Edgar Filing: AT&T INC.

att3q0910q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

		For the quarterly period ended September 30, 2009

		or

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

For the transition period from to

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware

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

208 S. Akard St., Dallas, Texas 75202

Telephone Number: (210) 821-4105

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

At October 31, 2009, there were 5,901 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,
	2009			2008			2009			2008
Operating Revenues
Wireless service	$	12,372		$	11,227		$	35,978		$	32,726
Voice		7,940			9,313			24,702			28,525
Data		6,424			6,144			18,981			18,170
Directory		1,162			1,333			3,622			4,114
Other		2,957			3,325			8,877			9,417
Total operating revenues		30,855			31,342			92,160			92,952
Operating Expenses
Cost of sales (exclusive of depreciation and amortization shown separately below)		12,885			13,022			37,605			36,914
Selling, general and administrative		7,672			7,724			23,225			23,034
Depreciation and amortization		4,910			4,978			14,699			14,839
Total operating expenses		25,467			25,724			75,529			74,787
Operating Income		5,388			5,618			16,631			18,165
Other Income (Expense)
Interest expense		(853	)		(858	)		(2,581	)		(2,577	)
Equity in net income of affiliates		181			257			549			712
Other income (expense) – net		27			(23	)		43			97
Total other income (expense)		(645	)		(624	)		(1,989	)		(1,768	)
Income Before Income Taxes		4,743			4,994			14,642			16,397
Income taxes		1,468			1,705			4,890			5,746
Net Income		3,275			3,289			9,752			10,651
Less: Net Income Attributable to Noncontrolling Interest		(83	)		(59	)		(236	)		(188	)
Net Income Attributable to AT&T	$	3,192		$	3,230		$	9,516		$	10,463

Basic Earnings Per Share Attributable to AT&T	$	0.54		$	0.55		$	1.61		$	1.76
Diluted Earnings Per Share Attributable to AT&T	$	0.54		$	0.55		$	1.61		$	1.75
Weighted Average Number of Common Shares Outstanding – Basic (in millions)		5,901			5,893			5,899			5,938
Dividends Declared Per Common Share	$	0.410		$	0.400		$	1.230		$	1.200

See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	September 30,			December 31,
	2009			2008
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	6,167		$	1,792
Accounts receivable – net of allowances for
uncollectibles of $1,345 and $1,270		14,796			16,047
Prepaid expenses		1,791			1,538
Deferred income taxes		991			1,014
Other current assets		2,176			2,165
Total current assets		25,921			22,556
Property, plant and equipment		225,669			218,579
Less: accumulated depreciation and amortization		(127,348	)		(119,491	)
Property, Plant and Equipment – Net		98,321			99,088
Goodwill		71,727			71,829
Licenses		47,946			47,306
Customer Lists and Relationships – Net		7,814			10,582
Other Intangible Assets – Net		5,656			5,824
Investments in Equity Affiliates		2,813			2,332
Other Assets		6,370			5,728
Total Assets	$	266,568		$	265,245

Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	6,755		$	14,119
Accounts payable and accrued liabilities		18,093			20,032
Advanced billing and customer deposits		4,036			3,849
Accrued taxes		1,965			1,874
Dividends payable		2,419			2,416
Total current liabilities		33,268			42,290
Long-Term Debt		65,909			60,872
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		22,279			19,196
Postemployment benefit obligation		31,750			31,930
Other noncurrent liabilities		13,361			14,207
Total deferred credits and other noncurrent liabilities		67,390			65,333

Stockholders’ Equity
Common shares issued ($1 par value)		6,495			6,495
Capital in excess of par value		91,678			91,728
Retained earnings		38,841			36,591
Treasury shares (at cost)		(21,280	)		(21,410	)
Accumulated other comprehensive loss		(16,161	)		(17,057	)
Noncontrolling interest		428			403
Total stockholders’ equity		100,001			96,750
Total Liabilities and Stockholders’ Equity	$	266,568		$	265,245

