att2q10.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2010
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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[X]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ]
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(Do not check if a smaller reporting company)
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Smaller reporting company
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[ ]
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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 July 31, 2010, there were 5,909 million common shares outstanding.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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AT&T INC.
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CONSOLIDATED STATEMENTS OF INCOME
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Dollars in millions except per share amounts
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(Unaudited)
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Three months ended
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Six months ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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Operating Revenues
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Wireless service
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$ |
13,186 |
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$ |
11,960 |
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$ |
26,036 |
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$ |
23,606 |
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Voice
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7,219 |
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8,255 |
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14,698 |
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16,758 |
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Data
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6,848 |
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6,323 |
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13,479 |
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12,605 |
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Directory
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1,007 |
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1,211 |
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2,048 |
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2,460 |
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Other
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2,548 |
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2,865 |
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5,077 |
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5,642 |
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Total operating revenues
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30,808 |
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30,614 |
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61,338 |
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61,071 |
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Operating Expenses
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Cost of services and sales (exclusive of depreciation and amortization shown separately below)
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12,381 |
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12,557 |
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24,716 |
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24,758 |
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Selling, general and administrative
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7,475 |
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7,682 |
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14,863 |
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15,340 |
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Depreciation and amortization
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4,838 |
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4,875 |
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9,638 |
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9,733 |
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Total operating expenses
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24,694 |
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25,114 |
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49,217 |
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49,831 |
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Operating Income
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6,114 |
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5,500 |
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12,121 |
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11,240 |
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Other Income (Expense)
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Interest expense
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(754 |
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(876 |
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(1,519 |
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(1,722 |
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Equity in net income of affiliates
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195 |
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231 |
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412 |
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368 |
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Other income (expense) – net
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723 |
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30 |
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700 |
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15 |
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Total other income (expense)
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164 |
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(615 |
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(407 |
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(1,339 |
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Income from Continuing Operations Before Income Taxes
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6,278 |
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4,885 |
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11,714 |
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9,901 |
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Income taxes
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2,173 |
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1,612 |
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5,048 |
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3,423 |
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Income from Continuing Operations
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4,105 |
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3,273 |
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6,666 |
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6,478 |
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Income (Loss) from Discontinued Operations, net of tax
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(4 |
) |
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3 |
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(3 |
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(1 |
) |
Net Income
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4,101 |
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3,276 |
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6,663 |
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6,477 |
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Less: Net Income Attributable to Noncontrolling Interest
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(78 |
) |
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(78 |
) |
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(165 |
) |
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(153 |
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Net Income Attributable to AT&T
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$ |
4,023 |
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$ |
3,198 |
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$ |
6,498 |
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$ |
6,324 |
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Basic Earnings Per Share from Continuing Operations Attributable to AT&T
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$ |
0.68 |
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$ |
0.54 |
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$ |
1.10 |
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$ |
1.07 |
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Basic Earnings Per Share from Discontinued Operations Attributable to AT&T
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- |
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- |
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- |
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- |
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Basic Earnings Per Share Attributable to AT&T
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$ |
0.68 |
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$ |
0.54 |
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$ |
1.10 |
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$ |
1.07 |
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Diluted Earnings Per Share from Continuing Operations Attributable to AT&T
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$ |
0.68 |
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$ |
0.54 |
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$ |
1.10 |
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$ |
1.07 |
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Diluted Earnings Per Share from Discontinued Operations Attributable to AT&T
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- |
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- |
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- |
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- |
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Diluted Earnings Per Share Attributable to AT&T
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$ |
0.68 |
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$ |
0.54 |
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$ |
1.10 |
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$ |
1.07 |
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Weighted Average Number of Common Shares Outstanding – Basic (in millions)
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5,909 |
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5,900 |
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5,907 |
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5,898 |
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Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)
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5,937 |
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5,923 |
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5,936 |
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5,923 |
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Dividends Declared Per Common Share
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$ |
0.42 |
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$ |
0.41 |
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$ |
0.84 |
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$ |
0.82 |
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See Notes to Consolidated Financial Statements.
AT&T INC.
