- ------- ------- ------- ------- -------
Segment operating revenues
Service $14,261 $13,675 4.3% $42,379 $39,711 6.7%
Equipment 1,345 1,505 (10.6) 4,138 3,608 14.7
------------------------------ ------ ------ ------ ------
Total Segment Operating
Revenues 15,606 15,180 2.8 46,517 43,319 7.4
------------------------------ ------ ------ ------ ------
Segment operating expenses
Operations and support 9,367 10,032 (6.6) 29,007 26,758 8.4
Depreciation and amortization 1,619 1,640 (1.3) 4,737 4,776 (0.8)
------------------------------ ------ ------ ------ ------
Total Segment Operating
Expenses 10,986 11,672 (5.9) 33,744 31,534 7.0
------------------------------ ------ ------ ------ ------
Segment Operating Income 4,620 3,508 31.7 12,773 11,785 8.4
Equity in Net Income (Loss)
of Affiliates (7) (6) (16.7) (19) 14 -
------------------------------ ------ ------ ------ ------
Segment Income $ 4,613 $ 3,502 31.7% $12,754 $11,799 8.1%
============================== ====== ====== ======= ====== ====== =======
The following table highlights other key measures of performance
for the Wireless segment:
Third Quarter Nine-Month Period
----------------------- ------------------------
Percent Percent
2011 2010 Change 2011 2010 Change
---------------------------------- ------ ------ ------- ------- ------ -------
Wireless Subscribers (000) 100,738 92,761 8.6%
Gross Subscriber Additions
(000)(1) 5,946 6,231 (4.6)% 17,154 16,367 4.8
Net Subscriber Additions (000)(1) 2,123 2,631 (19.3) 5,202 6,050 (14.0)
Total Churn 1.28% 1.32% -4 BP 1.36% 1.30% 6 BP
Postpaid Subscribers (000) 68,614 67,688 1.4%
Net Postpaid Subscriber Additions
(000)(1) 319 745 (57.2)% 712 1,753 (59.4)
Postpaid Churn 1.15% 1.14% 1 BP 1.16% 1.08% 8 BP
Prepaid Subscribers (000) 7,059 6,209 13.7%
Net Prepaid Subscriber Additions
(000)(1) 293 321 (8.7)% 515 645 (20.2)
Reseller Subscribers (000) 13,028 11,021 18.2
Net Reseller Subscriber Additions
(000)(1) 473 406 16.5 1,282 545 -
Connected Device Subscribers
(000)(2) 12,037 7,843 53.5
Net Connected Device Subscriber
Additions (000) 1,038 1,159 (10.4)% 2,693 3,107 (13.3)%
================================== ====== ====== ======= ======= ====== =======
(1) Excludes merger and acquisition-related additions during the
period.
(2) Includes data-centric devices such as eReaders, home security
monitoring, fleet management, and smart grid devices. Tablets
are primarily reflected in our prepaid subscriber category.
Wireless Metrics
Subscriber Additions As of September 30, 2011, we served 100.7 million wireless subscribers. Lower net subscriber additions (net additions) in the third quarter and first nine months of 2011 were primarily attributable to lower net postpaid additions and lower net connected devices additions. The declines in net postpaid additions in the third quarter and first nine months of 2011 reflect slowing growth in the industry's subscriber base, higher postpaid churn attributable in part to the integration of Alltel customers into our network, and the expiration of Apple iPhone exclusivity in the first quarter of 2011. The 4.6% decrease in gross additions in the third quarter of 2011 was primarily related to lower activations of postpaid smartphones (handsets with voice and data capabilities using an advanced operating system to better manage data and Internet access) associated with a delay in the launch of the latest iPhone model, partially offset by higher activations of Android devices and other non-iPhone smartphones. The 4.8% increase in gross additions for the first nine months of 2011 was primarily related to higher activations of postpaid smartphones, sales of connected devices and tablets, and growth in our reseller subscriber base.
Average service revenue per user (ARPU) from postpaid subscribers increased 1.4% in the third quarter and 1.9% for the first nine months of 2011, driven by an increase in postpaid data services ARPU of 14.2% in the third quarter and an increase of 15.5% for the first nine months of 2011. Of our total postpaid subscriber base, 69% now use more advanced handsets (with 53% using smartphones), up from 57% a year earlier (with 39% using smartphones). Approximately 70% of our postpaid subscribers were on data plans as of September 30, 2011, up from 61% as of September 30, 2010. The growth in postpaid data services ARPU in the third quarter and for the first nine months of 2011 was partially offset by a 5.6% decrease in the third quarter and a 5.0% decrease for the first nine months of 2011 in postpaid voice and other service ARPU. Postpaid voice and other service ARPU declined due to lower access and airtime charges and roaming revenues. Continued growth in our FamilyTalk(R) Plans (family plans) subscriber base, which generates lower ARPU compared to ARPU for our traditional postpaid subscribers, has also contributed to these declines. The postpaid ARPU for both periods also reflected ARPU declines resulting from the inclusion of subscribers from the acquisition of Alltel properties.
Total ARPU declined 4.4% in the third quarter and 3.8% for the first nine months of 2011, reflecting stronger growth in connected devices, tablet subscribers, and reseller subscribers compared to postpaid subscribers. Connected devices and other data-centric devices, such as tablets, have lower-priced data-only plans compared with our postpaid plans, which have voice and data features. Accordingly, ARPU for these subscribers is typically lower compared to that generated from our subscribers on postpaid and other plans. Data services ARPU increased 8.2% in the third quarter and 9.6% for the first nine months of 2011, reflecting subscriber growth trends. Voice and other service ARPU declined 11.1% in the third quarter and 10.5% for the first nine months of 2011. We expect continued pressure on voice and other service ARPU.
Churn The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Churn rate is calculated by dividing the aggregate number of wireless subscribers who canceled service during a period by the total number of wireless subscribers at the beginning of that period. The churn rate for the annual period is equal to the average of the churn rate for each month of that period. Higher total, postpaid, and connected device churn rates in the first nine months of 2011 contributed to the decline in net additions for the period. Year-to-date postpaid churn increased as we transitioned former Alltel subscribers to our network. Reseller subscribers, who generally have the lowest churn rate among our wireless subscribers, partially offset the churn rate increases for the first nine months of 2011 due to their increasing share of net additions. A lower prepaid churn rate in the third quarter and the first nine months of 2011, due in part to the introduction of additional tablets to the marketplace after the first quarter of 2010, also partially offset a higher postpaid churn rate in both periods and contributed to the lower total churn rate in the third quarter.
Wireless Subscriber Relationships
The wireless industry continues to mature. Accordingly, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices. To attract and retain subscribers, we offer a wide variety of service plans in addition to offering a broad handset line. Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. We also offer data plans at different price levels to attract a wide variety of subscribers and to differentiate us from our competitors. Many of our subscribers are on family plans or business plans, which provide for service on multiple handsets at discounted rates, and such subscribers tend to have higher retention and lower churn rates. As of September 30, 2011, more than 85% of our postpaid subscribers are on family plans or business discount plans. Moreover, the vast majority of postpaid subscribers (including family plan users) are allowed to accumulate unused minutes (known as Rollover Minutes(R) ), a feature that is currently not offered by other major postpaid carriers in the United States, and users would lose these minutes if they switched carriers. We also introduced our Mobile to Any Mobile feature, which enables our new and existing subscribers on these and other qualifying plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions.
Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn. In the first nine months of 2011, we continued to see a significant portion of our subscriber base upgrade from their current devices to smartphones.
We offer a large variety of handsets, including at least 16 smartphones with advanced operating systems from 10 manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models (e.g., various Windows, Android, and other smartphones) or significant revisions of existing models. We believe a broad offering of a wide variety of handsets reduces dependence on any single product as these products continue to evolve in terms of technology and subscriber appeal. From time to time, we offer and have offered attractive handsets on an exclusive basis. As these exclusivity arrangements expire, we expect to continue to offer such handsets (based on historical industry practice), and we believe our service plan offerings will help to retain our subscribers by providing incentives not to move to a new carrier. As is common in the industry, most of our phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. While the expiration of our iPhone exclusivity arrangement in the first quarter of 2011 contributed slightly to the increase in postpaid churn for the first nine months of 2011, this increase was largely due to customers that were not currently using an iPhone. While the expiration of our iPhone exclusivity arrangement may continue to affect our net postpaid subscriber additions, we do not expect exclusivity terminations to have a material impact on our Wireless segment income, consolidated operating margin or our cash flows from operations.
We also believe future wireless growth will depend upon a wireless network that has sufficient spectrum and capacity to support innovative services and devices, and makes these innovations available to more wireless subscribers. Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. Unless a solution is obtained, these constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services. To address these constraints, in March 2011, we announced an agreement to acquire T-Mobile, which is currently under ongoing regulatory review (see "T-Mobile" discussed in "Other Business Matters" for recent developments). While AT&T has and will continue to attempt to address spectrum and capacity constraints on a market-by-market basis, we believe this acquisition provides the surest, fastest, and most efficient solution to these spectrum and capacity constraints. We also anticipate that the acquisition will enhance our ability to provide LTE network technology to over 97% of the U.S. population, including those in various rural areas.
Wireless Operating Results
Our Wireless segment operating income margin in the third quarter increased from 23.1% in 2010 to 29.6% in 2011, and for the first nine months increased from 27.2% in 2010 to 27.5% in 2011. The margin increase in the third quarter reflected higher data revenues and non-iPhone sales and upgrades. The delay in the launch of the latest iPhone model until early in the fourth quarter of 2011, compared to late second-quarter timing for prior models, also contributed to the third-quarter margin increase. The margin increase for the first nine months of 2011 was primarily due to higher data revenues generated by our subscribers during the period, partially offset by higher equipment and selling costs associated with smartphone activations and costs associated with the transition of former Alltel subscribers to our network. While we subsidize the sales prices of various smartphones, we expect to recover that cost over time from increased usage of the devices (especially data usage by the subscriber).
Service revenues are comprised of local voice and data services, roaming, long-distance and other revenue. Service revenues increased $586, or 4.3%, in the third quarter and $2,668, or 6.7%, for the first nine months of 2011. The increases for these periods consisted of the following:
-- Data service revenues increased $857, or 18.0%, in the third quarter and $2,868, or 21.6%, for the first nine months of 2011. The increases were primarily due to the increased number of subscribers, heavier text and multimedia messaging and increased Internet access by subscribers using integrated devices and data-centric devices, such as eReaders, tablets, and mobile navigation devices. Data service revenues accounted for approximately 38% of our wireless service revenues for the first nine months of 2011, compared to 33% for the first nine months of 2010.
-- Voice and other service revenues decreased $271, or 3.0%, in the third quarter, and $200, or 0.8%, for the first nine months of 2011. While the number of wireless subscribers increased 8.6% over the last 12 months, ARPU continues to decline for voice and other non-data wireless services.
Equipmentrevenues decreased $160, or 10.6%, in the third quarter and increased $530, or 14.7%, for the first nine months of 2011. The third-quarter decline was primarily due to the delay in the launch of this year's iPhone model, which resulted in lower iPhone upgrades when compared to a record quarter of iPhone upgrades during last year's model launch. Higher sales of other smartphones partially offset this decline. As previously noted, an increasing share of our postpaid subscriber base now uses a smartphone, and manufacturers continue to introduce smartphones to the marketplace. Our mix of smartphone sales as a percentage of total sales and upgrades to postpaid subscribers has continued to increase year over year, contributing to the year-over-year increase in equipment revenues for the first nine months of 2011.
Operations and support expenses decreased $665, or 6.6%, in the third quarter, and increased $2,249, or 8.4%, for the first nine months of 2011. The third-quarter decrease was primarily due to the following:
-- Lower overall smartphone upgrades, reducing equipment costs $504 and commission expenses $210. Higher equipment sales and upgrades of Android devices and other smartphones partially offset lower iPhone upgrade levels. During the quarter, we also substantially completed our efforts to migrate former Alltel subscribers to our network.
-- Administrative expenses decreased $146 due in part to lower legal and tax costs and a reclassification of shared information technology costs, partially offset by higher payroll costs in the period.
-- Reseller, USF, and incollect roaming fees decreased $123 primarily due to lower usage and handset insurance costs.
Partially offsetting these decreases, network system, interconnect, and long-distance costs increased $299 in the third quarter due to higher network traffic, higher recurring, personnel-related network support costs in conjunction with our network enhancement efforts, and higher leasing costs, and bad debt expense increased $74.
The increase for the first nine months of 2011 was primarily due to the following:
-- Higher levels of smartphone sales and upgrades, as well as handsets provided to former Alltel subscribers, increased equipment costs $1,353 and commission expenses $172.
-- Network system, interconnect, and long-distance costs increased $889 due to higher network traffic, higher recurring, personnel-related network support costs in conjunction with our network enhancement efforts, and higher leasing costs.