See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
	Nine months ended
	September 30,
	2009			2008
Operating Activities
Net income	$	9,752		$	10,651
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization		14,699			14,839
Provision for uncollectible accounts		1,384			1,297
Deferred income tax expense		2,574			4,063
Net (gain) loss from impairment on sale of investments		89			(2	)
Changes in operating assets and liabilities:
Accounts receivable		(133	)		(1,597	)
Other current assets		(288	)		616
Accounts payable and accrued liabilities		(361	)		(5,958	)
Stock-based compensation tax benefit		-			(15	)
Other - net		(2,235	)		(1,121	)
Total adjustments		15,729			12,122
Net Cash Provided by Operating Activities		25,481			22,773

Investing Activities
Construction and capital expenditures
Capital expenditures		(11,067	)		(14,388	)
Interest during construction		(553	)		(455	)
Acquisitions, net of cash acquired		(184	)		(10,086	)
Dispositions		205			1,444
Investments in securities, net of sales		(14	)		(103	)
Sale of other investments		-			436
Other		44			33
Net Cash Used in Investing Activities		(11,569	)		(23,119	)

Financing Activities
Net change in short-term borrowings with
original maturities of three months or less		(3,918	)		5,188
Issuance of long-term debt		8,161			10,924
Repayment of long-term debt		(6,170	)		(3,143	)
Purchase of treasury shares		-			(6,077	)
Issuance of treasury shares		8			317
Dividends paid		(7,252	)		(7,150	)
Stock-based compensation tax benefit		-			15
Other		(366	)		(104	)
Net Cash Used in Financing Activities		(9,537	)		(30	)
Net increase (decrease) in cash and cash equivalents		4,375			(376	)
Cash and cash equivalents beginning of year		1,792			1,970
Cash and Cash Equivalents End of Period	$	6,167		$	1,594

Cash paid during the nine months ended September 30 for:
Interest	$	3,307		$	3,068
Income taxes, net of refunds	$	2,535		$	5,217

See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Dollars and shares in millions, except per share amounts
(Unaudited)
	Nine months ended
	September 30, 2009
	Shares			Amount
Common Stock
Balance at beginning of year		6,495		$	6,495
Balance at end of period		6,495		$	6,495

Capital in Excess of Par Value
Balance at beginning of year				$	91,728
Issuance of shares					26
Share-based payments					(76	)
Balance at end of period				$	91,678

Retained Earnings
Balance at beginning of year				$	36,591
Net income attributable to AT&T ($1.61 per diluted share)					9,516
Dividends to stockholders ($1.23 per share)					(7,255	)
Other					(11	)
Balance at end of period				$	38,841

Treasury Shares
Balance at beginning of year		(602	)	$	(21,410	)
Issuance of shares		7			130
Balance at end of period		(595	)	$	(21,280	)

Accumulated Other Comprehensive Income (Loss), net of tax
Balance at beginning of year				$	(17,057	)
Other comprehensive income (see Note 2)					896
Balance at end of period				$	(16,161	)

Noncontrolling Interest
Balance at beginning of year				$	403
Net income					236
Distributions					(209	)
Translation adjustments					(2	)
Balance at end of period				$	428

Total stockholders’ equity as of December 31, 2008				$	96,750
Changes attributable to AT&T stockholders					3,226
Changes attributable to noncontrolling interest					25
Total stockholders’ equity as of September 30, 2009				$	100,001
See Notes to Consolidated Financial Statements.

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

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

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

For interim periods, we calculate income taxes by determining an expected annual effective tax rate and applying that rate to pre-tax income for the period. The resulting tax expense is then adjusted for the impact of significant events or issues that arise during the period, such as enactment of tax legislation or resolution of tax controversies. During the third quarter of 2009, we recorded a benefit related to the favorable resolution of federal and state audit issues, which resulted in a decrease to our effective tax rate for the period.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.

Valuation and Other Adjustments In accordance with GAAP, 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, 2009, we had severance accruals of $516. At December 31, 2008, we had severance accruals of $752.

Included in the current liabilities reported on our consolidated balance sheets are accruals established prior to 2009. These liabilities include accruals for severance, lease terminations and equipment removal costs associated with our acquisitions of AT&T Corp., BellSouth Corporation and Dobson Communications Corporation. Following is a summary of the accruals recorded at December 31, 2008, cash payments made during 2009, and the adjustments thereto.