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CONSOLIDATED BALANCE SHEETS
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Dollars in millions except per share amounts
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Assets
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(Unaudited)
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Current Assets
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Cash and cash equivalents
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$ |
1,377 |
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$ |
3,741 |
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Accounts receivable – net of allowances for doubtful accounts of $1,084 and $1,202
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13,780 |
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14,845 |
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Prepaid expenses
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1,666 |
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1,562 |
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Deferred income taxes
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1,225 |
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1,247 |
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Other current assets
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3,344 |
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3,792 |
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Total current assets
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21,392 |
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25,187 |
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Property, plant and equipment
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236,187 |
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230,295 |
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Less: accumulated depreciation and amortization
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(135,885 |
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(130,242 |
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Property, Plant and Equipment – Net
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100,302 |
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100,053 |
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Goodwill
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73,484 |
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72,782 |
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Licenses
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49,957 |
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48,741 |
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Customer Lists and Relationships – Net
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6,047 |
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7,393 |
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Other Intangible Assets – Net
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5,539 |
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5,494 |
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Investments in Equity Affiliates
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4,346 |
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2,921 |
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Other Assets
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6,489 |
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6,275 |
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Total Assets
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$ |
267,556 |
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$ |
268,846 |
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Liabilities and Stockholders’ Equity
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Current Liabilities
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Debt maturing within one year
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$ |
9,721 |
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$ |
7,361 |
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Accounts payable and accrued liabilities
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18,157 |
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21,260 |
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Advanced billing and customer deposits
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3,943 |
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4,170 |
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Accrued taxes
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|
1,879 |
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1,681 |
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Dividends payable
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|
2,482 |
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2,479 |
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Total current liabilities
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36,182 |
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36,951 |
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Long-Term Debt
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60,277 |
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64,720 |
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Deferred Credits and Other Noncurrent Liabilities
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Deferred income taxes
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|
25,615 |
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|
23,781 |
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Postemployment benefit obligation
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|
27,421 |
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|
27,847 |
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Other noncurrent liabilities
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|
14,578 |
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|
13,226 |
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Total deferred credits and other noncurrent liabilities
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67,614 |
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64,854 |
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Stockholders’ Equity
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Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2010 and December 31, 2009: issued 6,495,231,088 at June 30, 2010 and December 31, 2009)
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6,495 |
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|
6,495 |
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Additional paid-in capital
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|
91,628 |
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|
91,707 |
|
Retained earnings
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|
40,909 |
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|
39,366 |
|
Treasury stock (586,184,637 at June 30, 2010 and 593,300,187 at December 31, 2009, at cost)
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|
(21,134 |
) |
|
|
(21,260 |
) |
Accumulated other comprehensive loss
|
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|
(14,852 |
) |
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|
(14,412 |
) |
Noncontrolling interest
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|
437 |
|
|
|
425 |
|
Total stockholders’ equity
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|
103,483 |
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|
102,321 |
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Total Liabilities and Stockholders’ Equity
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$ |
267,556 |
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|
$ |
268,846 |
|
See Notes to Consolidated Financial Statements.
AT&T INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Dollars in millions, increase (decrease) in cash and cash equivalents
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(Unaudited)
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Six months ended
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June 30,
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2010
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2009
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Operating Activities
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Net income
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|
$ |
6,663 |
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|
$ |
6,477 |
|
Adjustments to reconcile net income to
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|
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net cash provided by operating activities:
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|
|
|
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Depreciation and amortization
|
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|
9,638 |
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|
9,733 |
|
Undistributed earnings from investments in equity affiliates
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|
(378 |
) |
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|
(339 |
) |
Bad debt expense
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|
671 |
|
|
|
975 |
|
Deferred income tax expense
|
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|
2,076 |
|
|
|
746 |
|
Net (gain) loss from impairment and sale of investments
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|
(641 |
) |
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|
92 |
|
Changes in operating assets and liabilities:
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Accounts receivable
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|
394 |
|
|
|
169 |
|
Other current assets
|
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|
389 |
|
|
|
(58 |
) |
Accounts payable and accrued liabilities
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|
|
(3,063 |
) |
|
|
(2,054 |
) |
Net income attributable to noncontrolling interest
|
|
|
(165 |
) |
|
|
(153 |
) |
Other - net
|
|
|
226 |
|
|
|
184 |
|
Total adjustments
|
|
|
9,147 |
|
|
|
9,295 |
|
Net Cash Provided by Operating Activities
|
|
|
15,810 |
|
|
|
15,772 |
|
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|
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Investing Activities
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Construction and capital expenditures
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Capital expenditures
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|
(7,856 |
) |
|
|
(7,017 |
) |
Interest during construction
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|
(379 |
) |
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|
(368 |
) |
Acquisitions, net of cash acquired
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(2,554 |
) |
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|
(55 |
) |
Dispositions
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|
14 |
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|
199 |
|
(Purchases) and sales of securities, net
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|
(545 |
) |
|
|
4 |
|
Other
|
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|
17 |
|
|
|
14 |
|
Net Cash Used in Investing Activities
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|
|
(11,303 |
) |
|
|
(7,223 |
) |
|
|
|
|
|
|
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Financing Activities
|
|
|
|
|
|
|
|
|
Net change in short-term borrowings with original maturities of three months or less
|
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|
3,280 |
|
|
|
(3,915 |
) |
Issuance of long-term debt
|
|
|
- |
|
|
|
8,161 |
|
Repayment of long-term debt
|
|
|
(4,661 |
) |
|
|
(2,036 |
) |
Issuance of treasury stock
|
|
|
5 |
|
|
|
4 |
|
Dividends paid
|
|
|
(4,960 |
) |
|
|
(4,834 |
) |
Other
|
|
|
(535 |
) |
|
|
(381 |
) |
Net Cash Used in Financing Activities
|
|
|
(6,871 |
) |
|
|
(3,001 |
) |
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,364 |
) |
|
|
5,548 |
|
Cash and cash equivalents beginning of year
|
|
|
3,741 |
|
|
|
1,727 |
|
Cash and Cash Equivalents End of Period
|
|
$ |
1,377 |
|
|
$ |
7,275 |
|
|
|
|
|
|
|
|
|
|
Cash paid during the six months ended June 30 for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
2,390 |
|
|
$ |
2,219 |
|
Income taxes, net of refunds
|
|
$ |
2,449 |
|
|
$ |
2,295 |
|
See Notes to Consolidated Financial Statements.
