XMEX:T AT&T Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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


FORM 10-Q
 

 
(Mark One)
   

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
       
   
For the quarterly period ended March 31, 2012
 
       
   
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 April 30, 2012 there were 5,863 million common shares outstanding.

 
 

 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
Dollars in millions except per share amounts
 
(Unaudited)
 
 
 
Three months ended
 
 
 
March 31,
 
 
 
2012
   
2011
 
Operating Revenues
 
 
   
 
 
Wireless service
  $ 14,566     $ 13,961  
Data
    7,795       7,171  
Voice
    5,893       6,550  
Directory
    744       868  
Other
    2,824       2,697  
Total operating revenues
    31,822       31,247  
Operating Expenses
               
Cost of services and sales (exclusive of depreciation
               
   and amortization shown separately below)
    12,913       12,813  
Selling, general and administrative
    8,248       8,042  
Depreciation and amortization
    4,560       4,584  
Total operating expenses
    25,721       25,439  
Operating Income
    6,101       5,808  
Other Income (Expense)
               
Interest expense
    (859 )     (846 )
Equity in net income of affiliates
    223       249  
Other income (expense) – net
    52       59  
Total other income (expense)
    (584 )     (538 )
Income Before Income Taxes
    5,517       5,270  
Income tax expense
    1,865       1,802  
Net Income
    3,652       3,468  
Less: Net Income Attributable to Noncontrolling Interest
    (68 )     (60 )
Net Income Attributable to AT&T
  $ 3,584     $ 3,408  
Basic Earnings Per Share Attributable to AT&T
  $ 0.60     $ 0.57  
Diluted Earnings Per Share Attributable to AT&T
  $ 0.60     $ 0.57  
Weighted Average Number of Common Shares Outstanding – Basic (in millions)
    5,918       5,925  
Weighted Average Number of Common Shares Outstanding with Dilution (in millions)
    5,940       5,945  
Dividends Declared Per Common Share
  $ 0.44     $ 0.43  
See Notes to Consolidated Financial Statements.
               
 
 
 

 


AT&T INC.
 
 
   
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
   
 
 
Dollars in millions
 
 
   
 
 
(Unaudited)
 
 
   
 
 
 
 
Three months ended
 
 
 
March 31,
 
 
 
2012
   
2011
 
Net income
  $ 3,652     $ 3,468  
Other comprehensive income, net of tax:
               
      Foreign currency translation adjustments (includes $1 and $0 attributable to
        noncontrolling interest), net of taxes of $131 and $50
    243       93  
     Net unrealized gains (losses) on available-for-sale securities:
               
        Unrealized gains, net of taxes of $54 and $27
    101       49  
        Reclassification adjustment realized in net income, net of taxes of $(3) and $(19)
    (6 )     (35 )
     Net unrealized gains (losses) on cash flow hedges:
               
        Unrealized gains, net of taxes of $0 and $4
    -       7  
        Reclassification adjustment included in net income, net of taxes of
           $3 and $1
    6       2  
       Amortization of net prior service credit included in net income, net of taxes of
           $(84) and $(71)
    (137 )     (115 )
Other comprehensive income
    207       1  
Total comprehensive income
    3,859       3,469  
Less: Total comprehensive income attributable to noncontrolling interest
    (69 )     (60 )
Total Comprehensive Income Attributable to AT&T
  $ 3,790     $ 3,409  
See Notes to Consolidated Financial Statements.
               
 
 
 

 

AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
 
 
 
March 31,
   
December 31,
 
 
 
2012
   
2011
 
Assets
 
(Unaudited)
   
 
 
Current Assets
 
 
   
 
 