	12/31/08		Cash			Adjustments			9/30/09
	Balance		Payments			and Accruals			Balance
Severance accruals paid from:
Company funds	$	140	$	(105	)	$	(23	)	$	12
Pension and postemployment benefit plans		103		(4	)		-			99
Lease terminations		387		(54	)		(16	)		317
Equipment removal and other related costs		88		(38	)		(6	)		44
Total	$	718	$	(201	)	$	(45	)	$	472

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Recent Accounting Standards

Accounting Standards Codification In June 2009, the FASB issued standards that established the FASB Accounting Standards Codification (ASC or Codification) as the source of authoritative GAAP by the FASB for nongovernmental entities. The ASC supersedes all non-SEC accounting and reporting standards that existed at the ASC’s effective date. The FASB uses Accounting Standards Updates (ASU) to amend the ASC. These standards are effective for interim and annual periods ending after September 15, 2009 (i.e., the quarterly period ended September 30, 2009, for us).

Subsequent Events In May 2009, the FASB issued a standard that established general standards of accounting for and disclosing events that occur after the balance sheet date but before financial statements are issued or are available for issuance. They were effective for interim and annual periods ending after June 15, 2009 (i.e., the quarterly period ended June 30, 2009, for us). In preparing the accompanying unaudited consolidated financial statements, we have reviewed all known events that have occurred after September 30, 2009, and through the filing on November 5, 2009, for inclusion in the financial statements and footnotes.

Noncontrolling Interests Reporting In December 2007, the FASB issued a standard that requires noncontrolling interests held by parties other than the parent in subsidiaries to be clearly identified, labeled, and presented in the consolidated statements of financial position within equity, but separate from the parent’s equity. For us, the new standard became effective January 1, 2009, with restatement of prior financial statements and had no material impact on our financial position and results of operations.

Fair Value Measurement and Disclosures In April 2009, the FASB issued staff positions that require enhanced disclosures, including interim disclosures, on financial instruments, determination of fair value in turbulent markets, and recognition and presentation of other-than-temporary impairments. These staff positions were effective for interim and annual reporting periods beginning in our second quarter of 2009, and they have increased quarterly disclosures but have not had an impact on our financial position and results of operations (see Note 6).

In August 2009, the FASB issued ASU 2009-5, “Measuring Liabilities at Fair Value” (ASU 2009-5), which amends existing GAAP for fair value measurement guidance by clarifying the fair value measurement requirements for liabilities that lack a quoted price in an active market. Per the Codification, a valuation technique based on a quoted market price for the identical or similar liability when traded as an asset or another valuation technique (e.g., an income or market approach) that is consistent with the underlying principles of GAAP for fair value measurements would be appropriate. ASU 2009-5 was effective August 2009, the issuance date, and had no material impact on our financial position or results of operations.

In September 2009, the FASB issued ASU 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (ASU 2009-12), which provides guidance for an investor on using the net asset value per share provided by an investee to estimate the fair value of an alternative investment when the fair value for the primary investment is not readily determinable. It affects certain investments that are required or permitted by GAAP to be measured or disclosed at fair value on a recurring or nonrecurring basis. It requires disclosures by major category of investment about certain attributes (e.g., applicable redemption restrictions, unfunded commitments to the issuer of the investments, and the investment strategies of that issuer). ASU 2009-12 will be effective for interim and annual periods ending on or after December 15, 2009 (i.e., the year ending December 31, 2009, for us). Fair value standards apply not only to the investments we hold but also to investments held by our benefit plans. We are currently evaluating the impact on our financial position and results of operations.

Variable Interest Entities In June 2009, the FASB issued a standard that requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This standard is effective for both interim and annual periods as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009 (i.e., January 1, 2010, for us), and we are currently evaluating its impact on our financial position and results of operations.

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Revenue Arrangements with Multiple Deliverables In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements” (ASU 2009-13), which addresses how revenues should be allocated among all products and services included in our sales arrangements. It establishes a selling price hierarchy for determining the selling price of each product or service, with vendor-specific objective evidence (VSOE) at the highest level, third-party evidence of VSOE at the intermediate level, and a best estimate at the lowest level. It replaces “fair value” with “selling price” in revenue allocation guidance. It also significantly expands the disclosure requirements for such arrangements. ASU 2009-13 will be effective prospectively for sales entered into or materially modified in fiscal years beginning on or after June 15, 2010 (i.e., the year beginning January 1, 2011, for us). The FASB permits early adoption of ASU 2009-13, applied retrospectively, to the beginning of the year of adoption. We are currently evaluating the impact on our financial position and results of operations.