-- Selling expenses (other than commissions) increased $282 due to increased employee-related costs, bad debt expense, and advertising.
Partially offsetting these increases for the first nine months were the following:
-- Administrative expenses decreased $220 due in part to lower legal, tax, and payroll costs and a reclassification of shared information technology costs.
-- Reseller, USF, and incollect roaming fees decreased $222 primarily due to lower usage and handset insurance costs.
Depreciation and amortization expenses decreased $21, or 1.3%, in the third quarter and $39, or 0.8%, for the first nine months of 2011. Amortization expense decreased $139, or 42.5%, in the third quarter and $386, or 38.2%, for the first nine months primarily due to an accelerated method of amortization for customer lists related to acquisitions.
Depreciation expense increased $118, or 9.0%, in the third quarter and $347, or 9.2%, in the first nine months primarily due to ongoing capital spending for network upgrades and expansion and the reclassification of shared information technology costs partially offset by certain network assets becoming fully depreciated.
Wireline
Segment Results
-------------------------------- ------- ------- ------- ------- ------- -------
Third Quarter Nine-Month Period
--------------------------- ---------------------------
Percent Percent
2011 2010 Change 2011 2010 Change
-------------------------------- -------- -------- ------- -------- -------- -------
Segment operating revenues
Data $ 7,472 $ 6,947 7.6% $ 22,008 $ 20,464 7.5%
Voice 6,243 6,978 (10.5) 19,136 21,685 (11.8)
Other 1,246 1,379 (9.6) 3,702 4,023 (8.0)
-------------------------------- ------- ------- ------- -------
Total Segment Operating
Revenues 14,961 15,304 (2.2) 44,846 46,172 (2.9)
-------------------------------- ------- ------- ------- -------
Segment operating expenses
Operations and support 10,259 10,220 0.4 30,629 31,021 (1.3)
Depreciation and amortization 2,892 3,099 (6.7) 8,726 9,280 (6.0)
-------------------------------- ------- ------- ------- -------
Total Segment Operating
Expenses 13,151 13,319 (1.3) 39,355 40,301 (2.3)
-------------------------------- ------- ------- ------- -------
Segment Operating Income 1,810 1,985 (8.8) 5,491 5,871 (6.5)
Equity in Net Income
of Affiliates - 2 - - 7 -
-------------------------------- ------- ------- ------- -------
Segment Income $ 1,810 $ 1,987 (8.9)% $ 5,491 $ 5,878 (6.6)%
================================ ======= ======= ======= ======= ======= =======
Operating Income and Margin Trends
Our Wireline segment operating income decreased $175, or 8.8%, in the third quarter and $380, or 6.5%, for the first nine months of 2011. Segment operating income margin in the third quarter decreased from 13.0% in 2010 to 12.1% in 2011, and for the first nine months decreased from 12.7% in 2010 to 12.2% in 2011. Our operating income and margins continued to be pressured by access line declines as our wireline consumer and business customers either reduced usage or disconnected traditional landline services and switched to alternative technologies, such as wireless and VoIP. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video, and U-verse voice. Additionally, we have the opportunity to increase Wireless segment revenues if customers choose AT&T Mobility as an alternative provider. The Wireline operating margins also reflect increases in data revenue growth and decreases in employee-related costs, driven by continuing cost initiatives and workforce reductions.
Operating Results
Data revenues increased $525, or 7.6%, in the third quarter and $1,544, or 7.5%, for the first nine months of 2011. Data revenues accounted for approximately 49% of wireline operating revenues for the first nine months of 2011 and 44% for the first nine months of 2010. Data revenues include transport, IP and packet-switched data services.
-- IP data revenues increased $617, or 15.5%, in the third quarter and $1,894, or 16.6%, for the first nine months of 2011 primarily driven by U-verse expansion, broadband additions and growth in IP-based strategic business services, which include Ethernet and application services. In the third quarter and for the first nine months U-verse video revenues increased $279 and $902, strategic business service revenues increased $233 and $664 and broadband high-speed Internet access increased $83 and $270, respectively. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based services.
-- Traditional packet switched data services revenue, which include frame relay and asynchronous transfer mode services, decreased $95, or 24.9%, in the third quarter and $286, or 23.3%, for the first nine months of 2011. This decrease was primarily due to lower demand as customers continue to shift to IP-based technology such as Virtual Private Networks, DSL and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.
Voice revenues decreased $735, or 10.5%, in the third quarter and $2,549, or 11.8%, for the first nine months of 2011 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 $491, or 11.4%, in the third quarter and $1,605, or 12.0%, for the first nine months of 2011. The decrease was driven primarily by a 12.3% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by increased competition from alternative technologies and the disconnection of additional lines.
-- Long-distance revenues decreased $226, or 9.5%, in the third quarter and $879, or 11.8%, for the first nine months of 2011. Lower demand for long-distance service from global businesses and consumer customers decreased revenues $170 in the third quarter and $694 for the first nine months of 2011. Additionally, expected declines in the number of our national mass-market customers decreased revenues $55 in the third quarter and $188 for the first nine months of 2011.
Other operating revenues decreased $133, or 9.6%, in the third quarter and $321, or 8.0%, for the first nine months of 2011. Major items included in other operating revenues are integration services and customer premises equipment, government-related services and outsourcing, which account for more than 60% of total other revenue for both periods.
Operations and support expenses increased $39, or 0.4%, in the third quarter and decreased $392, or 1.3%, for the first nine months of 2011. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as salary, wage and bonus accruals. Costs in this category include certain network planning and engineering expenses, information technology, our repair technicians and repair services and property taxes. Operations and support expenses also include bad debt expense; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement service costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees.
The third quarter increase was primarily due to higher U-verse related spending of $117, primarily for software upgrades, and increased contract services and material and supplies expense of $100, reflecting a higher incidence of storms. These increases were partially offset by decreases in employee-related expense of $112, reflecting ongoing workforce reduction initiatives and lower bad debt expense of $70 due to lower business revenue and improvements in cash collections.
The year-to-date decrease was primarily due to lower employee-related expense of $599, reflecting ongoing workforce reduction initiatives, decreased traffic compensation of $335 and lower bad debt expense of $165 due to lower business revenue and improvements in cash collections. These decreases were partially offset by increases in U-verse related spending of $336, increased nonemployee-related expenses of $251, and increased contract services expense of $138 reflecting storm-related expenses.
Depreciation and amortization expenses decreased $207, or 6.7%, in the thirdquarter and $554, or 6.0%, for the first nine months of 2011. The third quarter and year-to-date decrease was primarily related to lower amortization of intangibles for the customer lists associated with acquisitions, partially offset by increased depreciation related to capital spending for network upgrades and expansion.
Supplemental Information
Telephone, Wireline Broadband and Video Connections Summary
Our switched access lines and other services provided by our local exchange telephone subsidiaries at September 30, 2011 and 2010 are shown below.
September September
30, 30, Percent
(in 000s) 2011 2010 Change
------------------------------------------- --------- --------- ----------
Switched Access Lines(1)
Retail Consumer 19,799 23,414 (15.4)%
Retail Business(2) 15,951 17,375 (8.2)
------------------------------------------- --------- ---------
Retail Subtotal(2) 35,750 40,789 (12.4)
------------------------------------------- --------- ---------
Wholesale Subtotal(2) 2,156 2,448 (11.9)
Total Switched Access Lines(2,3) 37,956 43,302 (12.3)%
=========================================== ========= ========= ======
Total Retail Consumer Voice Connections(6) 21,941 24,908 (11.9)%
=========================================== ========= ========= ======
Total Wireline Broadband Connections(4) 16,476 16,100 2.3%
=========================================== ========= ========= ======
Satellite service(5) 1,809 1,994 (9.3)%
U-verse video 3,583 2,741 30.7
------------------------------------------- --------- ---------
Video Connections 5,392 4,735 13.9%
=========================================== ========= ========= ======
(1) Represents access lines served by AT&T's ILECs and affiliates.
(2) Prior-period amounts restated to conform to current-period reporting methodology.
(3) Total switched access lines includes payphone access lines of 50 at September 30, 2011 and 65 at September 30, 2010.
(4) Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband.
(5) Satellite service includes connections under our agency and resale agreements.
(6) Includes consumer U-verse VoIP connections of 2,142 at September 30, 2011 and 1,494 at September 30, 2010.
Advertising Solutions
Segment Results
-------------------------------- ---- ---- ------- ----- ----- -------
Third Quarter Nine-Month Period
--------------------- -----------------------
Percent Percent
2011 2010 Change 2011 2010 Change
-------------------------------- ----- ----- ------- ------ ------ -------
Total Segment Operating
Revenues $ 803 $ 961 (16.4)% $2,512 $3,009 (16.5)%
-------------------------------- ---- ---- ----- -----
Segment operating expenses
Operations and support 553 631 (12.4) 1,706 1,957 (12.8)
Depreciation and amortization 94 123 (23.6) 301 393 (23.4)
-------------------------------- ---- ---- ----- -----
Total Segment Operating
Expenses 647 754 (14.2) 2,007 2,350 (14.6)
-------------------------------- ---- ---- ----- -----
Segment Income $ 156 $ 207 (24.6)% $ 505 $ 659 (23.4)%
================================ ==== ==== ======= ===== ===== =======
Operating Results
Our advertising solutions operating income margin in the third quarter decreased from 21.5% in 2010 to 19.4% in 2011, and for the first nine months decreased from 21.9% in 2010 to 20.1% in 2011. The declines were primarily attributable to decreased print advertising revenue.
Operating revenues decreased $158, or 16.4%, in the third quarter and $497, or 16.5%, for the first nine months of 2011, reflecting migration from print to online search, partially offset by an increase in interactive advertising.
Operating expenses decreased $107, or 14.2%, in the third quarter and $343, or 14.6%, for the first nine months of 2011, largely driven by decreased product related expense of $62 in the third quarter and $184 for the first nine months and lower bad debt expense of $19 in the third quarter and $87 for the first nine months. Also contributing to the decreases was lower amortization expense of $34 in the third quarter and $102 for the first nine months, due to an accelerated method of customer list amortization.
Other
Segment Results
------------------------ ----- ----- ------- ----- ----- -------
Third Quarter Nine-Month Period
----------------------- ---------------------------
Percent Percent
2011 2010 Change 2011 2010 Change
------------------------ ------ ------ ------- ------ ------ -------
Total Segment Operating
Revenues $ 108 $ 136 (20.6)% $ 345 $ 419 (17.7)%
------------------------ ----- ----- ----- -----
Total Segment Operating
Expenses 459 405 13.3 906 1,249 (27.5)
------------------------ ----- ----- ----- -----
Segment Operating Loss (351) (269) (30.5) (561) (830) 32.4
------------------------ ----- ----- ----- -----
Equity in Net Income of
Affiliates 200 221 (9.5) 668 608 9.9
------------------------ ----- ----- ----- -----
Segment Income (Loss) $(151) $ (48) - $ 107 $(222) -
======================== ===== ===== ======= ===== ===== =======
The Other segment includes results from customer information services and all corporate and other operations. This segment includes our portion of the results from our international equity investments. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including the interest cost and expected return on pension and postretirement benefits assets.
Segment operating revenues decreased $28, or 20.6%, in the third quarter and $74, or 17.7%, for the first nine months of 2011 primarily due to reduced revenues from our operator services.
Segment operating expenses increased $54, or 13.3%, in the third quarter and decreased $343, or 27.5%, for the first nine months of 2011. Increased operating expenses in the third quarter were primarily due to higher costs associated with our pending acquisition of T-Mobile and legal and other accrual adjustments partially offset by reduced financing-related costs associated with our pension and postretirement benefits and lower other employee-related charges. Expense decreases for the first nine months reflect the reduced financing-related costs associated with our pension and postretirement benefits and lower other employee-related charges, partially offset by T-Mobile related costs.
Our Other segment also includes our equity investments in America Movil and Telmex, the income from which we report as equity in net income of affiliates. Our earnings from foreign affiliates are sensitive to exchange-rate changes in the value of the respective local currencies.
Equity in net income of affiliates decreased $21, or 9.5%, in the third quarter and increased $60, or 9.9%, for the first nine months of 2011. Decreased equity in net income of affiliates in the third quarter was due to lower operating results at Telmex. Increased equity in net income of affiliates for the first nine months was primarily due to improved operating results at America Movil. In June 2010, America Movil acquired control of Telmex and Telmex Internacional, which contributed to the improved operating results at America Movil offset by decreases at Telmex.