Cash and cash equivalents
  $ 2,442     $ 3,185  
Accounts receivable - net of allowances for doubtful accounts of $784 and $878
    13,167       13,606  
Prepaid expenses
    1,706       1,155  
Deferred income taxes
    1,463       1,470  
Other current assets
    1,987       3,611  
Total current assets
    20,765       23,027  
Property, plant and equipment
    260,211       260,279  
   Less: accumulated depreciation and amortization
    (152,980 )     (153,192 )
Property, Plant and Equipment – Net
    107,231       107,087  
Goodwill
    70,929       70,842  
Licenses
    51,782       51,374  
Customer Lists and Relationships – Net
    2,385       2,757  
Other Intangible Assets – Net
    5,203       5,212  
Investments in Equity Affiliates
    4,302       3,718  
Other Assets
    6,759       6,327  
Total Assets
  $ 269,356     $ 270,344  
 
               
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Debt maturing within one year
  $ 6,775     $ 3,453  
Accounts payable and accrued liabilities
    17,593       19,858  
Advanced billing and customer deposits
    3,966       3,872  
Accrued taxes
    1,601       1,003  
Dividends payable
    2,585       2,608  
Total current liabilities
    32,520       30,794  
Long-Term Debt
    58,934       61,300  
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
    26,136       25,748  
Postemployment benefit obligation
    34,113       34,011  
Other noncurrent liabilities
    12,466       12,694  
Total deferred credits and other noncurrent liabilities
    72,715       72,453  
 
               
Stockholders’ Equity
               
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2012 and
               
   December 31, 2011: issued 6,495,231,088 at March 31, 2012 and December 31, 2011)
    6,495       6,495  
Additional paid-in capital
    91,032       91,156  
Retained earnings
    26,446       25,453  
Treasury stock (620,517,527 at March 31, 2012 and 568,719,202
               
   at December 31, 2011, at cost)
    (22,460 )     (20,750 )
Accumulated other comprehensive income
    3,386       3,180  
Noncontrolling interest
    288       263  
Total stockholders’ equity
    105,187       105,797  
Total Liabilities and Stockholders’ Equity
  $ 269,356     $ 270,344  
See Notes to Consolidated Financial Statements.
               
 
 
 

 

AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions
 
(Unaudited)
 
 
 
Three months ended
 
 
 
March 31,
 
 
 
2012
   
2011
 
Operating Activities
 
 
   
 
 
Net income
  $ 3,652     $ 3,468  
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
    4,560       4,584  
   Undistributed earnings from investments in equity affiliates
    (223 )     (233 )
   Provision for uncollectible accounts
    328       292  
   Deferred income tax expense and noncurrent unrecognized tax benefits
    337       731  
   Net gain from impairment and sale of investments
    (9 )     (41 )
   Changes in operating assets and liabilities:
               
      Accounts receivable
    111       72  
      Other current assets
    1,082       708  
      Accounts payable and accrued liabilities
    (1,573 )     (1,309 )
   Other - net
    (469 )     (540 )
Total adjustments
    4,144       4,264  
Net Cash Provided by Operating Activities
    7,796       7,732  
 
               
Investing Activities
               
Construction and capital expenditures:
               
   Capital expenditures
    (4,261 )     (4,133 )
   Interest during construction
    (65 )     (35 )
Acquisitions, net of cash acquired
    (433 )     (54 )
Dispositions
    16       11  
Sales of securities, net of investment
    5       127  
Other
    1       9  
Net Cash Used in Investing Activities
    (4,737 )     (4,075 )
 
               
Financing Activities
               
Net change in short-term borrowings with original maturities of three months or less
    -       (36 )
Issuance of long-term debt
    2,986       -  
Repayment of long-term debt
    (2,204 )     (1,264 )
Purchase of treasury stock
    (2,066 )     -  
Issuance of treasury stock
    218       18  
Dividends paid
    (2,606 )     (2,540 )
Other
    (130 )     119  
Net Cash Used in Financing Activities
    (3,802 )     (3,703 )
Net decrease in cash and cash equivalents
    (743 )     (46 )
Cash and cash equivalents beginning of year
    3,185       1,437  
Cash and Cash Equivalents End of Period
  $ 2,442     $ 1,391  
 
               
Cash paid during the three months ended March 31 for:
               
   Interest
  $ 1,224     $ 1,096  
   Income taxes, net of refunds
  $ (712 )   $ (511 )
See Notes to Consolidated Financial Statements.
 