Software In October 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements That Include Software Elements” (ASU 2009-14), which clarifies the guidance for allocating and measuring revenue, including how to identify software that is out of the scope. ASU 2009-14 amends accounting and reporting guidance for revenue arrangements involving both tangible products and software that is “more than incidental to the tangible product as a whole” and the hardware components will also be outside of the scope of software revenue guidance and may result in more revenue recognized at the time of the hardware sale. Additional disclosures will discuss allocation of revenue to products and services and the significant judgments applied in the revenue allocation method, including impacts on the timing and amount of revenue recognition. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (i.e., the year beginning January 1, 2011, for us). ASU 2009-14 has the same effective date, including early adoption provisions, as ASU 2009-13. Companies must adopt ASU 2009-14 and ASU 2009-13 at the same time. We are currently evaluating the impact on our financial position and results of operations.

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 2. COMPREHENSIVE INCOME

The components of our comprehensive income for the three and nine months ended September 30, 2009 and 2008 include net income, adjustments to stockholders’ equity for the foreign currency translation adjustment, net unrealized gain (loss) on available-for-sale securities, net unrealized gain (loss) on cash flow hedges and defined benefit postretirement plans. The foreign currency translation adjustment was due to exchange rate fluctuations in our foreign affiliates’ local currencies and the reclassification adjustment on cash flow hedges was due to the amortization of losses from our interest rate locks.

Following is our comprehensive income with the respective tax impacts for the three months and nine months periods ending September 30, 2009 and 2008:

	Three months ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008
Net income	$	3,275		$	3,289		$	9,752		$	10,651
Other comprehensive income, net of tax:
Foreign currency translation adjustment (includes $6, $3, $(2) and $8 attributable to noncontrolling interest), net of taxes of $1, $(75), $45 and $(15)		2			(139	)		86			(29	)
Net unrealized gains (losses) on securities:
Unrealized gains (losses), net of taxes of $115, $(118), $130 and $(153)		229			(220	)		258			(284	)
Less reclassification adjustment realized in net income, net of taxes of $(17), $(6), $24 and $(15)		(34	)		(12	)		43			(28	)
Net unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) on cross currency swaps, net of taxes of $(26), $24, $169 and $(28)		(52	)		44			316			(52	)
Unrealized gain (loss) on interest rate locks, net of taxes of $(30), $0, $(1) and $(2)		(60	)		-			(10	)		(3	)
Reclassification adjustment for losses on cash flow hedges included in net income, net of taxes of $2, $2, $6 and $6		4			4			11			13
Defined benefit postretirement plans:
Amortization of net actuarial (gain) loss and prior service benefit included in net income, net of taxes of $32, $(17), $99 and $(50)		64			(31	)		190			(90	)
Other		-			(1	)		-			(1	)
Other comprehensive income (loss)		153			(355	)		894			(474	)
Less: Total comprehensive income attributable to the noncontrolling interest		(89	)		(62	)		(234	)		(196	)
Total Comprehensive IncomeAttributable to AT&T	$	3,339		$	2,872		$	10,412		$	9,981

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 3. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for net income for the three and nine months ended September 30, 2009 and 2008 are shown in the table below:

	Three months ended				Nine months ended
	September 30,				September 30,
	2009		2008		2009		2008
Numerators
Numerator for basic earnings per share:
Net income attributable to AT&T	$	3,192	$	3,230	$	9,516	$	10,463
Dilutive potential common shares:
Other stock-based compensation		2		2		7		7
Numerator for diluted earnings per share	$	3,194	$	3,232	$	9,523	$	10,470
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common
shares outstanding		5,901		5,893		5,899		5,938
Dilutive potential common shares:
Stock options		3		6		3		12
Other stock-based compensation		18		22		20		21
Denominator for diluted earnings per share		5,922		5,921		5,922		5,971
Basic earnings per share	$	0.54	$	0.55	$	1.61	$	1.76
Diluted earnings per share	$	0.54	$	0.55	$	1.61	$	1.75

At September 30, 2009, we had issued and outstanding options to purchase approximately 180 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 158 million shares in the third quarter and 165 million for the first nine months were above the average market price of AT&T stock. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective period. At September 30, 2009, the exercise price of 19 million share options was below market price.