AT&T Inc.
|
|
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
|
|
Dollars and shares in millions except per share amounts
|
|
|
June 30, 2010
|
|
|
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
|
|
|
|
$ |
91,707 |
|
Issuance of treasury shares
|
|
|
|
|
68 |
|
Share-based payments
|
|
|
|
|
(147 |
) |
Balance at end of period
|
|
|
|
$ |
91,628 |
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
$ |
39,366 |
|
Net income attributable to AT&T ($1.10 per share)
|
|
|
|
|
6,498 |
|
Dividends to stockholders ($0.84 per share)
|
|
|
|
|
(4,963 |
) |
Other
|
|
|
|
|
8 |
|
Balance at end of period
|
|
|
|
$ |
40,909 |
|
|
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Balance at beginning of year
|
|
(593 |
) |
$ |
(21,260 |
) |
Issuance of shares
|
|
7 |
|
|
126 |
|
Balance at end of period
|
|
(586 |
) |
$ |
(21,134 |
) |
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) Attributable to AT&T, net of tax:
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
$ |
(14,412 |
) |
Other comprehensive income attributable to AT&T (see Note 2)
|
|
|
|
|
(440 |
) |
Balance at end of period
|
|
|
|
$ |
(14,852 |
) |
|
|
|
|
|
|
|
Noncontrolling Interest:
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
$ |
425 |
|
Net income attributable to noncontrolling interest
|
|
|
|
|
165 |
|
Distributions
|
|
|
|
|
(151 |
) |
Translation adjustments applicable to noncontrolling interest, net of taxes
|
|
|
|
|
(2 |
) |
Balance at end of period
|
|
|
|
$ |
437 |
|
|
|
|
|
|
|
|
Total Stockholders’ Equity at beginning of year
|
|
|
|
$ |
102,321 |
|
Total Stockholders’ Equity at end of period
|
|
|
|
$ |
103,483 |
|
See Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
AT&T INC.
JUNE 30, 2010
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 Regulation S-X and other applicable rules of the Securities and Exchange Commission that permit reduced disclosures for interim reporting. 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, 2009.
In preparing the accompanying unaudited consolidated financial statements, we have reviewed all known events that have occurred after June 30, 2010, and through the date that our Form 10-Q was available for issuance for possible inclusion in this Form 10-Q (see Note 8).
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 Note 4 for a discussion of our change in approach to intersegment activity, effective January 1, 2010, and see Note 7 for a discussion of changes in reporting related to discontinued operations.
Recent Accounting Standards
Fair Value Measurements and Disclosures In January 2010, the FASB issued “Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements” (Accounting Standards Update (ASU) 2010-06), which requires new disclosures and explanations for transfers of financial assets and liabilities between certain levels in the fair value hierarchy. ASU 2010-06 also clarifies that fair value measurement disclosures are required for each class of financial asset and liability, which may be a subset of a caption in the consolidated balance sheets, and those disclosures should include a discussion of inputs and valuation techniques. For financial assets and liabilities subject to lowest-level measurements, ASU 2010-06 further requires that we separately present purchases, sales, issuances, and settlements instead of netting these changes. With respect to matters other than lowest-level measurements, we adopted ASU 2010-06 beginning with the quarter ended March 31, 2010, with the remaining disclosure requirements becoming effective for fiscal years and interim periods beginning on or after December 15, 2010 (i.e., the quarter ending March 31, 2011, for us). See Note 6 for fair value measurements and disclosures for our investment securities and derivatives.
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Valuation and Other Adjustments Included in the current liabilities reported on our consolidated balance sheets are acquisition-related accruals established prior to 2009. The liabilities include accruals for severance, lease terminations and equipment removal costs associated with our acquisitions of AT&T Corp., BellSouth Corporation (BellSouth), and Dobson Communications Corporation (Dobson). Following is a summary of the accruals recorded at December 31, 2009, cash payments made during 2010, and the adjustments thereto:
|
|
12/31/09
|
|
|
Cash
|
|
|
Adjustments
|
|
|
6/30/10
|
|
|
|
Balance
|
|
|
Payments
|
|
|
and Accruals
|
|
|
Balance
|
|
Severance accruals paid from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company funds
|
|
$ |
6 |
|
|
$ |
(2 |
) |
|
$ |
(2 |
) |
|
$ |
2 |
|
Pension and postemployment
benefit plans
|
|
|
98 |
|
|
|
(2 |
) |
|
|
- |
|
|
|
96 |
|
Lease terminations1
|
|
|
212 |
|
|
|
(19 |
) |
|
|
(61 |
) |
|
|
132 |
|
Equipment removal and other related costs1
|
|
|
23 |
|
|
|
(1 |
) |
|
|
(20 |
) |
|
|
2 |
|
Total
|
|
$ |
339 |
|
|
$ |
(24 |
) |
|
$ |
(83 |
) |
|
$ |
232 |
|
1The “Adjustments and Accruals” related to the BellSouth and Dobson acquisitions and resulted in goodwill reductions.
Employee Separations We establish obligations for expected termination benefits provided under existing plans to former or inactive employees after employment but before retirement. These benefits include severance payments, workers’ compensation, disability, medical continuation coverage, and other benefits. We had severance accruals of $290 at June 30, 2010 and $676 at December 31, 2009. The decrease in balance was due to payments during the period.
Income Taxes In March 2010, the President of the United States signed into law comprehensive health care 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. We recorded a $995, or $0.17 per diluted share, charge to income tax expense in our consolidated statement of income during the first quarter of 2010 and increased our deferred income taxes liability balance to reflect the impact of this change. The charge also contributed to an increase in our effective tax rate to 43.1% for the six months ended June 30, 2010, compared to 34.6% for the same period in 2009.