 
 
 

 

AT&T INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
 
Dollars and shares in millions except per share amounts
 
(Unaudited)
 
 
 
March 31, 2012
 
 
Shares
   
Amount
 
Common Stock
 
 
   
 
 
Balance at beginning of year
    6,495     $ 6,495  
Issuance of stock
    -       -  
Balance at end of period
    6,495     $ 6,495  
 
               
Additional Paid-In Capital
               
Balance at beginning of year
          $ 91,156  
Issuance of treasury stock
            74  
Share-based payments
            (198 )
Balance at end of period
          $ 91,032  
 
               
Retained Earnings
               
Balance at beginning of year
          $ 25,453  
Net income attributable to AT&T ($0.60 per diluted share)
            3,584  
Dividends to stockholders ($0.44 per share)
            (2,584 )
Other
            (7 )
Balance at end of period
          $ 26,446  
 
               
Treasury Stock
               
Balance at beginning of year
    (568 )   $ (20,750 )
Purchase of stock
    (68 )     (2,066 )
Issuance of treasury stock
    15       356  
Balance at end of period
    (621 )   $ (22,460 )
 
               
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax:
               
Balance at beginning of year
          $ 3,180  
Other comprehensive income attributable to AT&T
            206  
Balance at end of period
          $ 3,386  
 
               
Noncontrolling Interest:
               
Balance at beginning of year
          $ 263  
Net income attributable to noncontrolling interest
            68  
Distributions
            (44 )
Translation adjustments attributable to noncontrolling interest, net of taxes
            1  
Balance at end of period
          $ 288  
 
               
Total Stockholders’ Equity at beginning of year
          $ 105,797  
Total Stockholders’ Equity at end of period
          $ 105,187  
See Notes to Consolidated Financial Statements.
               
 
 
 

 
AT&T INC.
MARCH 31, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
 
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation  Throughout this document, AT&T Inc. is referred to as “AT&T,” “we” or the “Company.” We believe that these consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the presented interim periods. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.

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, including a reclassification of certain operating expenses based on an enhanced activity-based expense tracking system.

Comprehensive Income Reporting  We have adopted Financial Accounting Standards Board guidance that requires the reporting of comprehensive income, either as a separate financial statement (our election) or a continuation of the consolidated statements of income. We disclose the related tax effect for each item on the face of the statement.

Employee Separations  We established obligations for expected termination benefits provided under existing plans to former or inactive employees after employment but before retirement. At March 31, 2012, we had severance accruals of $230 and at December 31, 2011, we had severance accruals of $335.


 

 
AT&T INC.
MARCH 31, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 2. 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 months ended March 31, 2012 and 2011, are shown in the table below:

 
 
Three months ended
 
 
 
March 31,
 
 
 
2012
   
2011
 
Numerators
 
 
   
 
 
Numerator for basic earnings per share:
 
 
   
 
 
   Net income
  $ 3,652     $ 3,468  
   Net income attributable to noncontrolling interest
    (68 )     (60 )
   Net income attributable to AT&T
    3,584       3,408  
   Dilutive potential common shares:
               
      Other share-based payment
    3       3  
Numerator for diluted earnings per share
  $ 3,587     $ 3,411  
Denominators (000,000)
               
Denominator for basic earnings per share:
               
   Weighted average number of common shares outstanding
    5,918       5,925  
   Dilutive potential common shares:
               
      Stock options
    4       4  
      Other share-based payment
    18       16  
Denominator for diluted earnings per share
    5,940       5,945  
Basic earnings per share attributable to AT&T
  $ 0.60     $ 0.57  
Diluted earnings per share attributable to AT&T
  $ 0.60     $ 0.57  

At March 31, 2012 and 2011, we had issued and outstanding options to purchase approximately 28 million and 98 million shares of AT&T common stock. For the quarter ended March 31, 2012 and 2011, the exercise prices of 5 million and 60 million shares were above the market price of AT&T stock for the respective periods. Accordingly, we did not include these amounts in determining the dilutive potential common shares. At March 31, 2012 and 2011, the exercise prices of 22 million and 34 million vested stock options were below market price.