At September 30, 2008, we had issued and outstanding options to purchase approximately 206 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 173 million shares in the third quarter and 131 million for the first nine months were above the average market price of AT&T stock. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective period. At September 30, 2008, the exercise price of 34 million share options was below market price.

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 4. SEGMENT INFORMATION

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

The wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services.

The wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, AT&T U-verseSM TV, high-speed broadband and voice services (U-verse) and managed networking to business customers. Additionally, we offer satellite television services through our agency arrangements.

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

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

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

Segment assets at September 30, 2009 were materially unchanged from the year ended December 31, 2008 with the exception of other segment assets. Our other segment assets totaled $14,078, which increased $5,376, or 61.8%, primarily due to an increase in cash.

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2009
					Advertising					Consolidation			Consolidated
	Wireless		Wireline		Solutions		Other			and Elimination			Results
Revenues from external customers	$	13,627	$	15,706	$	1,161	$	360		$	1		$	30,855
Intersegment revenues		27		598		19		67			(711	)		-
Total segment operating revenues		13,654		16,304		1,180		427			(710	)		30,855
Operations and support expenses		8,877		11,097		721		571			(709	)		20,557
Depreciation and amortization expenses		1,418		3,289		158		45			-			4,910
Total segment operating expenses		10,295		14,386		879		616			(709	)		25,467
Segment operating income (loss)		3,359		1,918		301		(189	)		(1	)		5,388
Interest expense		-		-		-		-			853			853
Equity in net income of affiliates		-		9		-		172			-			181
Other income (expense) – net		-		-		-		-			27			27
Segment income (loss) before income taxes	$	3,359	$	1,927	$	301	$	(17	)	$	(827	)	$	4,743

For the nine months ended September 30, 2009
					Advertising					Consolidation			Consolidated
	Wireless		Wireline		Solutions		Other			and Elimination			Results
Revenues from external customers	$	39,687	$	47,765	$	3,621	$	1,086		$	1		$	92,160
Intersegment revenues		72		1,743		59		202			(2,076	)		-
Total segment operating revenues		39,759		49,508		3,680		1,288			(2,075	)		92,160
Operations and support expenses		25,620		33,659		2,221		1,404			(2,074	)		60,830
Depreciation and amortization expenses		4,288		9,787		500		124			-			14,699
Total segment operating expenses		29,908		43,446		2,721		1,528			(2,074	)		75,529
Segment operating income (loss)		9,851		6,062		959		(240	)		(1	)		16,631
Interest expense		-		-		-		-			2,581			2,581
Equity in net income of affiliates		-		17		-		531			1			549
Other income (expense) – net		-		-		-		-			43			43
Segment income (loss) before income taxes	$	9,851	$	6,079	$	959	$	291		$	(2,538	)	$	14,642

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2008
					Advertising				Consolidation			Consolidated
	Wireless		Wireline		Solutions		Other		and Elimination			Results
Revenues from external customers	$	12,571	$	17,003	$	1,333	$	435	$	-		$	31,342
Intersegment revenues		47		547		17		66		(677	)		-
Total segment operating revenues		12,618		17,550		1,350		501		(677	)		31,342
Operations and support expenses		8,838		11,456		735		396		(679	)		20,746
Depreciation and amortization expenses		1,401		3,352		194		29		2			4,978
Total segment operating expenses		10,239		14,808		929		425		(677	)		25,724
Segment operating income (loss)		2,379		2,742		421		76		-			5,618
Interest expense		-		-		-		-		858			858
Equity in net income of affiliates		-		9		-		248		-			257
Other income (expense) – net		-		-		-		-		(23	)		(23	)
Segment income before income taxes	$	2,379	$	2,751	$	421	$	324	$	(881	)	$	4,994