AT&T INC.
JUNE 30, 2010
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 six months ended June 30, 2010 and 2009 include net income, foreign currency translation adjustments and net unrealized gains (losses) on available-for-sale securities, net unrealized gains (losses) 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 six months periods ended June 30, 2010 and 2009:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income
|
|
$ |
4,101 |
|
|
$ |
3,276 |
|
|
$ |
6,663 |
|
|
$ |
6,477 |
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (includes $(1), $(1), $(2) and $(8) attributable to noncontrolling interest), net of taxes of $12, $63, $62 and $43
|
|
|
22 |
|
|
|
119 |
|
|
|
115 |
|
|
|
82 |
|
Net unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses), net of taxes of $(62), $63, $(14) and $15
|
|
|
(115 |
) |
|
|
119 |
|
|
|
(25 |
) |
|
|
29 |
|
Less reclassification adjustment realized in net income, net of taxes of $(16), $0, $(29) and $41
|
|
|
(30 |
) |
|
|
- |
|
|
|
(55 |
) |
|
|
77 |
|
Net unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on rate locks and cross currency swaps net of taxes of $(257), $128, $(273) and $224
|
|
|
(472 |
) |
|
|
234 |
|
|
|
(502 |
) |
|
|
418 |
|
Reclassification adjustment for losses on cash flow hedges included in net income, net of taxes of $2, $1, $4 and $4
|
|
|
3 |
|
|
|
4 |
|
|
|
6 |
|
|
|
7 |
|
Defined benefit postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial gain and prior service cost included in net income, net of taxes of $5, $37, $11 and $67
|
|
|
8 |
|
|
|
69 |
|
|
|
19 |
|
|
|
126 |
|
Other
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Other comprehensive income (loss)
|
|
|
(584 |
) |
|
|
546 |
|
|
|
(442 |
) |
|
|
739 |
|
Total comprehensive income
|
|
|
3,517 |
|
|
|
3,822 |
|
|
|
6,221 |
|
|
|
7,216 |
|
Less: Total comprehensive income attributable to noncontrolling interest
|
|
|
(77 |
) |
|
|
(77 |
) |
|
|
(163 |
) |
|
|
(145 |
) |
Total Comprehensive IncomeAttributable to AT&T
|
|
$ |
3,440 |
|
|
$ |
3,745 |
|
|
$ |
6,058 |
|
|
$ |
7,071 |
|
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 3. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for net income attributable to AT&T for the three and six months ended June 30, 2010 and 2009, are shown in the table below:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Numerators
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AT&T
|
|
$ |
4,023 |
|
|
$ |
3,198 |
|
|
$ |
6,498 |
|
|
$ |
6,324 |
|
Dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other share-based payment
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
5 |
|
Numerator for diluted earnings per share
|
|
$ |
4,025 |
|
|
$ |
3,200 |
|
|
$ |
6,502 |
|
|
$ |
6,329 |
|
Denominators (000,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
5,909 |
|
|
|
5,900 |
|
|
|
5,907 |
|
|
|
5,898 |
|
Dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Other share-based payment
|
|
|
25 |
|
|
|
20 |
|
|
|
26 |
|
|
|
22 |
|
Denominator for diluted earnings per share
|
|
|
5,937 |
|
|
|
5,923 |
|
|
|
5,936 |
|
|
|
5,923 |
|
Basic earnings per share attributable to AT&T
|
|
$ |
0.68 |
|
|
$ |
0.54 |
|
|
$ |
1.10 |
|
|
$ |
1.07 |
|
Diluted earnings per share attributable to AT&T
|
|
$ |
0.68 |
|
|
$ |
0.54 |
|
|
$ |
1.10 |
|
|
$ |
1.07 |
|
At June 30, 2010, we had issued and outstanding options to purchase approximately 143 million shares of AT&T common stock. The exercise prices of 127 million shares were above the market price of AT&T stock at June 30, 2010. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the period. At June 30, 2010, the exercise prices of 12 million stock options were below market price.
At June 30, 2009, we had issued and outstanding options to purchase approximately 183 million shares of AT&T common stock. The exercise prices of 164 million shares were above the market price of AT&T stock at June 30, 2009. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the period. At June 30, 2009, the exercise prices of 16 million stock options were below market price.
AT&T INC.
JUNE 30, 2010
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. 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. 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-verseSM TV, high-speed broadband and voice services (U-verse) 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 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. In May 2010, we announced the sale of Sterling Commerce Inc. (Sterling). The Other segment results for all periods shown have been restated to exclude the results of Sterling, which are now reflected in discontinued operations (see Note 7).
Historically, the intersegment activity had been reported as revenue in the billing segment and offsetting operating expense in the purchasing segment. Upon consolidation, the intersegment revenue and expense were eliminated with the consolidated results reflecting the cash operating and depreciation expense of providing the intersegment service. As part of AT&T’s ongoing initiatives to manage its business from an external customer perspective, we no longer report intersegment revenue and instead report the cash operating and depreciation expense related to intersegment activity in the purchasing segment which provided services to the external customer. While this change did not impact AT&T’s total consolidated results, the impact to each operating segment varied. In particular, the Wireless segment, as a purchaser of network, IT and other services from the Wireline segment, experienced a reduction in cash operating expense partially offset by increased depreciation expense with the net result being increased operating margins. This change was effective with the reporting of operating results for the quarter ended March 31, 2010. We have restated 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 consolidation column adds in those line items that we manage on a consolidated basis only: interest expense and other income (expense) – net.