Our equity in net income of affiliates by major investment is listed below:
Third Quarter Nine-Month Period
------------------- -----------------------
2011 2010 2011 2010
-----------------------------------
America Movil $ 176 $ 171 $ 594 $ 454
Telmex 26 50 75 121
Telmex Internacional - - - 34
Other (2) - (1) (1)
----------------------------------- ----- ---- --- ------ ------
Other Segment Equity in Net Income
of Affiliates $ 200 $ 221 $ 668 $ 608
=================================== ===== ==== === ====== ======
OTHER BUSINESS MATTERS
U-verse Services We continue to expand our deployment of U-verse High Speed Internet and TV services. As of September 30, 2011, we have passed 29.8 million living units (constructed housing units as well as platted housing lots) and are marketing the services to 77% of those units. We are now nearing completion of our deployment goal of 30 million living units by year-end 2011.
We believe that our U-verse TV service is subject to federal oversight as a "video service" under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation. Certain municipalities have delayed our request or have refused us permission to use our existing right-of-ways to deploy or activate our U-verse-related services and products, resulting in litigation. Pending negotiations and current or threatened litigation involving municipalities could delay our deployment plans in those areas. Petitions have been filed at the Federal Communications Commission (FCC) alleging that the manner in which we provision "public, educational and governmental" (PEG) programming over our U-verse TV service conflicts with federal law, and a lawsuit has been filed in a California state superior court raising similar allegations under California law. If courts having jurisdiction where we have significant deployments of our U-verse services were to decide that federal, state and/or local cable regulation were applicable to our U-verse services, or if the FCC, state agencies or the courts were to rule that we must deliver PEG programming in a manner substantially different from the way we do today or in ways that are inconsistent with our current network architecture, it could have a material adverse effect on the cost, timing and extent of our deployment plans.
Retiree Phone Concession Litigation In May 2005, we were served with a purported class action in U.S. District Court, Western District of Texas (Stoffels v. SBC Communications Inc.), in which the plaintiffs, who are retirees of Pacific Bell Telephone Company, Southwestern Bell and Ameritech, contend that the cash reimbursement formerly paid to retirees living outside their company's local service area, for telephone service they purchased from another provider, is a "defined benefit plan" within the meaning of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In October 2006, the Court certified two classes. The issue of whether the concession is an ERISA pension plan was tried before the judge in November 2007. In May 2008, the court ruled that the concession was an ERISA pension plan. We asked the court to certify this ruling for interlocutory appeal, and in August 2008, the court denied our request. In May 2009, we filed a motion for reconsideration with the trial court. That motion was granted in January 2011, and a final judgment was entered in our favor. Plaintiffs have appealed the judgment to the Fifth Circuit Court of Appeals. In June 2011, the Fifth Circuit Court of Appeals held that a similar cash reimbursement program currently offered to out-of-region retirees of BellSouth is not a defined benefit plan. The Court's decision lends significant support to our belief that an adverse outcome having a material effect on our financial statements in this case is unlikely, but we will continue to evaluate the potential impact of this suit on our financial results as it progresses.
NSA Litigation Twenty-four lawsuits were filed alleging that we and other telecommunications carriers unlawfully provided assistance to the National Security Agency in connection with intelligence activities that were initiated following the events of September 11, 2001. In the first filed case, Hepting et al v. AT&T Corp., AT&T Inc. and Does 1-20, a purported class action filed in U.S. District Court in the Northern District of California, plaintiffs alleged that the defendants disclosed and are currently disclosing to the U.S. Government content and call records concerning communications to which Plaintiffs were a party. Plaintiffs sought damages, a declaratory judgment and injunctive relief for violations of the First and Fourth Amendments to the U.S. Constitution, the Foreign Intelligence Surveillance Act (FISA), the Electronic Communications Privacy Act and other federal and California statutes. We filed a motion to dismiss the complaint. The United States asserted the "state secrets privilege" and related statutory privileges and also filed a motion asking the court to dismiss the complaint. The Court denied the motions, and we and the United States appealed. In August 2008, the U.S. Court of Appeals for the Ninth Circuit remanded the case to the district court without deciding the issue in light of the passage of the FISA Amendments Act, a provision of which addresses the allegations in these pending lawsuits (immunity provision). The immunity provision requires the pending lawsuits to be dismissed if the Attorney General certifies to the court either that the alleged assistance was undertaken by court order, certification, directive or written request or that the telecom entity did not provide the alleged assistance. In September 2008, the Attorney General filed his certification and asked the district court to dismiss all of the lawsuits pending against the AT&T Inc. telecommunications companies. The court granted the Government's motion to dismiss and entered final judgments in July 2009. In addition, a lawsuit seeking to enjoin the immunity provision's application on grounds that it is unconstitutional was filed. In March 2009, we and the Government filed motions to dismiss this lawsuit. The court granted the motion to dismiss and entered final judgment in July 2009. All cases brought against the AT&T entities have been dismissed. In August 2009, plaintiffs in all cases filed an appeal with the Ninth Circuit Court of Appeals. On August 31, 2011, the appeal was argued before a panel of the Ninth Circuit Court of Appeals and we are waiting for the Court's decision. Management believes this appeal is without merit and intends to continue to defend these matters vigorously.
Universal Service Fees Litigation In October 2010, our wireless subsidiary was served with a purported class action in Circuit Court, Cole County, Missouri (MBA Surety Agency, Inc. v. AT&T Mobility, LLC), in which the plaintiffs contend that we violated the FCC's rules by collecting Universal Service Fees on certain services not subject to such fees, including Internet access service provided over wireless handsets commonly called "smartphones" and wireless data cards, as well as collecting certain other state and local fees. Plaintiffs define the class as all persons who from April 1, 2003, until the present had a contractual relationship with us for Internet access through a smartphone or a wireless data card. Plaintiffs seek an unspecified amount of damages as well as injunctive relief. We believe that an adverse outcome having a material effect on our financial statements in this case is unlikely.
Wireless Transactions
Qualcomm Spectrum Purchase In December 2010, we agreed to purchase spectrum licenses in the Lower 700 MHz frequency band from Qualcomm Incorporated for approximately $1,925 in cash. The purchase agreement expires on January 13, 2012, although either party may extend the agreement for an additional 90 days if regulatory approval by the FCC is still pending on that date. The spectrum covers more than 300 million people total nationwide, including 12 MHz of Lower 700 MHz D and E block spectrum covering more than 70 million people in five of the top 15 metropolitan areas and 6 MHz of Lower 700 MHz D block spectrum covering more than 230 million people across the rest of the United States. We plan to deploy this spectrum as supplemental downlink capacity, using carrier aggregation technology once compatible handsets and network equipment are developed. The transaction is subject to regulatory approvals and other customary closing conditions. In February 2011, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) expired without the
Department of Justice (DOJ) requesting additional information. We are awaiting approval by the FCC to complete this transaction. We anticipate closing the purchase by the end of the first quarter of 2012.
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 in exchange for approximately $39,000, consisting of $25,000 cash and approximately $14,000 of our common stock, subject to certain adjustments, and the right to nominate a person to a seat on our Board of Directors. 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 LTE 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. DOJ notice of the transaction as required under the HSR Act. In April 2011, we filed our application for approval of the merger with the 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 U.S. DOJ filed a complaint against us in the U.S. District Court for the District of Columbia alleging that the proposed acquisition would substantially lessen competition and likely raise prices in markets for mobile wireless services. We dispute the allegations and intend to vigorously contest the matter. The U.S. District Court has set a trial date in that case for February 13, 2012. On September 6, 2011, Sprint Nextel Corporation (Sprint) also filed a complaint against us in the same U.S. District Court that is hearing the U.S. DOJ's complaint. Like the U.S. DOJ, Sprint alleged that the proposed acquisition of T-Mobile would substantially lessen competition in markets for mobile wireless services. Sprint also asserted that the proposed acquisition would adversely affect its access to certain inputs used to provide mobile wireless services; specifically, Sprint claimed that, as a result of the proposed acquisition, its costs to obtain mobile wireless devices, roaming services, and dedicated transmission services known as "backhaul" would increase. On September 19, 2011, Cellular South, Inc. and its subsidiary Corr Wireless Communications, L.L.C. (collectively, "Cellular South") filed a complaint against us raising claims similar to those contained in the Sprint complaint. Both Sprint and Cellular South have requested injunctive relief. We filed motions to dismiss Sprint's and Cellular South's complaints. On November 2, 2011, the U.S. District Court granted our motion in part and denied it in part. The order dismissed both plaintiffs' complaints insofar as they involved alleged harm to competition in markets for mobile wireless services and access to backhaul. It also dismissed the claims regarding roaming services, except insofar as they pertained to Corr Wireless, Cellular South's subsidiary. The order allowed Sprint's and Cellular South's complaints to proceed insofar as they involved the proposed acquisition's effects on the market for mobile wireless devices. Accordingly, the complaints will go forward with respect to a portion of the Sprint's and Cellular South's claims. We dispute those allegations and intend to vigorously contest the matter. The U.S. District Court has set an initial scheduling conference in Sprint's and Cellular South's cases for December 9, 2011. No trial date for those cases has been set. 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 obligations of the lenders under the agreement to provide advances will terminate on September 20, 2012, unless prior to that date: (i) we reduce to $0 the commitments of the lenders under the agreement, (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 a debt-to-EBITDA (earnings before interest, income taxes, depreciation and amortization, and other modifications described in the agreement) financial ratio covenant effective after the acquisition closes, that AT&T will maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.0 to 1.0.
We must repay all advances no later than the first anniversary of the date on which advances are made. The agreement also provides that in the event of certain asset sales or certain debt or stock offerings, we must use the net proceeds to prepay any outstanding advances or to reduce the amount of the lenders' commitments.
Tender of Telmex Shares In August 2011, the Board of Directors of America Movil approved a tender offer for the remaining outstanding shares of Telmex that were not already owned by America Movil. The offer was for $10.50 Mexican pesos per share (payable in cash). The tender offer was launched in October 2011. We have announced our intent to tender all of our shares of Telmex for approximately $1,200 of cash. We expect the transaction to close in the fourth quarter and do not anticipate a material gain or loss on the tender.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided, and regulation is generally limited to operational licensing authority for the provision of services to enterprise customers.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. We are pursuing additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers. The current FCC appears to be more open to maintaining or expanding regulatory requirements on entities subject to its jurisdiction and has declared a national policy objective of ensuring that all Americans have access to broadband technologies and services. To that end, the FCC delivered a National Broadband Plan to Congress in 2010. The FCC has issued dozens of notices seeking comment on whether and how it should modify its rules and policies on a host of issues, which would affect all segments of the communications industry, to achieve universal access to broadband. These issues include rules and policies relating to universal service support, intercarrier compensation (ICC) and regulation of special access services, as well as a variety of others that could affect AT&T's operations and revenues. The Commission has opened proceedings to address some of these issues. For example, in February 2011, the Commission released a notice of proposed rulemaking to consider whether and how it should modify its policies and rules relating to ICC and universal service support to encourage deployment of broadband to all Americans.
On October 27, 2011, the FCC adopted new rules governing USF support and ICC reform. Among other things, the FCC adopted a new ICC regime that will result in the elimination of all terminating switched access charges over six years for AT&T. Additionally, the FCC will redirect $4,500 in high-cost USF support that is used currently for basic telephone service to support for broadband (including mobile broadband) service in unserved geographical areas. While the text of these new rules was not available at the time of filing of this Form 10-Q and any analysis is therefore preliminary and subject to change, we expect the overall long-term financial impact of the new rules to be positive for AT&T.
In addition, states representing a majority of our local service access lines have adopted legislation that enables new video entrants to acquire a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer competitive video services. We also are supporting efforts to update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
Our wireless operations operate in robust competitive markets but are likewise subject to substantial governmental regulation. Wireless communications providers must be licensed by the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the rules and policies governing the use of the spectrum as adopted by the FCC. The FCC has recognized the importance of providing carriers with access to adequate spectrum to permit continued wireless growth and has begun investigating how to develop policies to promote that goal. While wireless communications providers' prices and service offerings are generally not subject to state regulation, states continue to attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.
Wireless Broadband Competition In April 2011, the FCC released a wireless data roaming order requiring wireless carriers to offer wireless data roaming services on "commercially reasonable terms" to other wireless carriers in places where those operators do not have their own systems. As of October 2011, we have entered into approximately 50 data roaming agreements (including 16 broadband data roaming agreements) most of which were entered into prior to the effective data of the order. We do not expect this order to have a material impact on our operating results.
Net Neutrality Rules In December 2010, the FCC adopted "net neutrality" rules that impose certain transparency and "no blocking" obligations on fixed and mobile broadband Internet access services, as well as a "no unreasonable discrimination" obligation that applies only to fixed services. The rules are scheduled to become effective on November 20, 2011. Verizon and other parties have filed appeals of the FCC's rules, which are pending in the D.C. Circuit Court of Appeals. We do not expect the FCC's rules to have a material impact on our operating results.