NOTE 3. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our various operating segments based on segment income before income taxes. We make our capital allocations decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and other assets needed to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have four reportable segments: (1) Wireless, (2) Wireline, (3) Advertising Solutions and (4) Other.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services. The Wireless segment results have been restated to include the operating results of a subsidiary that provides services for subscribers to wirelessly monitor their home that was previously reported in the Wireline segment.
 
 
 

 
AT&T INC.
MARCH 31, 2012

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

The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, AT&T U-verse® TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements. The Wireline segment results have been restated to exclude the operating results of the business moved to our Wireless segment and to include the operating results of customer information services, which were previously reported in our Other segment’s results.

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. In April 2012, we announced an agreement to sell our Advertising Solutions and Interactive businesses (see Note 6).
 
The Other segment includes our portion of the results from our international equity investments and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest cost and expected return on plan assets for our pension and postretirement benefit plans. The Other segment results have been restated to exclude the operating results of customer information services, which are now reported in our Wireline segment’s results.

In the following tables, we show how our segment results are reconciled to our consolidated results reported.

For the three months ended March 31, 2012                                    
           
Advertising Solutions
               
Consolidated Results
 
   
Wireless
   
Wireline
   
Other
   
Consolidations
 
Total segment operating revenues
  $ 16,136     $ 14,928     $ 744     $ 14     $ -     $ 31,822  
Operations and support expenses
    10,083       10,297       547       234       -       21,161  
Depreciation and amortization expenses
    1,666       2,808       77       9       -       4,560  
Total segment operating expenses
    11,749       13,105       624       243       -       25,721  
Segment operating income (loss)
    4,387       1,823       120       (229 )     -       6,101  
Interest expense
    -       -       -       -       859       859  
Equity in net income (loss) of affiliates
    (13 )     -       -       236       -       223  
Other income (expense) – net
    -       -       -       -       52       52  
Segment income (loss) before income taxes
  $ 4,374     $ 1,823     $ 120     $ 7     $ (807 )   $ 5,517  
                                                 
For the three months ended March 31, 2011
                                               
             
Advertising Solutions
                   
Consolidated Results
 
   
Wireless
   
Wireline
   
Other
   
Consolidations
 
Total segment operating revenues
  $ 15,310     $ 15,051     $ 868     $ 18     $ -     $ 31,247  
Operations and support expenses
    9,861       10,312       572       110       -       20,855  
Depreciation and amortization expenses
    1,506       2,958       106       14       -       4,584  
Total segment operating expenses
    11,367       13,270       678       124       -       25,439  
Segment operating income (loss)
    3,943       1,781       190       (106 )     -       5,808  
Interest expense
    -       -       -       -       846       846  
Equity in net income of affiliates
    (4 )     -       -       253       -       249  
Other income (expense) – net
    -       -       -       -       59       59  
Segment income (loss) before income taxes
  $ 3,939     $ 1,781     $ 190     $ 147     $ (787 )   $ 5,270  
                                                 
 
 

 
AT&T INC.
MARCH 31, 2012

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

NOTE 4. PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of various noncontributory pension and death benefit plans. We also provide certain medical, dental and life insurance benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs as active employees earn these benefits. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to meet the plans’ obligations to provide benefits to employees upon their retirement. No significant cash contributions are required under ERISA regulations during 2012.

The following details pension and postretirement benefit costs included in operating expenses (in cost of services and sales, and selling, general and administrative expenses) in the accompanying consolidated statements of income. We recognize actual gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required.

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 projects, providing a small reduction in the net expense recorded.