Segment assets as of June 30, 2010 are materially unchanged from the year ended December 31, 2009 with the exception of Wireless segment assets. Our Wireless segment assets totaled $119,496, which increased $2,969, or 2.5%, primarily due to increases in goodwill and licenses related to purchase of certain Verizon Wireless properties (See Note 7).
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Wireless
|
|
|
Wireline
|
|
|
Solutions
|
|
|
Other
|
|
|
Consolidations
|
|
|
Results
|
|
Total segment operating revenues
|
|
$ |
14,242 |
|
|
$ |
15,396 |
|
|
$ |
1,007 |
|
|
$ |
163 |
|
|
$ |
- |
|
|
$ |
30,808 |
|
Operations and support expenses
|
|
|
8,562 |
|
|
|
10,389 |
|
|
|
673 |
|
|
|
232 |
|
|
|
- |
|
|
|
19,856 |
|
Depreciation and amortization expenses
|
|
|
1,578 |
|
|
|
3,123 |
|
|
|
132 |
|
|
|
5 |
|
|
|
- |
|
|
|
4,838 |
|
Total segment operating expenses
|
|
|
10,140 |
|
|
|
13,512 |
|
|
|
805 |
|
|
|
237 |
|
|
|
- |
|
|
|
24,694 |
|
Segment operating income (loss)
|
|
|
4,102 |
|
|
|
1,884 |
|
|
|
202 |
|
|
|
(74 |
) |
|
|
- |
|
|
|
6,114 |
|
Interest expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
754 |
|
|
|
754 |
|
Equity in net income of affiliates
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
188 |
|
|
|
- |
|
|
|
195 |
|
Other income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
723 |
|
|
|
723 |
|
Segment income before income taxes
|
|
$ |
4,109 |
|
|
$ |
1,884 |
|
|
$ |
202 |
|
|
$ |
114 |
|
|
$ |
(31 |
) |
|
$ |
6,278 |
|
For the six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Wireless
|
|
|
Wireline
|
|
|
Solutions
|
|
|
Other
|
|
|
Consolidations
|
|
|
Results
|
|
Total segment operating revenues
|
|
$ |
28,139 |
|
|
$ |
30,817 |
|
|
$ |
2,048 |
|
|
$ |
334 |
|
|
$ |
- |
|
|
$ |
61,338 |
|
Operations and support expenses
|
|
|
16,745 |
|
|
|
21,006 |
|
|
|
1,348 |
|
|
|
480 |
|
|
|
- |
|
|
|
39,579 |
|
Depreciation and amortization expenses
|
|
|
3,136 |
|
|
|
6,219 |
|
|
|
270 |
|
|
|
13 |
|
|
|
- |
|
|
|
9,638 |
|
Total segment operating expenses
|
|
|
19,881 |
|
|
|
27,225 |
|
|
|
1,618 |
|
|
|
493 |
|
|
|
- |
|
|
|
49,217 |
|
Segment operating income (loss)
|
|
|
8,258 |
|
|
|
3,592 |
|
|
|
430 |
|
|
|
(159 |
) |
|
|
- |
|
|
|
12,121 |
|
Interest expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,519 |
|
|
|
1,519 |
|
Equity in net income of affiliates
|
|
|
20 |
|
|
|
5 |
|
|
|
- |
|
|
|
387 |
|
|
|
- |
|
|
|
412 |
|
Other income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
700 |
|
|
|
700 |
|
Segment income before income taxes
|
|
$ |
8,278 |
|
|
$ |
3,597 |
|
|
$ |
430 |
|
|
$ |
228 |
|
|
$ |
(819 |
) |
|
$ |
11,714 |
|
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Wireless
|
|
|
Wireline
|
|
|
Solutions
|
|
|
Other
|
|
|
Consolidations
|
|
|
Results
|
|
Total segment operating revenues
|
|
$ |
13,222 |
|
|
$ |
15,989 |
|
|
$ |
1,211 |
|
|
$ |
192 |
|
|
$ |
- |
|
|
$ |
30,614 |
|
Operations and support expenses
|
|
|
8,428 |
|
|
|
10,924 |
|
|
|
706 |
|
|
|
181 |
|
|
|
- |
|
|
|
20,239 |
|
Depreciation and amortization expenses
|
|
|
1,504 |
|
|
|
3,194 |
|
|
|
166 |
|
|
|
11 |
|
|
|
- |
|
|
|
4,875 |
|
Total segment operating expenses
|
|
|
9,932 |
|
|
|
14,118 |
|
|
|
872 |
|
|
|
192 |
|
|
|
- |
|
|
|
25,114 |
|
Segment operating income (loss)
|
|
|
3,290 |
|
|
|
1,871 |
|
|
|
339 |
|
|
|
- |
|
|
|
- |
|
|
|
5,500 |
|
Interest expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
876 |
|
|
|
876 |
|
Equity in net income of affiliates
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
226 |
|
|
|
- |
|
|
|
231 |
|
Other income (expense) – net
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
31 |
|
|
|
30 |
|
Segment income before income taxes
|
|
$ |
3,290 |
|
|
$ |
1,875 |
|
|
$ |
339 |
|
|
$ |
226 |
|
|
$ |
(845 |
) |
|
$ |
4,885 |
|
For the six months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Wireless
|
|
|
Wireline
|
|
|
Solutions
|
|
|
Other
|
|
|
Consolidations
|
|
|
Results
|
|
Total segment operating revenues
|
|
$ |
26,060 |
|
|
$ |
32,151 |
|
|
$ |
2,460 |
|
|
$ |
400 |
|
|
$ |
- |
|
|
$ |
61,071 |
|
Operations and support expenses
|
|
|
16,314 |
|
|
|
21,856 |
|
|
|
1,427 |
|
|
|
501 |
|
|
|
- |
|
|
|
40,098 |
|
Depreciation and amortization expenses
|
|
|
3,003 |
|
|
|
6,368 |
|
|
|
342 |
|
|
|
20 |
|
|
|
- |
|
|
|
9,733 |
|
Total segment operating expenses
|
|
|
19,317 |
|
|
|
28,224 |
|
|
|
1,769 |
|
|
|
521 |
|
|
|
- |
|
|
|
49,831 |
|
Segment operating income (loss)
|
|
|
6,743 |
|
|
|
3,927 |
|
|
|
691 |
|
|
|
(121 |
) |
|
|
- |
|
|
|
11,240 |
|
Interest expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,722 |
|
|
|
1,722 |
|
Equity in net income of affiliates