LIQUIDITY AND CAPITAL RESOURCES
We had $10,762 in cash and cash equivalents available at September 30, 2011. Cash and cash equivalents included cash of $1,478 and money market funds and other cash equivalents of $9,284. In the first nine months of 2011, cash inflows were primarily provided by cash receipts from operations and the issuance of long-term debt. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, dividends to stockholders and the repayment of debt. We discuss many of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first nine months of 2011, cash provided by operating activities was $27,150, compared to $25,350 for the first nine months of 2010. Our higher operating cash flows reflected decreased tax payments of $3,134 partially offset by employee and other accrued liabilities.
In September 2010, we reached a settlement with the IRS on the calculation of the tax basis of certain assets relating to a restructuring of our wireless operations. The allowed amortization deductions on these settlement-related assets are expected to cover a 15-year period, which began in 2008. As a result of this settlement, we decreased our net tax liabilities approximately $8,300 and expect to recognize the cash flow impacts of the settlement over a 15-year period, which began in 2008. The effect of the change to our net tax liabilities was recognized through our income statement in the third quarter of 2010 as a reduction in income tax expense.
Cash Used in or Provided by Investing Activities
For the first nine months of 2011, cash used in investing activities totaled $15,025 and consisted primarily of $14,625 for capital expenditures, excluding interest during construction.
Virtually all of our capital expenditures are spent on our wireless and wireline subsidiaries' networks, our U-verse services and support systems for our communications services. The Wireline segment, which includes U-verse services, represented 53% of the total capital expenditures, excluding interest during construction, and was flat in the first nine months. Wireline expenditures related to expanding Ethernet access and IP-data services. Capital spending in our Wireless segment, excluding capitalized interest during construction, represented 47% of our total spending and increased 27% in the first nine months. Wireless expenditures were primarily used for network capacity expansion, integration and upgrades to our High-Speed Downlink Packet Access network and the initial deployment of LTE (4G) equipment for our recent commercial launch.
We expect that our capital expenditures during 2011 will be in the $20,000 range, assuming that the regulatory environment remains favorable for investment. We continue to expect to fund 2011 capital expenditures for our Wireless and Wireline segments, including international operations, using cash from operations and incremental borrowings, depending on interest rate levels and overall market conditions. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory considerations.
Cash Used in or Provided by Financing Activities
For the first nine months of 2011, our financing activities included proceeds of $7,935 from the following:
-- August 2011 issuance of $1,500 of 2.40% global notes due 2016, $1,500 of 3.875% global notes due 2021, and $2,000 of 5.55% global notes due 2041.
-- April 2011 issuance of $1,750 of 2.95% global notes due 2016 and $1,250 of 4.45% global notes due 2021.
Our other financing activities primarily consisted of the payment of dividends and the repayment of debt.
We paid dividends of $7,627 during the first nine months of 2011, compared with $7,436 for the first nine months of 2010, primarily reflecting an increase in the quarterly dividend approved by our Board of Directors in December 2010. Dividends declared by our Board of Directors totaled $0.43 per share in the third quarter and $1.29 per share for the first nine months of 2011 and $0.42 per share in the third quarter and $1.26 per share for the first nine months of 2010. Our dividend policy considers the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
At September 30, 2011, we had $8,900 of debt maturing within one year, which included $8,895 of long-term debt maturities and $5 of other short-term borrowings. Debt repayments due in the fourth quarter of $3,250 were paid in October 2011. On October 26, 2011, we called $1,000 of 5.875% notes due in the first quarter of 2012. The notes will have a redemption date of November 22, 2011. Debt maturing within one year includes the following notes that may be put back to us by the holders:
-- $1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021.
-- An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.
During the first nine months of 2011, we repaid $1,298 of long-term debt with a weighted average interest rate of 6.23%.
In December 2010, we entered into two revolving credit facilities with a syndicate of banks - a four-year, $5,000 agreement and a $3,000, 364-day agreement. In the event advances are made under either agreement, those advances would be used for general corporate purposes, which could include repayment of maturing commercial paper. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under each agreement. Under each agreement, we can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. Under the four-year agreement, we must maintain a debt-to-EBITDA, including modifications described in the agreement, financial debt ratio of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. Both agreements also contain a negative pledge covenant, which generally provides that if we pledge assets or permit liens on our property, then any advances must also be secured. At September 30, 2011, we had no advances outstanding under either agreement and were in compliance with all covenants under each agreement.
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our international equity investees. At September 30, 2011, our debt ratio was 38.5%, compared to 37.9% at September 30, 2010, and 37.1% at December 31, 2010. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At September 30, 2011, we had interest rate swaps with a notional value of $11,800 and a fair value of $595.
We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $7,502 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(748) at September 30, 2011. We have rate locks with a notional value of $800 and a fair value of $(159) and foreign exchange contracts with a notional value of $210 and a net fair value of $(4) at September 30, 2011.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of September 30, 2011. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of September 30, 2011.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
-- Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets and at favorable rates.
-- Changes in available technology and the effects of such changes, including product substitutions and deployment costs.
-- Increases in our benefit plans' costs, including increases due to adverse changes in the U.S. and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates and adverse medical cost trends and unfavorable healthcare legislation and regulations.
-- The final outcome of Federal Communications Commission and other federal agency proceedings and reopenings of such proceedings and judicial review, if any, of such proceedings, including issues relating to access charges, broadband deployment, E911 services, competition, net neutrality, unbundled loop and transport elements, wireless license awards and renewals and wireless services, including data roaming agreements.
-- The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings and judicial review, if any, of such proceedings, including proceedings relating to Interconnection terms, access charges, universal service, unbundled network elements and resale and wholesale rates, broadband deployment including our U-verse services, net neutrality, performance measurement plans, service standards and traffic compensation.
-- Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
-- Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures.
-- The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless operating margins.
-- Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets.
-- The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).
-- The development of attractive and profitable U-verse service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
-- Our continued ability to attract and offer a diverse portfolio of devices, some on an exclusive basis.
-- The availability and cost of additional wireless spectrum and regulations relating to licensing and technical standards and deployment and usage, including network management rules.
-- Our ability to manage growth in wireless data services, including network quality.
-- The outcome of pending, threatened or potential litigation, including patent and product safety claims by or against third parties.
-- The impact on our networks and business from major equipment failures, security breaches related to the network or customer information, our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers, severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks.
-- The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
-- The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions.
-- Our ability to adequately fund our wireless operations, including payment for additional spectrum; network upgrades and technological advancements.
-- Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
PART II -- OTHER INFORMATION Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. The additional Risk Factor below reflects our pending acquisition of T-Mobile. See "Other Business Matters" for recent developments relating to this acquisition, including the August 31, 2011 filing of a lawsuit by the U.S. Department of Justice ("DOJ").
The impact of our pending acquisition of T-Mobile, including our ability to obtain governmental approvals on favorable terms including any required divestitures; the risk that such approvals are not obtained and we must pay a break-up fee; the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.
We have agreed to acquire T-Mobile for approximately $39,000. We believe that the acquisition will give us the scale, resources and spectrum to enable us to deploy LTE technology to more customers than otherwise possible and to address impending spectrum and network capacity constraints thereby enabling us to provide higher quality service including fewer dropped calls, fewer failed calls attempted and increased data speeds. In addition, we believe the acquisition will result in cost savings and other potential synergies. Achieving these results first will depend upon obtaining governmental approvals on favorable terms within the time limits set forth in the purchase agreement. To this point, the recently filed lawsuit by the DOJ has created uncertainty regarding both the eventual outcome of the case and the possibility of delays to the approval process beyond the termination date set forth in the agreement. Other delays also could jeopardize our ability to complete the acquisition and divert attention from ongoing operations on the part of management and employees, adversely affecting customers and suppliers and therefore revenues. If such approvals are obtained, then we must integrate a large number of network and other operational systems and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. While we have successfully merged large companies into our operations in the past, and therefore expect a successful integration in this case, delays in the process could have a material adverse affect on our revenues, expenses, operating results and financial condition. In addition, events outside of our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition.
Item 6. Exhibits
Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
10-zz BellSouth Corporation Supplemental Executive Retirement
Plan, amended and restated as of December 31, 2011
12 Computation of Ratios of Earnings to Fixed Charges
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32 Section 1350 Certifications
101 XBRL Instance Document
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AT&T Inc.
November 3, 2011 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
Exhibit 10-zz
BELLSOUTH CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Amended and Restated effective as of December 31, 2011
BELLSOUTH CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE I. STATEMENT OF PURPOSE
The purpose of the BellSouth Corporation Supplemental Executive Retirement Plan is to provide supplemental pension benefits to Executives and certain other employees of BellSouth Corporation and certain subsidiaries of BellSouth Corporation, hereinafter referred to as Participants, who retire or terminate from service. The Plan was originally effective as of January 1, 1984 and was subsequently amended from time to time. The Plan was amended and restated, effective as of January 1, 2005, and as so amended and restated is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to all benefits accrued and vested on or after January 1, 2005. Further, with respect to all benefits of Participants employed on or after January 1, 2007, the Plan is intended to fully comply with the requirements of Code Section 409A. During the period from January 1, 2005, to the date of the adoption of this restated Plan document, the Plan has been operated in good faith compliance with the provisions of Code Section 409A, Internal Revenue Service Notice 2005-1, the proposed Treasury Regulations for Code Section 409A, the Final Treasury Regulations for Code Section 409A, applicable Internal Revenue Services Notices and Announcements and any other generally applicable guidance published in the Internal Revenue Service Bulletin.
Following the merger of AT&T Inc. and BellSouth Corporation, the Plan was amended and restated, effective January 1, 2008, to reflect the transition of certain participants to other AT&T retirement plans and/or other AT&T companies. The Plan was further amended and restated effective January 1, 2010. In order for a Participant to accrue benefits on or after January 1, 2010, the provisions of Article VIII shall apply. The Plan is now hereby amended and restated effective December 31, 2011 in order to freeze benefit accruals for active participants, as specifically set forth herein. This amendment and restatement shall supersede in all respects the amendment and restatement previously effective January 1, 2010.
ARTICLE II. DEFINITIONS
1. The term "ADEA" shall mean the Age Discrimination in Employment Act of 1967, as amended from time to time.
2. The term "Affiliate" shall mean any corporation, other than BellSouth Corporation (or a Participating Company), which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as BellSouth Corporation and any trade or business (whether or not incorporated) which is under common control with BellSouth Corporation within the meaning of Code Section 414(c).
3. The term "Annual Bonus Award" shall mean the bonus amount paid annually to a Participant that is included in the calculation of pension benefits under the Pension Plan.
4. The term "AT&T SERP Participant" shall mean an officer who is designated as a participant in the AT&T, Inc. 2005 Supplemental Employee Retirement Plan (the "A&T SERP"). The initial day of participation in such plan is the named officer's "SERP Effective Date" as defined in the AT&T SERP.
5. The term "AT&T SERP Vesting Date" shall mean the date that an AT&T SERP Participant becomes 100% vested in the AT&T SERP.
6. The terms "BellSouth Corporation" and "Company" shall mean BellSouth Corporation, a Georgia corporation, or its successors.
7. The terms "Chairman of the Board", "President" and "Board of Directors" or "Board" shall mean the Chairman of the Board of Directors, President and Board of Directors, respectively, of the Company.
8. The term "Claim Review Committee" shall mean the BellSouth Corporation Employees' Benefit Claim Review Committee appointed by the Committee to be the claims fiduciary for any claims brought under the Pension Plan.
9. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
10. The term "Committee" shall mean the Employee Benefit Committee of BellSouth Corporation appointed by the Company to administer the Pension Plan.
11. The term "Disabled" or "Disability" means the following:
(a) the inability of the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; OR
(b) the Participant is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under a short-term disability plan covering employees of a Participating Company.
12. The term "Executive" shall mean an employee on the active payroll of any Participating Company who holds a position that the Board of Directors has designated to be within the Company's executive compensation group.
13. The term "Executive Severance Agreement" means a BellSouth executive change in control agreement entered into by and between an executive who is a Participant in this Plan and BellSouth, as amended and/or superseded from time to time, providing certain benefits in the event of a change in corporate control of BellSouth Corporation.
14. The term "Former Affiliate" shall have the same meaning as "Interchange Company".
15. The term "Included Earnings" shall have the meaning ascribed to such term in Section 4(a)(ii) of Article IV of this Plan.
16. The term "Interchange Company" shall have the same meaning as is attributed to such term under the Pension Plan.
17. The term "Mandatory Retirement Age" shall have the same meaning as is attributed to such term under the Pension Plan.
18. The term "Merger" shall mean the merger, pursuant to the Agreement and Plan of Merger dated as of March 4, 2006 (the "Merger Agreement"), by and among BellSouth, AT&T Inc. ("AT&T"), and ABC Consolidation Corp., a Georgia corporation and wholly-owned subsidiary of AT&T ("Merger Sub"), pursuant to which, at the "Effective Time" (as defined in the Merger Agreement), BellSouth was merged with and into the Merger Sub.