For the nine months ended September 30, 2008
					Advertising					Consolidation			Consolidated
	Wireless		Wireline		Solutions		Other			and Elimination			Results
Revenues from external customers	$	36,333	$	51,149	$	4,114	$	1,356		$	-		$	92,952
Intersegment revenues		143		1,633		60		201			(2,037	)		-
Total segment operating revenues		36,476		52,782		4,174		1,557			(2,037	)		92,952
Operations and support expenses		23,750		34,141		2,293		1,802			(2,038	)		59,948
Depreciation and amortization expenses		4,327		9,814		609		88			1			14,839
Total segment operating expenses		28,077		43,955		2,902		1,890			(2,037	)		74,787
Segment operating income (loss)		8,399		8,827		1,272		(333	)		-			18,165
Interest expense		-		-		-		-			2,577			2,577
Equity in net income of affiliates		5		18		-		689			-			712
Other income (expense) – net		-		-		-		-			97			97
Segment income before income taxes	$	8,404	$	8,845	$	1,272	$	356		$	(2,480	)	$	16,397

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

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

The following details pension and postretirement benefit costs included in operating expenses (in cost of sales and selling, general and administrative expenses) in the accompanying Consolidated Statements of Income. We account for these costs in accordance with GAAP standards for employers’ accounting for pensions and other postretirement benefits. In the following table, gains are denoted with parentheses and losses are not. A portion of these expenses is effectively capitalized as part of the benefit load on internal construction and capital expenditures, historically averaging approximately 10%.

	Three months ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008
Pension (benefit) cost:
Service cost – benefits earned during the period	$	265		$	294		$	808		$	880
Interest cost on projected benefit obligation		835			830			2,525			2,489
Expected return on assets		(1,140	)		(1,400	)		(3,421	)		(4,201	)
Amortization of prior service cost		6			34			62			100
Recognized actuarial loss		163			1			495			7
Net pension (benefit) cost	$	129		$	(241	)	$	469		$	(725	)

Postretirement (benefit) cost:
Service cost – benefits earned during the period	$	81		$	108		$	257		$	322
Interest cost on accumulated postretirement
benefit obligation		595			637			1,856			1,912
Expected return on assets		(239	)		(331	)		(716	)		(995	)
Amortization of prior service benefit		(134	)		(92	)		(313	)		(271	)
Recognized actuarial loss (gain)		-			-			(1	)		-
Postretirement cost	$	303		$	322		$	1,083		$	968

Combined net pension and postretirement cost	$	432		$	81		$	1,552		$	243

Our combined net pension and postretirement cost increased $351 in the third quarter and $1,309 for the first nine months of 2009. The increase was due to lower expected return on assets and an increase in amortization of actuarial losses, both primarily from investment losses in 2008. As allowed under GAAP, we use a method in which gains and losses are amortized only when the net gains or losses exceed 10 percent of the greater of the projected benefit obligation or the market-related value of assets (MRVA). Under GAAP, the expected long-term rate of return is calculated on the MRVA. GAAP requires that actual gains and losses on pension and postretirement plan assets be recognized in the MRVA equally over a period of up to five years. However, we use a methodology, allowed under GAAP, under which we hold the MRVA to within 20% of the actual fair value of plan assets, which can have the effect of accelerating the recognition of excess actual gains and losses in the MRVA in less than five years. The use of this policy increased pre-capitalization pension and postretirement cost by approximately $400 in the third quarter and $1,200 for the first nine months of 2009. This methodology did not have a significant effect on our 2008 combined net pension and postretirement benefits.

In August 2009, non-management retirees were informed of medical and drug coverage changes. In addition, we adopted changes to our pension plans consistent with the Pension Protection Act. Because of these modifications of retiree benefits, our amortization of prior service (benefit) cost also changed, reducing costs by $128 for the third quarter of 2009. We anticipate the fourth quarter will show cost reductions consistent with the reductions that began in August.

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

We have varying types of pension programs providing benefits for substantially all of certain non-U.S. operations. In addition to the pension and postretirement costs above, we recorded net pension (benefit) cost for non-U.S. plans of ($2) in the third quarter and ($4) for the first nine months of 2009 and $4 in the third quarter and $11 for the first nine months of 2008.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental retirement pension cost, which is not included in the table above, was $42 in the third quarter, $35 of which was interest cost, and $125 for the first nine months of 2009, $105 of which was interest cost. Net supplemental retirement pension benefits cost was $45 in the third quarter, $35 of which was interest cost, and $136 for the first nine months of 2008, $106 of which was interest cost.