|
|
|
- |
|
|
|
8 |
|
|
|
- |
|
|
|
360 |
|
|
|
- |
|
|
|
368 |
|
Other income (expense) – net
|
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
16 |
|
|
|
15 |
|
Segment income before income taxes
|
|
$ |
6,743 |
|
|
$ |
3,934 |
|
|
$ |
691 |
|
|
$ |
239 |
|
|
$ |
(1,706 |
) |
|
$ |
9,901 |
|
AT&T INC.
JUNE 30, 2010
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 2010.
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, historically averaging approximately 10%.
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Pension (benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost – benefits earned during the period
|
|
$ |
269 |
|
|
$ |
272 |
|
|
$ |
538 |
|
|
$ |
544 |
|
Interest cost on projected benefit obligation
|
|
|
788 |
|
|
|
845 |
|
|
|
1,575 |
|
|
|
1,690 |
|
Expected return on assets
|
|
|
(1,143 |
) |
|
|
(1,141 |
) |
|
|
(2,286 |
) |
|
|
(2,281 |
) |
Amortization of prior service (benefit) cost
|
|
|
(4 |
) |
|
|
28 |
|
|
|
(8 |
) |
|
|
55 |
|
Recognized actuarial loss
|
|
|
171 |
|
|
|
166 |
|
|
|
342 |
|
|
|
332 |
|
Net pension cost
|
|
$ |
81 |
|
|
$ |
170 |
|
|
$ |
161 |
|
|
$ |
340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement (benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost – benefits earned during the period
|
|
$ |
87 |
|
|
$ |
88 |
|
|
$ |
174 |
|
|
$ |
176 |
|
Interest cost on accumulated postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit obligation
|
|
|
566 |
|
|
|
631 |
|
|
|
1,129 |
|
|
|
1,261 |
|
Expected return on assets
|
|
|
(285 |
) |
|
|
(239 |
) |
|
|
(569 |
) |
|
|
(478 |
) |
Amortization of prior service benefit
|
|
|
(157 |
) |
|
|
(89 |
) |
|
|
(313 |
) |
|
|
(179 |
) |
Recognized actuarial gain
|
|
|
(1 |
) |
|
|
- |
|
|
|
(3 |
) |
|
|
- |
|
Postretirement cost
|
|
$ |
210 |
|
|
$ |
391 |
|
|
$ |
418 |
|
|
$ |
780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined net pension and postretirement cost
|
|
$ |
291 |
|
|
$ |
561 |
|
|
$ |
579 |
|
|
$ |
1,120 |
|
Our combined net pension and postretirement cost decreased $270 in the second quarter and $541 for the first six months of 2010. The decrease was primarily related to lower interest costs due to a lower net obligation, as a result of retiree medical and drug coverage changes, partially offset by a change in the discount rate from 7% to 6.5%. An increase in amortization of prior service benefit, driven by the utilization of market interest rates for lump sum pension distributions, under the Pension Protection Act and changes in future retiree benefits, also contributed to the decrease in combined net pension and postretirement cost. We use a method in which gains and losses are amortized only when the net gains or losses exceed 10% of the greater of the projected benefit obligation or the market-related value of assets (MRVA). The expected long-term rate of return is calculated on the MRVA. Actual gains and losses on pension and postretirement plan assets are generally recognized in the MRVA equally over a period of up to five years. However, we use a methodology 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. Due to investment losses on plan assets experienced in 2008, this methodology contributed $1,577 to our combined net pension and postretirement costs in 2009. This methodology will not have a material impact on our combined net pension and postretirement cost in 2010.
We have varying types of pension programs providing benefits for substantially all of certain non-U.S. operations. In addition to the pension and postretirement costs above, we recorded net pension cost for non-U.S. plans of ($1) in the second quarter and $1 for the first six months of 2010 and ($4) in the second quarter and ($3) for the first six months of 2009.
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental retirement pension benefits cost, which is not included in the table above, was $42 in the second quarter, of which $33 was interest cost, and $84 for the first six months of 2010, of which $67 was interest cost. In 2009, net supplemental retirement pension benefits cost was $41 in the second quarter, $35 of which was interest cost, and $83 for the first six months, $70 of which 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 AT&T has 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.
|
|
|
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
|
Level 3
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
· Fair value is often based on internally 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. AT&T believes its 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 at June 30, 2010 and December 31, 2009.