19. The term "Merger Severance Plan" means a severance plan (or plans) adopted under the terms of the Company Disclosure Letter to the Merger Agreement (as defined in Section 16 of this Article II).
20. The term "Officer" shall mean any Participant who is an "officer" for compensation purposes as shown on the records of AT&T.
21. The term "Net Credited Service", except as expressly limited or otherwise provided in this Plan or under an individual Participant's employment-related agreement with the Company, shall have the same meaning as is attributed to such term under the Pension Plan and shall be interpreted in the same manner as that term is interpreted for purposes of the Pension Plan.
22. The term "Participants" shall mean all Executives as defined herein, as well as all other management employees (i.e., non-collectively bargained employees) at pay grade E01 (or equivalent) and above and any other employees designated by the Chief Executive Officer of BellSouth Corporation or his or her delegated representative.
No employee shall commence or re-commence participation in the Plan on and after February 8, 2007.
23. The term "Participating Company" shall mean BellSouth Corporation, and each subsidiary of BellSouth Corporation which shall have determined, with the concurrence of the senior human resources officer of BellSouth Corporation, to participate in the Plan. Each Participating Company participating in the Plan as of the adoption of this amendment and restatement shall be a Participating Company in the Plan.
In addition, any Participant who transfers employment on or after December 29, 2006 from a Participating Company to an Affiliate shall remain an eligible Participant in this Plan, and the employing Affiliate shall be considered a Participating Company for purposes of that Participant's service and earnings hereunder.
24. The term "Pension Act" shall mean the Employee Retirement Income Security Act of 1974 (ERISA) as it may be amended from time to time.
25. The term "Pension Commencement Date" shall have the same meaning as is attributed to such term under the Pension Plan.
26. The term "Pension Plan" shall mean the BellSouth Personal Retirement Account Pension Plan as in effect on the date of the Merger.
27. The term "Plan" shall mean this BellSouth Corporation Supplemental Executive Retirement Plan.
28. The term "Post-04 Benefit" shall mean the Participant's Plan benefit accrued on or after January 1, 2005 determined in accordance with the provisions of Code Section 409A.
29. The term "Pre-05 Benefit" shall mean the Participant's Plan benefit accrued and vested as of December 31, 2004 determined in accordance with the provisions of Code Section 409A.
30. The term "Rabbi Trust Agreement" shall mean each and all of the following: (i) BellSouth Corporation Trust Under Executive Benefit Plan(s); (ii) BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s); (iii) BellSouth Enterprises, Inc. Trust Under Executive Benefit Plan(s); (iv) BellSouth Corporation Trust Under Executive Benefit Plan(s) for Mobile Systems Executives; (v) BellSouth Corporation Trust Under Executive Benefit Plan(s) for Advertising and Publishing Executives; (vi) Trust Under Executive Benefit Plan(s) for Certain BellSouth Companies; in each case, as amended from time to time.
31. The term "Senior Manager" shall mean any Participant who is a "senior manager" for compensation purposes as shown on the records of AT&T.
32. The term "Specified Employee" shall mean, for periods on or after December 29, 2006, any Participant who is a "Key Employee" (as defined in Code Section 416(i) without regard to paragraph (5) thereof), as determined by AT&T in accordance with its uniform policy with respect to all arrangements subject to Code Section 409A, based upon the 12-month period ending on each December 31(st) (such 12-month period is referred to below as the "identification period"). All Participants who are determined to be Key Employees under Code Section 416(i) (without regard to paragraph (5) thereof) during the identification period shall be treated as Key Employees for purposes of the Plan during the 12-month period that begins on the first day of the 4(th) month following the close of such identification period. For periods prior to December 29, 2006, the term Specified Employee shall mean a specified employee under Code Section 409A.
33. The term "Standard Annual Bonus" shall mean an amount determined by (1) a stated dollar amount, or (2) applying a target percentage of a Participant's base pay rate, as determined by the annual compensation plan and the Participant's current job or pay grade.
34. The term "Vesting Service Credit", except as expressly limited or otherwise provided in this Plan or under an individual Participant's employment-related agreement with the Company, shall have the same meaning as is attributed to such term under the Pension Plan and shall be interpreted in the same manner as that term is interpreted for purposes of the Pension Plan.
An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Vesting Service Credit ("VSC") determined in the same manner that is determined in the Pension Plan; provided however, his VSC shall not increase after his AT&T SERP Vesting Date (i.e., years of VSC earned after that date will not be included for purposes of calculating this Plan's benefit).
In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his VSC determined in the same manner that is determined in the Pension Plan; provided however, his VSC shall not increase after his SERP Effective Date.
Lastly, Vesting Service Credit for all Participants shall be frozen and shall not increase after December 31, 2011. For Participants who are otherwise accruing benefits under the Plan as of December 31, 2011, their Vesting Service Credit shall be frozen to the period of service as would have been recognized if such Participant had terminated employment on that date.
35. The use in this Plan of personal pronouns of the masculine gender is intended to include both the masculine and feminine genders.
ARTICLE III. ADMINISTRATION
1. The Company shall be the Plan Administrator and the Plan Sponsor of the Plan as those terms are defined in the Pension Act. The Company may allocate all or any part of its responsibilities for the operation and administration of the Plan, except to the extent expressly prohibited by the Plan's terms. The Company may designate in writing other persons to carry out its responsibilities under the Plan, and may employ persons to advise it with regard to such responsibilities. The Company, acting through the Committee, the Claim Review Committee or any other person designated by the Company, as applicable, shall have the exclusive responsibility and complete discretionary authority to interpret the terms of the Plan (including the power to construe ambiguous or uncertain terms), to control the operation and administration of the Plan and to resolve all questions in connection therewith, with all powers necessary to enable it to properly carry out such responsibilities, including without limitation the powers and responsibilities set forth in this Article III, and its determinations shall be final, conclusive and binding on all persons.
2. The Plan Administrator shall have the power to determine status, coverage, eligibility for and the amount of benefits under the Plan and all questions arising in connection therewith, with respect to employees of each Participating Company, respectively, and shall have the power to authorize disbursements according to this Plan.
3. The review and final determination of claims and appeals for Participants and beneficiaries under the Plan shall be determined by, and in the complete discretion of, the Plan Administrator acting through the Claim Review Committee and in accordance with the claims and appeals procedures set forth in the summary plan description for the Pension Plan and shall be administered and interpreted in accordance with the Pension Act and procedures in effect under the Pension Plan. All determinations of the Plan Administrator shall be final and binding and not subject to further administrative review.
4. The expenses of administering the Plan shall be borne by the Company and/or the applicable Participating Company.
5. The Company, the Committee and the Claim Review Committee, and each other Plan Administrator described herein, are each a named fiduciary as that term is used in the Pension Act with respect to the particular duties and responsibilities herein provided to be allocated to each of them.
6. Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan.
7. Notwithstanding the preceding, effective as of the date of the Merger, responsibility for administration of the Plan shall be determined under the terms of the Rabbi Trust Agreements. As provided in the Rabbi Trust Agreements, claims for benefits, appeals of benefit denials and Plan interpretations shall be made by a "Trust Contractor" or "Independent Fiduciary" (as such terms are defined in the Rabbi Trust Agreements), as the case may be. At any time during which a Trust Contractor or Independent Fiduciary shall, under the terms of the Rabbi Trust Agreements, have such Plan administrative responsibilities, the term "Plan Administrator" as used in this Plan shall refer to such Trust Contractor or Independent Fiduciary.
ARTICLE IV. BENEFITS
1. Participation
All persons included in the definition of the term "Participants" are deemed participants in this Plan. In addition, each individual who has participated in this Plan but who has ceased to be included in the definition of "Participants", whether due to demotion, termination or otherwise, shall continue to be a Participant in this Plan, except for purposes of accruing additional benefits under Section 4 of this Article IV, and shall be entitled to a benefit under this Plan if, at the time such individual ceased to be included in the definition of "Participants", he or she had satisfied the service requirements for a deferred vested pension under the Pension Plan. Each such individual shall receive a benefit under the terms of the Plan as in effect immediately prior to the effective date of such demotion, termination or other event, the amount of such benefit to be calculated as if the individual retired (or otherwise terminated employment) on such date, it being the Company's intent that any such demotion, termination or other event removing individuals from the definition of "Participants" shall not adversely affect entitlement to such benefits.
2. Mandatory Retirement Age
Each Paticipant, whether or not eligible for benefits under this Plan, shall cease to be eligible for continued employment no later than the last day of the month in which such Participant attains the Mandatory Retirement Age.
3. Eligibility
(a) Service Benefit
An individual who is both a Participant in this Plan and who is eligible for a service pension pursuant to the terms of the Pension Plan at the time of employment termination or whose age and Net Credited Service recognized under this Plan would satisfy the eligibility requirements of the Pension Plan for a service pension is eligible for a service benefit pursuant to this Plan. Additionally, each Participant who has attained age 62 or older and whose Net Credited Service is ten years or more at the time of employment termination is eligible for a service benefit under this Plan. Each Participant whose employment terminates pursuant to and under the terms of the Merger Severance Plan may also be eligible for a service benefit under this Plan, if at the time of employment termination the Participant's age and Net Credited Service meets the requirements established under such severance program to be deemed service pension eligible for purposes of this Plan. Each Participant whose employment terminates pursuant to and under the terms of an Executive Severance Agreement shall be deemed to be eligible for a service pension for purposes of this Plan.
(b) Deferred Benefit
(i) Any individual not described in Section 3(a) of this Article IV who is a Participant in this Plan at the time of voluntary employment termination is eligible for a deferred vested pension pursuant to this Plan, provided he is eligible for a deferred vested pension pursuant to the Pension Plan.
(ii) In the event that a Participant's employment is terminated involuntarily prior to his or her becoming eligible for a deferred benefit under this Plan, and the termination is not for cause, such Participant shall nevertheless be entitled to a deferred benefit hereunder, based upon the Participant's Vesting Service Credit at his or her date of termination.
(c) Disability Pension
An individual who while a Participant in this Plan has become eligible for a disability pension pursuant to the terms of the Pension Plan and who is also determined to be Disabled shall be eligible for a disability pension hereunder, calculated as follows: the amount is determined in accordance with Section 4 of this Article IV calculated to one year after date of Disability (pro--rata if less than 20 years of service) with no reduction factor but offset by the actual service or deferred benefit determined under Section 4 of this Article IV applying all applicable early retirement reduction factors (determined assuming that the service or deferred benefit is payable as an annuity). Should the disability pension be discontinued pursuant to the terms of the Pension Plan, the disability pension hereunder shall be discontinued as well. Regardless of the Participant's Disabled status, the disability pension hereunder shall be discontinued upon the Participant's attaining age 65.
4. Benefit Amounts
(a) Computation of Benefit
(i) (A) Benefit Formula
The aggregate annualized benefit of each Participant payable as provided in the Plan shall be determined by adding the sum of two percent (2%) of Included Earnings for each year of the Participant's Vesting Service Credit for the first twenty years, plus one and one-half percent (1.5%) of Included Earnings for each year of the Participant's Vesting Service Credit for the next ten years, plus one percent (1%) of Included Earnings for each year of the Participant's Vesting Service Credit for each additional year up to the month in which the Participant retires less (1) 100% of the retirement benefit (unreduced for survivor annuity) payable from the Pension Plan and (2) 100% of the Primary Social Security benefit payable at age 65.
An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Pension Plan benefit and Primary Social Security benefit calculated and frozen as of his AT&T SERP Vesting Date for purposes of calculating this Plan's benefit.
In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his Pension Plan benefit and Primary Social Security benefit calculated and frozen as of his AT&T SERP Effective Date.
Furthermore, any Participant who is otherwise accruing a benefit as of December 31, 2011 shall have his Pension Plan benefit and Primary Social Security benefit calculated and frozen as if he had terminated employment on that date.
Lastly, any Participant whose annualized benefit (as described in the first paragraph of Section 4(a)(i)(A) above) determined as of December 31, 2011, including offsets for the Pension Plan and Primary Social Security (both frozen as described in the preceding sentence), is equal to $0, shall not be due any benefit from this Plan. Future years of age and service will not be applied for any benefit calculation purpose.
(B) Special Rules
(1) With respect to service benefits, the benefit reduction to be applied pursuant to Section 4(a)(i)(A)(1) above for the benefit payable from the Pension Plan shall be the amount of such benefit that would be payable on the date that benefits are eligible to be paid (or become payable) under this Plan (regardless of the Participant's actual pension commencement date under the Pension Plan) and determined assuming that the Participant elected a single life annuity (regardless of the actual form of benefit elected under the Pension Plan).
(2) With respect to deferred vested benefits, the benefit reduction to be applied pursuant to Section 4(a)(i)(A)(1) above for the benefit payable from the Pension Plan shall be the amount of such benefit that would be payable on the Participant's 65(th) birthday (regardless of the Participant's actual pension commencement date under the Pension Plan) and determined assuming that the Participant elected a single life annuity (regardless of the actual form of benefit elected under the Pension Plan).