 
 
Three months ended
 
 
 
March 31,
 
 
 
2012
   
2011
 
Pension cost:
 
 
   
 
 
   Service cost – benefits earned during the period
  $ 310     $ 297  
   Interest cost on projected benefit obligation
    700       740  
   Expected return on assets
    (880 )     (922 )
   Amortization of prior service (credit)
    (4 )     (4 )
   Net pension cost
  $ 126     $ 111  
 
               
Postretirement cost:
               
   Service cost – benefits earned during the period
  $ 84     $ 90  
   Interest cost on accumulated postretirement benefit obligation
    447       513  
   Expected return on assets
    (200 )     (260 )
   Amortization of prior service (credit)
    (217 )     (174 )
   Net postretirement cost
  $ 114     $ 169  
 
               
   Combined net pension and postretirement cost
  $ 240     $ 280  

Our combined net pension and postretirement cost decreased $40 in the first quarter of 2012. The decrease was primarily related to higher amortization of prior service credits due to our plan change that provides prescription drug benefits on a group basis under Medicare Part D, as allowed under federal healthcare law.

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 $31 in the first quarter of 2012, of which $29 was interest cost and $35 for the first quarter of 2011, of which $31 was interest cost.


10 
 

 
AT&T INC.
MARCH 31, 2012

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

NOTE 5. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.

Level 2
Inputs to the valuation methodology include:
·  
Quoted prices for similar assets and liabilities in active markets.
·  
Quoted prices for identical or similar assets or liabilities in inactive markets.
·  
Inputs other than quoted market prices that are observable for the asset or liability.
·  
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
   ·  
Fair value is often based on developed models in which there are few, if any, external observations.

The fair value measurement level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2011.

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:

 
March 31, 2012
 
December 31, 2011
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Notes and debentures
  $ 65,472     $ 74,525     $ 64,514     $ 73,738  
Investment securities
    2,272       2,272       2,092       2,092  

The fair values of our notes and debentures were estimated based on quoted market prices, where available. The carrying value of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 under the Fair Value Measurement and Disclosure framework.

Investment Securities
Our investment securities consist of primarily available-for-sale instruments, which include equities, fixed income bonds and other securities. Substantially all the fair values of our available-for-sale securities were estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in “Other income (expense) – net” in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated other comprehensive income (accumulated OCI). Unrealized losses that are considered other than temporary are recorded in “Other income (expense) – net” with the corresponding reduction to the carrying basis of the investment. Fixed income investments have maturities of $146 less than one year, $59 within one to three years, $75 within three to five years, and $280 for five or more years.
 
 
11 
 

 
AT&T INC.
MARCH 31, 2012

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

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

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

Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2012 and December 31, 2011:

   
March 31, 2012
   
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
   Domestic equities
$
 1,073
 
$
 - 
 
$
 - 
 
$
 1,073
   International equities
 
 534
 
 
 - 
 
 
 - 
 
 
 534
   Fixed income bonds
 
 - 
 
 
 560
 
 
 - 
 
 
 560
Asset Derivatives1
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swaps
 
 - 
 
 
 434
 
 
 - 
 
 
 434
   Cross-currency swaps
 
 - 
 
 
 248
 
 
 - 
 
 
 248
   Foreign exchange contracts
 
 - 
 
 
 2
 
 
 - 
 
 
 2
Liability Derivatives1
 
 
 
 
 
 
 
 
 
 
 
   Cross-currency swaps
 
 - 
 
 
 (701)
 
 
 - 
 
 
 (701)
   Foreign exchange contracts
 
 - 
 
 
 (4)
 
 
 - 
 
 
 (4)
   
 
 
 
 
 
 
 
 
 
 
 
   
December 31, 2011
   
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
   Domestic equities
$
 947
 
$
 - 
 
$
 - 
 
$
 947
   International equities
 
 495
 
 
 - 
 
 
 - 
 
 
 495
   Fixed income bonds
 
 - 
 
 
 562
 
 
 - 
 
 
 562
Asset Derivatives1
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swaps
 
 - 
 
 
 521
 
 
 - 
 
 
 521
   Cross-currency swaps
 
 - 
 
 
 144
 
 
 - 
 
 
 144
   Foreign exchange contracts
 
 - 
 
 
 2
 
 
 - 
 
 
 2
Liability Derivatives1
 
 
 
 
 
 
 
 
 
 
 
   Cross-currency swaps
 
 - 
 
 
 (820)
 
 
 - 
 
 
 (820)
   Interest rate locks
 
 - 
 
 
 (173)
 
 
 - 
 
 
 (173)
   Foreign exchange contracts
 
 - 
 
 
 (9)
 
 
 - 
 
 
 (9)
1 Derivatives designated as hedging instruments are reflected as other assets, other liabilities and, for a portion of interest rate swaps, accounts receivable.