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:
|
June 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Notes and debentures
|
|
$ |
66,448 |
|
|
$ |
72,447 |
|
|
$ |
71,811 |
|
|
$ |
75,212 |
|
Commercial paper
|
|
|
3,278 |
|
|
|
3,278 |
|
|
|
- |
|
|
|
- |
|
Bank borrowings
|
|
|
35 |
|
|
|
35 |
|
|
|
33 |
|
|
|
33 |
|
Investment securities
|
|
|
2,132 |
|
|
|
2,132 |
|
|
|
1,885 |
|
|
|
1,885 |
|
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.
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. Realized gains and losses on these 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.
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 June 30, 2010 and December 31, 2009:
|
|
June 30, 2010
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equities
|
|
$ |
942 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
942 |
|
International equities
|
|
|
395 |
|
|
|
- |
|
|
|
- |
|
|
|
395 |
|
Fixed income bonds
|
|
|
- |
|
|
|
690 |
|
|
|
- |
|
|
|
690 |
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
- |
|
|
|
602 |
|
|
|
- |
|
|
|
602 |
|
Cross-currency swaps
|
|
|
- |
|
|
|
108 |
|
|
|
- |
|
|
|
108 |
|
Foreign exchange contracts
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
5 |
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
|
- |
|
|
|
(1,014 |
) |
|
|
- |
|
|
|
(1,014 |
) |
Interest rate locks
|
|
|
- |
|
|
|
(290 |
) |
|
|
- |
|
|
|
(290 |
) |
Foreign exchange contracts
|
|
|
- |
|
|
|
(21 |
) |
|
|
- |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
|
|
December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equities
|
|
$ |
1,047 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,047 |
|
International equities
|
|
|
412 |
|
|
|
- |
|
|
|
- |
|
|
|
412 |
|
Fixed income bonds
|
|
|
- |
|
|
|
341 |
|
|
|
- |
|
|
|
341 |
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
- |
|
|
|
399 |
|
|
|
- |
|
|
|
399 |
|
Cross-currency swaps
|
|
|
- |
|
|
|
635 |
|
|
|
- |
|
|
|
635 |
|
Interest rate locks
|
|
|
- |
|
|
|
150 |
|
|
|
- |
|
|
|
150 |
|
Foreign exchange contracts
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
|
- |
|
|
|
(390 |
) |
|
|
- |
|
|
|
(390 |
) |
Interest rate locks
|
|
|
- |
|
|
|
(6 |
) |
|
|
- |
|
|
|
(6 |
) |
Foreign exchange contracts
|
|
|
- |
|
|
|
(7 |
) |
|
|
- |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 which 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). Only a portion of our foreign exchange forward contracts is not designated to receive hedge accounting.
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. We record changes in the fair value of the swaps, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. 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, though they net to zero. Realized gains or losses upon early termination of our fair value hedges would be recognized in interest expense.
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 in other income - 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 six months ended June 30, 2010 and June 30, 2009, no ineffectiveness was measured.
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to income. In the second quarter, we settled $200 of notional rate locks without utilizing them in a debt issuance. The total impact to interest expense was $(5). We are confident our remaining rate locks will be utilized given our probable refinancing needs over the next two years. No other ineffectiveness was measured in the six months ended June 30, 2010. Over the next 12 months, we expect to reclassify $16 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.
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 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 six months ended June 30, 2010, no ineffectiveness was measured. No transactions were designated in the first half of 2009.
Non-designated and Discontinued Hedging Instruments Changes in the fair value of non-designated derivatives are recorded in other income (expense) – net, along with the change in fair value of the underlying asset or liability, as applicable. When hedge accounting is discontinued, the derivative is adjusted for changes in fair value through other income (expense) – net. For fair value hedges, the swap asset or liability and the underlying hedged liability or asset will no longer be adjusted for changes in fair value, and the net adjustment to the hedged item at that time will be amortized into earnings over the remaining life of the hedged item. For cash flow hedges, gains and losses that were in accumulated OCI as a component of stockholders' equity in connection with hedged assets or liabilities or forecasted transactions will be recognized in other income (expense) - net, in the same period the hedged item affects earnings.
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 June 30, 2010, we had posted collateral of $168 (a deposit asset). Under the agreements, if our credit rating had been downgraded one rating level, we would have been required to post additional collateral of $232. At December 31, 2009, we held $222 of counterparty collateral. 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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$ |
11,250 |
|
|
$ |
9,000 |
|
Cross-currency swaps
|
|
|
7,502 |
|
|
|
7,502 |
|
Interest rate locks
|
|
|
3,400 |
|
|
|
3,600 |
|
Foreign exchange contracts
|
|
|
229 |
|
|
|
293 |
|
Total
|
|
$ |
22,381 |
|
|
$ |
20,395 |
|
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Following are our derivative instruments and their related hedged items affecting our financial position and performance:
Fair Value of Derivatives in the Consolidated Balance Sheets
Derivatives designated as hedging instruments are reflected as other assets, other liabilities and, for a portion of interest rate swaps, accounts receivable.