(3) In the case of any Executive (i) who has attained the age of sixty--two (62) or more or who is deceased, (ii) who was previously employed by a Former Affiliate, (iii) who serves or has served as an officer (as such term is used in the employment practices and policies of the relevant company) of BellSouth Corporation or an Affiliate, and (iv) whose service with a Former Affiliate is disregarded in determining the Executive's Vesting Service
Credit under the Pension Plan, for purposes of this Plan, the Executive's Vesting Service Credit and Net Credited Service shall be increased by
(x) the Executive's Vesting Service Credit and Net Credited Service with the Former Affiliate(s) (determined under the rules of the Pension Plan as if the Executive had been employed by BellSouth Corporation during such period and had no other service covered under the Pension Plan), multiplied by
(y) a fraction, the numerator of which is the number of whole years (not to exceed ten (10)) of such Executive's Net Credited Service as an officer of BellSouth Corporation or an Affiliate and the denominator of which is ten (10). Notwithstanding the foregoing, no Executive's Vesting Service Credit or Net Credited Service, for purposes of this Plan shall be increased for service with a Former Affiliate to the extent that any such service would otherwise be considered, directly or indirectly, in determining such Executive's benefits under this Plan by virtue of the terms of any other agreement, plan or arrangement.
(4) In the case of any Participant whose Vesting Service Credit or Net Credited Service includes a period of service with an employer with respect to which the Participant is entitled to any retirement benefit payable from defined benefit pension plan(s ) (including qualified plans and nonqualified plans such as excess benefit and supplemental executive retirement plans), including any Executive whose Vesting Service Credit and Net Credited Service under this Plan is increased pursuant to Section 4(a)(i)(B)(3) preceding, the benefit reduction described in Section 4(a)(i)(A)(1) above for the retirement benefit payable from the Pension Plan shall include any such retirement benefit payable by such employer. The determination of the benefit reduction for any such benefit shall be made using approaches which approximate as nearly as practicable the approaches used in making such determinations with respect to benefits payable under the Pension Plan, as described above in this Section 4(a)(i). In the case of any Executive whose Vesting Service Credit and Net Credited Service under this Plan is increased pursuant to paragraph (B)(3) of this Section 4(a)(i), the benefit payable by such employer shall first be multiplied by the fraction described in that paragraph and the product thereof shall be the amount of the benefit reduction.
(5) A Participant's service or deferred benefit (the value of which is expressed as an annuity) at the time of termination of employment shall not be less than the service or deferred benefit that would have been payable to the Participant if the Participant had terminated employment on any prior December 31, through December 31, 2011, (using pay, service, offsets and all factors applicable on the previous dates and assuming an immediate benefit commencement).
(6) In the case of each Participant who terminates employment pursuant to the terms of the Merger Severance Plan, the service benefit or deferred vested benefit calculated hereunder shall be calculated by adding additional months of Vesting Service Credit and an equal amount of months of age with the amount of such months equaling (i) 24, minus (ii) the number of months that have elapsed since the closing of the Merger (but not below zero).
(7) The terms and conditions set forth in Article VIII shall apply to any benefits accrued under any provision of this Plan on or after January 1, 2010, and in order for a Participant to accrue (or collect) such Plan benefits on or after January 1, 2010, the Participant must comply with the terms and conditions set forth in Article VIII.
(ii) Included Earnings
Included Earnings shall equal the 12 month average of the sum of (1) the last sixty (60) months of base pay, plus (2) the Annual Bonus Awards payable during or after that sixty (60) month period. The amounts of base pay and other payments used to determine Included Earnings as described above include all amounts during the specified period including those amounts previously deferred pursuant to other plans. If a Participant terminates employment while eligible for a benefit under this Plan and thereafter receives compensation of the types described in clause (ii) of this Section 4(a), the additional Included Earnings shall be deemed to have been paid as of the date the Participant terminated employment, and the amount of benefit payable under this Plan shall be corrected accordingly.
An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Included Earnings calculated and frozen as of his AT&T SERP Vesting Date for purposes of calculating this Plan's benefit.
In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his Included Earnings calculated and frozen as of his SERP Effective Date.
Lastly, for Participants who are otherwise accruing benefits under the Plan as of December 31, 2011, their Included Earnings shall be frozen at the amount as would have been recognized under this Section if such Participant had terminated employment on that date.
(b) Minimum Benefit
In no event shall a Participant, whose Vesting Service Credit has been five years or more, who terminates employment on or after his or her sixty--second birthday, or who is retired on a service or disability pension under the Pension Plan or is otherwise eligible for a service pension benefit hereunder, receive a total annual retirement benefit (including any benefit under the Pension Plan) from the Company of less than 15% of the employee's annual base salary plus Standard Annual Bonus in effect on the employee's last day on the active payroll.
An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Minimum Benefit calculated and frozen as of his AT&T SERP Vesting Date for purposes of calculating this Plan's benefit.
In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his Minimum Benefit calculated and frozen as of his SERP Effective Date.
Lastly, any Participant who is otherwise accruing benefits under the Plan as of December 31, 2011 shall have his Minimum Benefit calculated and frozen as of December 31, 2011 as if he had terminated employment on such date.
(c) Early Retirement Discount
(i) The service benefit amount, determined in accordance with the provisions of this Section 4, for each Participant who is granted a service benefit, shall be reduced (before the offset for benefits under the Pension Plan) by one--half percent (0.5%) for each calendar month or part thereof by which the commencement of benefits under this Plan precedes the Participant's 62nd birthday, except that each employee retired with thirty (30) or more years of service (either Net Credited Service or Vesting Service Credit) shall receive a service benefit reduced by one-quarter percent (0.25%) for each calendar month or part thereof by which the commencement of benefits under this Plan precedes the Participant's 62nd birthday. With respect to Participants who terminate employment and receive benefits under the Merger Severance Plan, the preceding sentence shall be applied by substituting "twenty-eight (28) or more" for the words "thirty (30) or more." Further, with respect to a Participant who retires during 2006, in no event shall the amount by which such Participant's benefit is reduced pursuant to this provision be greater than the amount by which such benefit would have been reduced pursuant to this provision had the Participant retired on December 31, 2005.
(ii) The deferred vested benefit amount, determined in accordance with the provisions of this Section 4, for each Participant who is granted a deferred vested benefit, shall be reduced (after the offset for benefits under the Pension Plan) by an actuarially equivalent amount, using mortality rates and other assumptions then in effect under the Pension Plan, for each calendar month or part thereof by which the commencement of benefits under this Plan precedes the Participant's 65th birthday.
(iii) An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Early Retirement Discount calculated and frozen as of his AT&T SERP Vesting Date for purposes of calculating this Plan's benefit.
In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his Early Retirement Discount calculated and frozen as of his SERP Effective Date.
(d) Survivor/Death Benefits for Participant's Terminating Employment prior to January 1, 2007
(i) Benefit Payable Before Benefit Commencement
If a Participant who has not made a valid lump sum election with respect to his or her Pre-2005 Benefit dies prior to termination of employment (or commencement of benefits for Participants with a deferred benefit) and leaves a surviving spouse at the time of his death, a pre-retirement survivor benefit is payable to the surviving spouse as an immediate life annuity equal to 100% of the service benefit or deferred benefit that the Participant would have received with respect to his or her Pre-2005 Benefit had he survived and terminated employment on the date of his death and commenced benefit payments. In addition, with respect to the Participant's Post-2004 Benefit, such benefit shall be paid to the surviving spouse as soon as administratively feasible following the Participant's death in a single sum payment calculated in accordance with Section 5 of this Article IV. If such Participant does not have a surviving spouse at the time of his death, the entire survivor benefit described in this paragraph shall be paid to the Participant's estate as soon as administratively feasible following the Participant's death (even if the Participant was a Band BB officer or above) in the form of a single sum payment calculated in accordance with the provisions of Section 5 of this Article IV.
(ii) Benefit Payable After Benefit Commencement
If the Participant was receiving benefits in the form of an annuity with respect to his Pre-2005 Benefit (or was eligible to receive benefits in the form of an annuity because of termination of employment), and leaves a surviving spouse at the time of his/her death, then such surviving spouse shall automatically receive a survivor annuity for life equal to 50% of the net pension benefit that the Participant was receiving (or eligible to receive) just prior to his death. If the Participant was eligible to receive payment of his Post-2004 Benefit but had not yet received such payment, then his Post-2004 Benefit shall be paid to the spouse, if any, and otherwise to the Participant's estate in the form of a single lump sum payment calculated in accordance with the provisions of Section 5 of this Article IV.
(iii) Lump Sum Election
In the event of the death of a Participant who has made a valid lump sum election under the Plan with respect to his or her Pre-2005 Benefit, his surviving spouse (or his estate if there is no surviving spouse) shall be entitled to receive 100% of the lump sum payment that would have been payable to the Participant as of the date of his death (including the lump sum payment of the Participant's Post-2004 Benefit), and such lump sum shall be payable as soon as administratively feasible following the Participant's death (even if the Participant was an Executive designated as a Band BB officer or above).
(iv) Lump Sum Settlement
If a Participant has already received a lump sum settlement of his entire benefit under the Plan, then no further benefits are payable under this subparagraph (d).
(e) Survivor/Death Benefits for Participant's Terminating Employment on or after January 1, 2007
(i) Benefit Payable Before Benefit Commencement
If a Participant dies prior to termination of employment and leaves a surviving spouse at the time of his death, a pre-retirement survivor benefit is payable to the surviving spouse in the same form as elected by the Participant for payment of his benefit (i.e., single lump sum, 10 year installments, or single life annuity) in an amount equal to 100% of the service benefit or deferred benefit that the Participant would have received with respect to his benefit had he survived and terminated employment on the date of his death and commenced benefit payments; provided, if the survivor benefit is payable in a single life annuity, there will be no payment of an additional survivor annuity upon the surviving spouse's death. If such Participant does not have a surviving spouse at the time of his death, the entire survivor benefit described in this paragraph shall be paid to the Participant's estate as soon as administratively feasible following the Participant's death (even if the Participant was a "specified employee" as defined under Code Section 409A) in the form of a single sum payment calculated in accordance with the provisions of Section 5 of this Article IV.
(ii) Benefit Payable After Benefit Commencement
(A) Life Annuity. If the Participant leaves a surviving spouse and was receiving benefits in the form of an annuity (or was eligible to receive benefits in the form of an annuity because of termination of employment and because the Participant had elected an annuity form of payment in accordance with Section 5 of this Article IV), then such surviving spouse shall automatically receive a survivor annuity for life equal to 50% of the net pension benefit that the Participant was receiving (or eligible to receive) just prior to his death. If the Participant does not leave a surviving spouse and was receiving benefits in the form of an annuity (or was eligible to receive benefits in the form of an annuity because of termination of employment and because the Participant had elected an annuity form of payment in accordance with Section 5 of this Article IV), then no further benefits will be payable after the Participant's death, subject to the provisions of Section 6(b)(iii) of this Article IV.
(B) 10-Year Installments. If the Participant leaves a surviving spouse and was receiving benefits in the form of 10-year installments, then the remaining installments shall continue to be paid to the surviving spouse. If the Participant was receiving benefits in the form of 10-year installments and does not leave a surviving spouse, then the remaining installments shall be paid in the form of a single lump sum payable to his estate, subject to the provisions of Section 6(b)(iii) of this Article IV.
(C) Lump Sum Payment. If the Participant was eligible to receive a single lump sum payment of his Plan benefit but dies prior to the payment being made, then the single lump sum payment shall be made to his surviving spouse, if applicable, and otherwise to his estate, subject to the provisions of Section 6(b)(iii) of this Article IV.
(iii) Lump Sum Settlement
If a Participant has already received a lump sum settlement of his entire benefit under the Plan, then no further benefits are payable under this subparagraph (e).
(f) Special Increases
Service and disability benefit payments of retired Participants shall be increased by the same percentage and pursuant to the same terms and conditions as are set forth in the Pension Plan.
5. Form of Benefit Payments
(a) Rules Applicable to Participants who terminate Employment Prior to January 1, 2007
(i) Annuity Payments. With respect to a Participant who has not made a valid lump sum election in accordance with subparagraph (ii) hereof, such Participant's Pre-2005 Benefit shall be paid in monthly payments. Notwithstanding the foregoing, if at the time of the Participant's termination of employment, the present value of the benefit of a Participant, whether payable as a service benefit, a deferred benefit, or a survivor's benefit, is less than $20,000, such benefit shall be paid in the form of a single lump sum payment, calculated in accordance with subparagraph (c) of this Section 5.