NOTE 6. 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 at September 30, 2009:

	2009
	Carrying			Fair
	Amount			Value
Notes and debentures		$	72,471		$	76,588
Commercial paper			-			-
Bank borrowings			25			25
Available-for-sale securities			1,952			1,952

GAAP standards require disclosures for financial assets and liabilities that are remeasured at fair value at least annually. GAAP standards establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Substantially all of our available-for-sale securities are valued using quoted market prices (referred to as Level 1). Adjustments to fair value are recorded in accumulated other comprehensive income (OCI) until the investment is sold or experiences an other-than-temporary decline in fair value (see Note 2). All of our derivatives are Level 2.

The fair values of our notes and debentures were estimated based on quoted market prices, where available, or on the net present value method of expected future cash flows using current interest rates. The carrying value of debt with an original maturity of less than one year approximates market value.

Our available-for-sale securities are carried at fair value, and realized gains and losses on these securities were included in “Other income (expense) – net” in the consolidated statements of income. The fair value of our available-for-sale securities was principally determined based on quoted market prices, and the carrying amount of the remaining securities approximates fair value. These securities include $1,566 of equities, $303 in government fixed income bonds and $83 of other securities.

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

Derivatives We use interest rate swaps, interest rate locks and foreign currency exchange contracts to manage our market risk to changes in interest rates and foreign exchange rates. We do not use financial instruments for trading or speculative purposes. Virtually all of our derivatives are designated as fair value hedges or cash flow hedges.

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Fair Value Hedging We designate our fixed-to-floating interest rates swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. Unrealized gains or losses on interest rate swaps are recorded at fair market value as assets or liabilities, respectively. 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. 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.

Cash Flow Hedging Unrealized gains or losses on derivatives designated as cash flow hedges are recorded at fair value as assets or liabilities respectively for the period they are outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized in income from continuing operations in each current period.

We designate our combined interest rate foreign currency swap agreements (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 period. In the period ending September 30, 2009, no material ineffectiveness was measured.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to 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 at the time we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to income. In the nine months ending September 30, 2009, no material ineffectiveness was measured. Over the next 12 months, we expect to reclassify $21 from OCI to interest expense due to the amortization of net losses on historical interest rate locks. Our unutilized interest rate locks carry mandatory early terminations, the latest occurring in April 2011.

We enter into foreign exchange contracts with third parties to manage our exposure to changes in currency exchange rates related to foreign currency-denominated transactions. Some of these instruments are designated as cash flow hedges while others are not, largely based on size and duration. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income over the next few months as the hedged funds are spent by our foreign subsidiaries, except where a material amount is deemed to be ineffective, which would be immediately reclassified to income. In the nine months ended September 30, 2009, no material ineffectiveness was measured.

The balance of the derivative loss in accumulated other comprehensive loss was $166 at September 30, 2009, and $483 at December 31, 2008.

Collateral and Credit-Risk Contingency We have entered into agreements with most of our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2009, we held $247 of counterparty collateral (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level, we would have been required to post collateral of $23 (a deposit asset). 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.

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Following is the size of our outstanding derivative positions:

Volume of Derivative Activity

	September 30,
	2009
	Notional Value

Interest rate swaps		$	9,000
Cross-currency swaps			7,502
Interest rate locks			2,800
Foreign exchange contracts			139

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

Fair Value of Derivatives in the Consolidated Balance Sheet

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

	September 30,
Asset Derivatives	2009

Interest rate swaps	$	436
Cross-currency swaps		471
Interest rate locks		19
Foreign exchange contracts		-
Total	$	926

	September 30,
Liability Derivatives	2009

Cross-currency swaps	$	(449	)
Interest rate locks		(92	)
Foreign exchange contracts		-
Total	$	(541	)

AT&T INC.