|
|
June 30,
|
|
|
December 31,
|
|
Asset Derivatives
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$ |
602 |
|
|
$ |
399 |
|
Cross-currency swaps
|
|
|
108 |
|
|
|
635 |
|
Interest rate locks
|
|
|
- |
|
|
|
150 |
|
Foreign exchange contracts
|
|
|
5 |
|
|
|
2 |
|
Total
|
|
$ |
715 |
|
|
$ |
1,186 |
|
|
|
June 30,
|
|
|
December 31,
|
|
Liability Derivatives
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
$ |
(1,014 |
) |
|
$ |
(390 |
) |
Interest rate locks
|
|
|
(290 |
) |
|
|
(6 |
) |
Foreign exchange contracts
|
|
|
(21 |
) |
|
|
(7 |
) |
Total
|
|
$ |
(1,325 |
) |
|
$ |
(403 |
) |
Effect of Derivatives on the Consolidated Statements of Income
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Six months ended
|
|
Fair Value Hedging Relationships
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (Interest expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on interest rate swaps
|
|
$ |
142 |
|
|
$ |
(169 |
) |
|
$ |
194 |
|
|
$ |
(220 |
) |
Gain (Loss) on long-term debt
|
|
|
(142 |
) |
|
|
169 |
|
|
|
(194 |
) |
|
|
220 |
|
In addition, the net swap settlements that accrued and settled in the quarter ended June 30 were also reported as reductions of interest expense.
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Six months ended
|
|
Cash Flow Hedging Relationships
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in accumulated OCI
|
|
$ |
(345 |
) |
|
$ |
343 |
|
|
$ |
(324 |
) |
|
$ |
563 |
|
Other income (expense) reclassified from accumulated OCI into income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate locks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in accumulated OCI
|
|
|
(379 |
) |
|
|
19 |
|
|
|
(433 |
) |
|
|
79 |
|
Interest income (expense) reclassified from accumulated OCI into income
|
|
|
(6 |
) |
|
|
(5 |
) |
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in accumulated OCI
|
|
|
(3 |
) |
|
|
- |
|
|
|
(16 |
) |
|
|
- |
|
Other income (expense) reclassified from accumulated OCI into income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Non-designated Hedging Instruments
|
Three months ended
|
|
Three months ended
|
|
Six months ended
|
|
Six months ended
|
|
|
June 30, 2010
|
|
June 30, 2009
|
|
June 30, 2010
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts Other income (expense)
|
|
$ |
- |
|
|
$ |
8 |
|
|
$ |
- |
|
|
$ |
(2 |
) |
The balance of the unrealized derivative gain (loss) in accumulated OCI was $(354) at June 30, 2010 and $142 at December 31, 2009.
AT&T INC.
JUNE 30, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 7. ACQUISITIONS, DISPOSITIONS, AND OTHER ADJUSTMENTS
Acquisitions
Wireless Properties Transaction In May 2009, we announced a definitive agreement to acquire certain wireless properties, including Federal Communications Commission (FCC) licenses and network assets, from Verizon Wireless. On June 22, 2010, we acquired these assets for $2,372 in cash and increased goodwill by $972. The assets primarily represent former Alltel Wireless assets and serve approximately 1.6 million subscribers in 79 service areas across 18 states. The preliminary fair value of the acquired net assets of $1,400 included $364 of property plant and equipment, $776 of FCC licenses, and $194 of customer lists and other intangible assets.
Dispositions
Sale of Sterling Operations In May 2010, we announced a definitive agreement to sell our Sterling subsidiary to International Business Machines Corporation (IBM), an unrelated party, for $1,400 in cash. Sterling provides business applications and integration solutions to approximately 18,000 customers worldwide. The sale is subject to regulatory approvals and the satisfaction of customary closing conditions. We also entered into a transition services agreement with IBM related to short-term support of Sterling’s operations after the sale, and an enterprise license agreement, under which we would purchase software from Sterling.
We are treating Sterling as a discontinued operation as of May 24, 2010, the measurement date, as we have determined that the cash inflows under the transition services agreement and our cash outflows under the enterprise license agreement will not constitute significant continuing involvement with Sterling’s operations after the sale. As of the measurement date, we have applied held-for-sale treatment to Sterling’s assets and liabilities, as we believe that the sale is probable and anticipate that it will occur by September 30, 2010. Accordingly, we have reclassified Sterling’s operating results, for all historical periods, to Net income from discontinued operations in the accompanying consolidated statements of income. We have included Sterling’s assets in Other current assets—and the related liabilities in Accounts payable and accrued liabilities—in our consolidated balance sheets as of June 30, 2010, and December 31, 2009. While we committed to sell Sterling in 2010, we have elected to classify Sterling’s assets and liabilities as of December 31, 2009, in the same manner as those as of the measurement date for comparability. Sterling’s assets and liabilities included the following as of the indicated periods:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
Assets held for sale:
|
|
|
|
|
|
|
Current assets
|
|
$ |
278 |
|
|
$ |
333 |
|
Property, plant and equipment
|
|
|
36 |
|
|
|
40 |
|
Goodwill and other intangible assets
|
|
|
649 |
|
|
|
672 |
|
Other assets
|
|
|
39 |
|
|
|
47 |
|
Total assets
|
|
$ |
1,002 |
|
|
$ |
1,092 |
|
|
|
|
|
|
|
|
|
|
Liabilities related to assets held for sale:
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
294 |
|
|
$ |
365 |
|
Other liabilities
|
|
|
122 |
|
|
|
126 |
|
Total liabilities
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