(ii) Lump Sum Benefit Payment
(1) Pre-2005 Benefit. A Participant may elect to receive his Pre-2005 Benefit hereunder, whether payable as a service benefit, a deferred benefit or a survivor's benefit, paid in the form of a single lump sum payment, calculated in accordance with the provisions of subparagraph (c) of this Section 5; provided, any such election must be made in accordance with procedures established by the Company and must be on file with the Company, or its designee, for at least 12 consecutive calendar months prior to the Participant's termination of employment or death in order to be valid and in effect.
(2) Post-2004 Benefit. All Post-2004 Benefits, whether payable as a service benefit or a deferred benefit shall be paid in the form of a single lump sum payment, calculated in accordance with the provisions of subparagraph (c) of this Section 5.
(b) Rules Applicable to Participants who terminate Employment on or after January
1, 2007
(i) Lump Sum Benefit Payment. Absent an election to the contrary in accordance with subparagraph (iv) hereof, a Participant's entire benefit under the Plan, whether payable as a service benefit or a deferred benefit, shall be paid in the form of a single lump sum payment, calculated in accordance with the provisions of subparagraph (c) of this Section 5.
(ii) 10-Year Installments. If a Participant made a valid election for 10-year installments under subparagraph (iv) hereof, such Participant's entire benefit under the Plan, whether payable as a service benefit or a deferred benefit, shall be paid in the form of annual installments payable over a period of 10 years. The amount of the annual installments shall be determined by calculating the Participant's benefit under the Plan as a single lump sum in accordance with subparagraph (c) of this Section 5 and then paying 1/10(th) of the amount each year plus interest annually at the rate then specified under the Pension Plan.
(iii) Life Annuity. If a Participant made a valid election for a life annuity under subparagraph (iv) hereof, such Participant's entire benefit under the Plan, whether payable as a service benefit or a deferred benefit, shall be paid in the form of monthly payments payable over the life of the Participant. The amount of the monthly payments shall equal the Participant's annualized benefit determined under Section 4(a)(i)(A) of Article IV divided by 12.
If a Participant is Disabled, the disability pension described in Section 3(d) of Article IV shall be paid in the form of monthly payments until the earlier of the Participant's death or attaining age 65.
(iv) Election Opportunity
(1) Initial Election. Participants who are participating in the Plan as of September 30, 2006 (or become newly eligible during October 2006) may elect a single lump sum payment, 10-year installments or a life annuity during the period between October 1, 2006 and November 30, 2006. Participants who first become Participants in the Plan on or after November 1, 2006 may elect a single lump sum, 10-year installments or a life annuity; provided such election must be made within 30 days of the Participant's initial participation in the Plan.
(2) Subsequent Elections. Participants may elect to change the form of payment (and the timing of payment) during a time other than that specified under subparagraph (1) above; however, such election must comply with the requirements of Code Section 409A and applicable regulations thereunder, which means that the subsequent election will only be effective if made at least one year prior to the time at which the distribution would be made absent the subsequent election AND if the first payment under the form of payment elected is delayed for at least a five year period.
Participants may not make a payment election with regard to any disability benefit that may become payable under the Plan.
(v) De Minimis Cash-Out. Notwithstanding any election made under subparagraph (iv) of this Section 5(b), if at the time of the Participant's termination of employment, the present value of the benefit of a Participant, whether payable as a service benefit or a deferred benefit, is less than $20,000, such benefit shall be paid in the form of a single lump sum payment, calculated in accordance with subparagraph (c) of this Section 5. The preceding paragraph will no longer apply for distributions made after December 31, 2008.
(c) Lump Sum Calculation
Benefits payable in a single lump sum in accordance with the Plan shall be the amount that is the actuarial present value of the Participant's benefit, or applicable portion thereof, expressed as a single life annuity and shall be determined using (i) the applicable interest rate then in effect under the Pension Plan, and (ii) the applicable mortality table then in effect under the Pension Plan.
6. Timing of Payment of Benefits
Except for the reasons specified below, benefits granted under this Plan shall commence on the day following the date of termination of employment from the Company and all Affiliates.
(a) For Terminations of Employment Occurring Prior to January 1, 2007
(i) An Executive who is a Band BB officer or above and who has made a valid lump sum election shall receive the lump sum payment (including interest accrued annually at the applicable interest rate in effect under the Pension Plan) as soon as administratively feasible following the date that is 2 years following his date of retirement or other termination of employment.
(ii) Participants eligible for a deferred vested benefit will have their entire benefit commence at such time as the individual otherwise elects to commence payment of benefits under the Pension Plan provided such benefits commence on or before December 31, 2008. Otherwise, payment of the deferred vested benefit will automatically commence as soon as administratively practicable following July 1, 2009.
(iii) Participants who have a Post-2004 Benefit and who are Executives or otherwise Specified Employees at the time of his or her termination of employment shall receive the lump sum payment (including interest accrued annually at the applicable interest rate in effect under the Pension Plan) as soon as administratively feasible following the date that is 6 months following his or her date of retirement or other termination of employment.
(b) For Terminations of Employment On or After January 1, 2007
(i) Participants electing a single lump sum payment or 10-year installment payments and who are Executives or otherwise Specified Employees at the time of his or her termination of employment shall receive the single lump sum payment or the first installment under the 10-year installment form of benefit (each including interest accrued annually at the applicable interest rate in effect under the Pension Plan) as soon as administratively feasible following the date that is 6 months following his or her date of retirement or other termination of employment.
(ii) Participants electing a life annuity payment form and who are Executives or otherwise Specified Employees shall receive the first annuity payment as soon as administratively feasible following the date that is 6 months following his or her retirement date or other termination of employment and this first payment shall equal 7 monthly annuity payments.
(iii) Notwithstanding anything herein to the contrary, if a Participant whose benefit is delayed under subparagraphs (i) or (ii) of this Section 6(b) dies prior to the payment of such delayed amounts, such delayed amounts shall be paid in a single lump sum payment to the Participant's estate. The remainder of such Participant's benefit (if any) shall be paid in accordance with Section 4(e) of this Article IV.
7. Treatment During Subsequent Employment
Employment with any Participating Company or Affiliate for which a Participant is an eligible employee, subsequent to retirement or termination of employment with entitlement to any type of benefits described heretofore, shall result in the permanent suspension of the benefit for the period of such employment or reemployment. Upon termination of such subsequent employment, the full benefit payable hereunder shall be recalculated and then offset by any amounts previously paid to the Participant using assumptions set forth under the Pension Plan. The benefit will commence following the subsequent termination of employment but shall be subject to the provisions set forth in Section 6 of this Article IV regarding the timing of payment of benefits. This Section 7 shall not apply on or after January 1, 2009, provided, however, that any Participant whose benefits were suspended as of December 31, 2008 shall be grandfathered and shall continue to have his benefits suspended subject to the provisions of this Section 7.
8. Employment with Cingular
Individuals who were Participants as of December 23, 2001 and who transferred to Cingular Wireless, LLC on or before December 23, 2001 pursuant to the Contribution Agreement by and between BellSouth Corporation and AT&T Inc. (formerly SBC Communications, Inc.) continue to be treated as actively employed by the Company for all purposes of this Plan while they remain actively employed by Cingular Wireless, LLC or an AT&T Affiliate, subject to all conditions and provisions set forth in this plan.
ARTICLE V. DEATH BENEFITS 1. Eligibility and Administration
All individuals who became eligible to participate in the Plan prior to January 1, 2006 shall be eligible for death benefits under this Plan. With respect to individuals who become eligible to participate in the Plan on or after January 1, 2006, no death benefits shall be payable pursuant to this Article V. Death benefits described herein are in addition to death benefits payable under the Pension Plan but shall be subject to the same terms and conditions of, and administered in the same manner as, corresponding death benefit provisions of the Pension Plan.
2. Amount of Death Benefit
For an Executive, the benefit equals the annual base salary plus two times the Standard Annual Bonus. The above stated amounts of base salary and Standard Annual Bonus are those amounts in effect at the earlier of retirement or death including those amounts previously deferred pursuant to other plans. For all other Participants, the benefit equals the Standard Annual Bonus in effect at the earlier of retirement or death. In addition, the death benefit for all Participants will include the amount of death benefit, if any, that would otherwise have been payable under the Pension Plan had there been no deferral of compensation under any plan of the Company. The benefit amount will also include the amount of death benefit, if any, that would otherwise have been payable under the Pension Plan had the restriction on the amount of compensation that may be taken into account under Code Section 401(a)(17) not been applicable.
3. Death Benefits After 2005
Notwithstanding the provisions of Section 2 of this Article V, with respect to each Participant in the Plan on December 31, 2005, the amount of any death benefit payable pursuant to Section 1 of this Article V shall in no event be based on base salary and/or Standard Award amounts greater than such Participant's base salary and the Standard Award applicable with respect to such Participant on December 31, 2005.
4. Form and Source of Payments
All death benefits payable pursuant to this Article V of the Plan shall be paid in a single lump sum as soon as administratively feasible following the death of the Participant and shall be paid from Company or Participating Company's operating expenses, or through the purchase of insurance from an insurance company as the Company may determine.
ARTICLE VI. GENERAL PROVISIONS 1. Effective Date
This Plan was originally effective January 1, 1984 and this restatement of the Plan is effective December 31, 2011.
2. Rights to Benefit
There is no right to any benefit under this Plan except as may be provided by the Company or each Participating Company. Participants have the status of general, unsecured creditors of the Participating Company and the Plan constitutes a mere promise by the Participating Company to make benefit payments in the future. A Participant shall have only a contractual right to receive the benefits provided for hereunder if and when he complies with all of the conditions set forth herein. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind. The Plan is intended to be "unfunded" for purposes of the Pension Act and the Code. If any payment is made to a Participant, his or her surviving spouse or other beneficiary with respect to benefits described in this Plan from any source arranged by the Company or a Participating Company including the Rabbi Trust Agreements and also including, without limitation, any other fund, trust, insurance arrangement, bond, security device, or any similar arrangement, such payment shall be deemed to be in full and complete satisfaction of the obligation of the Company or Participating Company under this Plan to the extent of such payment as if such payment had been made directly by the Company or Participating Company. If any payment from a source described in the preceding sentence shall be made, in whole or in part, prior to the time payment would be made under the terms of this Plan, such payment shall be deemed to satisfy the obligation of the Company or Participating Company to pay Plan benefits beginning with the benefit which would next become payable under the Plan and continuing in the order in which benefits are so payable, until the payment from such other source is fully recovered. In determining the benefits satisfied by a payment, Plan benefits, as they become payable, shall be discounted to their value as of the date such actual payment was made using an interest rate equal to the valuation interest rate for deferred annuities as last published by the Pension Benefit Guaranty Corporation prior to the date of such actual payment. If the benefits which actually become payable under this Plan, after applying the discount described in the preceding sentence, are less than the amount of any prepayment described herein, any such shortfall shall not be collected from or enforced against the Participant as a claim by the Company or Participating Company.
3. Liability for Payment of Benefits
Where a Participant's period of service includes service in more than one Participating Company or in a company that is not a Participating Company, the last Participating Company to employ him or her immediately prior to his or her retirement or termination of employment with entitlement to a benefit hereunder shall be responsible for the full benefit under this Plan.
4. Governing Law
The Company intends that this Plan be an unfunded deferred compensation plan maintained primarily for a select group of management and highly compensated employees exempt from Parts 2, 3 and 4 of Title I of the Pension Act by reason of the exemptions set forth in Sections 201(a), 301(a) and 401(a) of the Pension Act and from Part 1 of the Pension Act by reason of the exemption set forth in Section 2520.104--23 of applicable United States Department of Labor regulations. This Plan shall be interpreted and administered accordingly. This Plan shall be construed in accordance with the laws of the State of Texas to the extent such laws are not preempted by the Pension Act. Notwithstanding any provision to the contrary in this Plan, each provision of this Plan shall be interpreted to permit the deferral of compensation and the payment of deferred amounts in accordance with Code Section 409A and any provision that would conflict with such requirements shall not be valid or enforceable.
5. Assignment or Alienation
Benefits payable, and rights to benefits, under this Plan may not in any manner be anticipated, sold, transferred, assigned (either at law or in equity), alienated, pledged, encumbered or subject to attachment, garnishment, levy, execution or other legal or equitable process.
6. Employment at Will
Nothing contained in this Plan shall be construed as conferring upon a Participant the right to continue in the employ of the Company.
7. Savings Clause
In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
8. Payments to Others
Benefits payable to a former employee or retiree unable to execute a proper receipt may be paid to other person(s) in accordance with the standards and procedures set forth in the Pension Plan.