SEPTEMBER 30, 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Effect of Derivatives on the Consolidated Income Statement

	Three months ended			Nine months ended
Fair Value Hedge Relationships	September 30, 2009			September 30, 2009

Interest rate swaps (Interest expense):
Gain/(Loss) on swap	$	79		$	(141	)
Gain/(Loss) on long-term debt		(79	)		141
In addition, the net swap settlements that accrued and settled in the three and nine months ended September 30, 2009 were also reported as reductions of interest expense.

Cash Flow Hedge Relationships

Cross-currency swaps:
Gain/(Loss) recognized in OCI	$	(78	)	$	485
Other income (expense) reclassified from OCI into income		-			-

Interest rate locks:
Gain/(Loss) recognized in OCI		(90	)		(11	)
Interest income (expense) reclassified from OCI into income		(6	)		(17	)

Non-designated Hedging Instruments

Foreign exchange contracts (Other income)	$	-		$	1

AT&T INC.

SEPTEMBER 30, 2009

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T,” or the “Company” throughout this document and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry in both the United States and internationally providing telecommunications services and equipment as well as 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, 2008. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.

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

	Third Quarter							Nine-Month Period
	2009		2008		Percent Change			2009		2008		Percent Change
	2009		2008		Percent Change			2009		2008		Percent Change
Operating Revenues	$	30,855	$	31,342		(1.6	)%	$	92,160	$	92,952		(0.9	)%
Operating expenses
Cost of sales		12,885		13,022		(1.1	)		37,605		36,914		1.9
Selling, general and administrative		7,672		7,724		(0.7	)		23,225		23,034		0.8
Depreciation and amortization		4,910		4,978		(1.4	)		14,699		14,839		(0.9	)
Total Operating Expenses		25,467		25,724		(1.0	)		75,529		74,787		1.0
Operating income		5,388		5,618		(4.1	)		16,631		18,165		(8.4	)
Income before income taxes		4,743		4,994		(5.0	)		14,642		16,397		(10.7	)
Net Income Attributable to AT&T	$	3,192	$	3,230		(1.2	)%	$	9,516	$	10,463		(9.1	)%

Overview

Operating income Our operating income decreased $230, or 4.1%, in the third quarter and $1,534, or 8.4%, for the first nine months of 2009, primarily due to the decline in voice revenues along with an increase in pension and other postemployment benefits (OPEB) expense, partially offset by continued growth in wireless service revenue and wireline data revenue and decreases in wireline expenses. Operating income also decreased in part due to higher cost of equipment sales in our wireless segment mainly attributed to the continued success of the Apple iPhone. These factors were the primary causes of our operating income margin decreasing from 17.9% to 17.5% in the third quarter and from 19.5% to 18.0% for the first nine months of 2009.

Operating revenues Our operating revenues decreased $487, or 1.6%, in the third quarter and $792, or 0.9%, for the first nine months primarily due to the continuing decline in voice revenues and a decline in directory revenue driven by lower print revenue. These declines were partially offset by continued growth in wireless service revenue due to an increase in average customers of 9.1%, driven in part by the continued success of the Apple iPhone, and an increase in wireline data revenue largely due to Internet Protocol (IP) data growth, including U-verse and broadband growth. Consistent with our quarterly and year to date results, we expect our 2009 revenues to be slightly lower than our 2008 revenues.

The declines in our voice and advertising revenues reflect continuing economic pressures on our customers as well as increasing competition. Total retail consumer voice connections decreased 11.8%. Business customers also disconnected switched access lines, reduced usage-based services and reduced print advertising. 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 the 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 sales expenses decreased $137, or 1.1%, in the third quarter and increased $691, or 1.9%, for the first nine months. The decrease in the third quarter was primarily due to reductions in wireline expenses partially offset by increases in pension/OPEB expenses as well as higher upgrade equipment costs driven by higher Apple iPhone sales. The increase in the first nine months was primarily due to higher upgrade costs and higher equipment costs related to the continued success of the Apple iPhone and other smartphones along with an increase in pension/OPEB expenses. Pension/OPEB expense increased due to lower expected return on assets and an increase in amortization of actuarial losses, both primarily from investment losses in 2008. Partially offsetting these nine-month increases were decreases in wireline expenses primarily driven by employee-related costs (excluding pension/OPEB) due to workforce reductions.