9. Plan Termination
Subject to the limitations described below, the Company retains the right to terminate, in whole or in part, and each Participating Company retains the right to withdraw from this Plan, at any time, for any reason, with or without notice. The Company will continue to make payments, in accordance with the terms and conditions of the Plan, to all Participants who were either retired or terminated prior to Plan termination, and will also continue to recognize its obligation to the surviving spouse of the aforementioned individuals. Additionally, Participants who have satisfied the service requirements for a deferred vested pension under the Pension Plan on the date of Plan termination shall receive benefits under the terms of the Plan as in effect immediately prior to its termination, the amount of such benefit to be calculated as if the Participant retired (or otherwise terminated employment) on the termination date of the Plan, it being the Company's intent that termination of the Plan shall not adversely affect any entitlement to such benefits and any amendment, modification or termination of this Plan inconsistent with this expression of intent shall be null and void.
ARTICLE VII. INTERCHANGE OF BENEFIT OBLIGATION
The same transfer of service credit provisions contained in interchange agreements presently in existence under the Pension Plan, or as they may be amended from time to time, by and between the Company, on behalf of all Participating Companies, and any Interchange Company shall apply to the transfer of service credit for purposes of this Plan.
ARTICLE VIII. LOYALTY CONDITIONS FOR OFFICERS AND SENIOR MANAGERS
This Article shall apply only to Participants who are Officers or Senior Managers at the time benefits accrue or are received.
1. Generally
AT&T would be unwilling to provide Plan benefits but for the loyalty conditions and covenants set forth in this Article VIII, and the conditions and covenants herein are a material inducement to AT&T's willingness to sponsor the Plan and to offer Plan benefits for the Participants on or after January 1, 2010. Accordingly, as a condition of accruing and/or receiving any Plan benefits on or after January 1, 2010, each Participant is deemed to agree that he shall not, without obtaining the written consent of AT&T in advance, participate in activities that constitute engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as those terms are defined in Article VIII, Section 2 hereof. Further, notwithstanding any other provision of this Plan, all benefits provided under the Plan with respect to a Participant shall be subject to the enforcement provisions of this Article VIII if the Participant, without the consent of AT&T, participates in an activity that constitutes engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as so defined.
2. Definitions.
For purposes of this Article VIII and of the Plan generally:
(a) an "Employer Business" shall mean AT&T, any subsidiary of AT&T, the Company, a Participating Company, an Affiliate, and any business in which any of them or a subsidiary or an affiliated company of theirs has a substantial ownership or joint venture interest;
(b) "engaging in competition with AT&T" shall mean, while employed by an Employer Business or within two (2) years after the Participant's termination of employment, engaging by the Participant in any business or activity in all or any portion of the same geographical market where the same or substantially similar business or activity is being carried on by an Employer Business. "Engaging in competition with AT&T" shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer Business. However, "engaging in competition with AT&T" shall include representing or providing consulting services to, or being an employee or director of, any person or entity that is engaged in competition with any Employer Business or that takes a position adverse to any Employer Business.
(c) "engaging in conduct disloyal to AT&T" means, while employed by an Employer Business or within two (2) years after the Participant's termination of employment, (i) soliciting for employment or hire, whether as an employee or as an independent contractor, for any business in competition with an Employer Business, any person employed by an Employer Business during the one (1) year prior to Participant's termination of employment, whether or not acceptance of such position would constitute a breach of such person's contractual obligations to any Employer Business; (ii) soliciting, encouraging, or inducing any vendor or supplier with which Participant had business contact on behalf of any Employer Business during the two (2) years prior to Participant's termination of employment, to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with AT&T or its affiliate; or (iii) soliciting, encouraging, or inducing any customer or active prospective customer with whom Participant had business contact, whether in person or by other media ("Customer"), on behalf of any Employer Business during the two (2) years prior to Participant's termination of employment, to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with any Employer Business, or to purchase competing goods or services from a business competing with any Employer Business, or accepting or servicing business from such Customer on behalf of himself or any other business. "Engaging in conduct disloyal to AT&T" also means, disclosing Confidential Information to any third party or using Confidential Information, other than for an Employer Business, or failing to return any Confidential Information to the Employer Business following termination of employment.
(d) "Confidential Information" shall mean all information belonging to, or otherwise relating to, an Employer Business, which is not generally known, regardless of the manner in which it is stored or conveyed to Participant, and which the Employer Business has taken reasonable measures under the circumstances to protect from unauthorized use or disclosure. Confidential Information includes trade secrets as well as other proprietary knowledge, information, know-how, and non-public intellectual property rights, including unpublished or pending patent applications and all related patent rights, formulae, processes, discoveries, improvements, ideas, conceptions, compilations of data, and data, whether or not patentable or copyrightable and whether or not it has been conceived, originated, discovered, or developed in whole or in part by Participant. For example, Confidential Information includes, but is not limited to, information concerning the Employer Business' business plans, budgets, operations, products, strategies, marketing, sales, inventions, designs, costs, legal strategies, finances, employees, customers, prospective customers, licensees, or licensors; information received from third parties under confidential conditions; or other valuable financial, commercial, business, technical or marketing information concerning the Employer Business, or any of the products or services made, developed or sold by the Employer Business. Confidential Information does not include information that (i) was generally known to the public at the time of disclosure; (ii) was lawfully received by Participant from a third party; (iii) was known to Participant prior to receipt from the Employer Business; or (iv) was independently developed by Participant or independent third parties; in each of the foregoing circumstances, this exception applies only if such public knowledge or possession by an independent third party was without breach by Participant or any third party of any obligation of confidentiality or non-use, including but not limited to the obligations and restrictions set forth in this Plan.
3. Forfeiture of Benefits
A Participant's right to receive Plan benefits accrued on or after January 1, 2010 shall be forfeited and no benefits accrued on or after January 1, 2010 shall be provided under this Plan if the Committee determines that, within the time period and without the written consent specified, Participant either engaged in competition with AT&T or engaged in conduct disloyal to AT&T, as defined in Article VIII, Section 2, hereof, regardless of the position or duties the Participant takes and regardless of whether or not the employing company, or the company that Participant becomes associated with or renders service to, is itself engaged in direct competition with an Employer Business.
4. Equitable Relief
The parties recognize (i) that any Participant's breach of any of the covenants in this Article VIII will cause irreparable injury to the Company, and will represent a failure of the consideration under which the Company (in its capacity as creator and sponsor of the Plan) agreed to provide the Participant with the opportunity to accrue Plan benefits on and after January 1, 2010, and (ii) that monetary damages would not provide the Company with an adequate or complete remedy that would warrant the Company's continued sponsorship of the Plan and payment of Plan benefits for all Participants. Accordingly, in the event of a Participant's actual or threatened breach of covenants in this Article VIII, the Committee, in addition to all other rights and acting as a fiduciary under ERISA for the limited purpose of enforcing the provisions hereof on behalf of all Participants, shall have a fiduciary duty (in order to assure that the Company receives fair and promised consideration for its continued Plan sponsorship and funding) to seek an injunction restraining the Participant from breaching the covenants in this Article VIII. To enforce its repayment rights with respect to a Participant, the Plan shall have a first priority, equitable lien on all Plan benefits that are paid to the Participant. In addition, the Company shall pay for any Plan expenses that the Committee incurs hereunder, and shall be entitled to recover from the Participant its reasonable attorneys' fees and costs incurred in obtaining such injunctive remedies. In the event the Committee succeeds in enforcing the terms of this Section through a written settlement with the Participant or a court order granting an injunction hereunder, the Participant shall be entitled to collect Plan benefits prospectively, if the Participant is otherwise entitled to such benefits, net of any fees and costs assessed pursuant hereto (which fees and costs shall be paid to AT&T as a repayment on behalf of the Participant), provided that the Participant complies with said settlement or injunction.
5. Uniform Enforcement.
In recognition of AT&T's need for nationally uniform standards for the Plan's administration, it is an absolute condition in consideration of any Participant's accrual or receipt of benefits under the Plan on or after January 1, 2010 that each and all of the following conditions apply to all Participants and to any benefits that are accrued on or after January 1, 2010 and that are thereafter paid or are payable under the Plan:
(a) ERISA shall control all issues and controversies hereunder, and the Committee shall serve for the limited purposes of this Article VIII as a "fiduciary" of the Plan.
(b) All litigation between the parties relating to this Section shall occur in federal court, which shall have exclusive jurisdiction, any such litigation shall be held in the United States District Court for the Northern District of Texas, and the only remedies available with respect to the Plan shall be those provided under ERISA.
(c) If the Committee determines in its sole discretion either (I) that the Company or any Employer Business that employed the Participant terminated the Participant's employment for cause, or (II) that equitable relief enforcing the Participant's covenants under this Article VIII is either not reasonably available, not ordered by a court of competent jurisdiction, or circumvented because the Participant has sued in state court, or has otherwise sought remedies not available under ERISA, then in any and all of such instances the Participant shall not be entitled to collect any Plan benefits accrued on or after January 1, 2010, and if any such Plan benefits have been paid to the Participant, the Participant shall immediately repay all such Plan benefits to the Plan (which shall be used to pay Plan administrative expenses or Plan benefits.) upon written demand from the Committee. Furthermore, the Participant shall hold the Company and each Employer Business harmless from any loss, expense, or damage that may arise from any of the conduct described in clauses (I) and (II) hereof.
ARTICLE IX. PLAN MODIFICATION
The Company may, in its sole discretion, from time to time make any changes in the Plan as it deems appropriate, provided, that no such action shall accelerate or postpone the time or schedule of payment of any Plan benefit except as may be permitted under Code Section 409A and regulations thereunder; and provided further, such modifications shall not result in a reduction of benefits to either: (i) those participants or their surviving spouses already receiving benefits under this Plan, or (ii) those participants who have satisfied the service requirements for a deferred vested pension under the Pension Plan. Specifically, no Plan modification shall have the effect of reducing a Participant's benefits under the Plan to which he or she would be entitled under the terms of the Plan as in effect immediately prior to its modification, the amount of such benefit to be calculated as if the Participant retired (or otherwise terminated employment) on the date the Plan was modified, it being the Company's intent that any modification of the Plan shall not adversely affect any entitlement to such benefits and any amendment, modification or termination of this Plan inconsistent with this expression of intent shall be null and void. In addition, the Company may authorize the execution of agreements providing retirement benefits subject generally to the terms and conditions of the Plan and benefits under such agreements shall be deemed provided hereunder, and any such amendments authorized prior to the amendment and restatement of the Plan shall be incorporated herein by reference.
EXHIBIT
12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Nine Months Ended
September 30,
(Unaudited) Year Ended December 31,
--------------------- ---------------------------------------------
2011 2010 2010 2009 2008(1) 2007 2006
------------ ------- ------- ------- -------- ------- -------
Earnings:
Income (loss) from continuing
operations before income taxes $ 16,406 $16,691 $18,238 $18,518 $(4,572) $27,186 $ 18,638
Equity in net income of
affiliates
included above (649) (629) (762) (734) (819) (692) (2,043)
Fixed charges 3,570 3,557 4,786 5,071 4,943 4,489 2,166
Distributed income of equity
affiliates 110 98 161 317 164 395 97
Interest capitalized (119) (577) (772) (740) (659) (171) (73)
--- ------- ------ ------ ------ ------- ------ -------
Earnings, as adjusted $ 19,318 $19,140 $21,651 $22,432 $ (943) $31,207 $ 18,785
=== ======= ====== ====== ====== ======= ====== =======
Fixed Charges:
Interest expense $ 2,583 $ 2,248 $ 2,994 $ 3,368 $ 3,369 $ 3,460 $ 1,800
Interest capitalized 119 577 772 740 659 171 73
Dividends on preferred
securities - - - - 4 3 3
Portion of rental expense
representative
of interest factor 868 732 1,020 963 911 855 290
--- ------- ------ ------ ------ ------- ------ -------
Fixed Charges $ 3,570 $ 3,557 $ 4,786 $ 5,071 $ 4,943 $ 4,489 $ 2,166
=== ======= ====== ====== ====== ======= ====== =======
Ratio of Earnings to Fixed
Charges 5.41 5.38 4.52 4.42 - 6.95 8.67
(1) Earnings were not sufficient to cover fixed charges
in 2008. The deficit was $943.
Exhibit 31.1
CERTIFICATION
I, Randall Stephenson, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 3, 2011
/s/ Randall Stephenson
Randall Stephenson Chairman of the Board,
Chief Executive Officer and President
Exhibit 31.2
CERTIFICATION
I, John J. Stephens, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 3, 2011
/s/ John J. Stephens
John J. Stephens Senior Executive Vice President
and Chief Financial Officer
Exhibit 32
Certification of Periodic Financial Reports
Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of AT&T Inc. (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2011 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 3, 2011 November 3, 2011
By: /s/ Randall Stephenson By: /s/ John J. Stephens
Randall Stephenson John J. Stephens
Chairman of the Board, Chief Executive Officer Senior Executive Vice President
and President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 ("Exchange Act") or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AT&T Inc. and will be retained by AT&T Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
This information is provided by RNS
The company news service from the London Stock Exchange
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