 
12 
 

 
AT&T INC.
MARCH 31, 2012

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

Derivative Financial Instruments
We employ derivatives to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

The majority of our derivatives are designated either as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense on the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed-rate notes payable they hedge due to changes in the designated benchmark interest rate and are recognized in interest expense. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the three months ended March 31, 2012 and March 31, 2011, no ineffectiveness was measured.

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

We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro and British pound sterling denominated debt. These agreements include initial and final exchanges of principal from fixed foreign denominations to fixed U.S. denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed foreign-denominated rate to a fixed U.S. denominated interest rate. We evaluate the effectiveness of our cross-currency swaps each quarter. In the three months ended March 31, 2012 and March 31, 2011, no ineffectiveness was measured.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to income. Over the next 12 months, we expect to reclassify $46 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks. In February 2012, we utilized $800 notional value of interest rate locks related to our February 2012 debt issuance.

We hedge a 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 nondesignated, largely based on size and duration. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to income. In the three months ended March 31, 2012 and March 31, 2011, no ineffectiveness was measured.
 
 
13 
 

 
AT&T INC.
MARCH 31, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31, 2012, we had posted collateral of $39 (a deposit asset) and held collateral of $23 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Moody’s Investors Service and Fitch, Inc. before the final collateral exchange in March, we would have been required to post additional collateral of $102. At December 31, 2011, we had posted collateral of $98 (a deposit asset) and had no held collateral (a receipt liability). 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:

 
 
March 31,
   
December 31,
 
 
 
2012
   
2011
 
Interest rate swaps
  $ 7,800     $ 8,800  
Cross-currency swaps
    7,502       7,502  
Interest rate locks
    -       800  
Foreign exchange contracts
    208       207  
Total
  $ 15,510     $ 17,309  

Following is the related hedged items affecting our financial position and performance:
 
 
 
 
   
 
 
Effect of Derivatives on the Consolidated Statements of Income
 
 
   
 
 
Fair Value Hedging Relationships
Three months ended
 
March 31,
 
March 31,
 
2012
 
2011
 
Interest rate swaps (Interest expense):
 
 
   
 
 
Gain (Loss) on interest rate swaps
  $ (61 )   $ (86 )
Gain (Loss) on long-term debt
    61       86  

In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were also reported as reductions of interest expense.

   
Three months ended
 
   
March 31,
   
March 31,
 
Cash Flow Hedging Relationships  
2012
   
2011
 
Cross-currency swaps:
 
 
   
 
 
Gain (Loss) recognized in accumulated OCI
  $ (5 )   $ (32 )
 
               
Interest rate locks:
               
Gain (Loss) recognized in accumulated OCI
    -       35  
Interest income (expense) reclassified from accumulated OCI into income
    (9 )     (3 )
 
               
Foreign exchange contracts:
               
Gain (Loss) recognized in accumulated OCI
    5       8  

The balance of the unrealized derivative gain (loss) in accumulated OCI was $(415) at March 31, 2012 and $(421) at December 31, 2011.
 
 
14 
 

 
AT&T INC.
MARCH 31, 2012

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

NOTE 6. SUBSEQUENT EVENTS

Advertising Solutions Sale  On April 9, 2012, we announced an agreement to sell our Advertising Solutions and Interactive businesses to an affiliate of Cerberus Capital Management, L.P. for approximately $750 in cash (subject to adjustment primarily related to timing of closing), a $200 note and a 47% equity interest in the new company (known as YP Holdings LLC). The transaction is expected to close in mid-year 2012 and we do not expect to record a material gain or loss.
 
 
15 
 

 
AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry in both the United States and internationally, providing wireless and wireline telecommunications services and equipment as well as advertising services. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.

Consolidated Results  Our financial results in the first quarter of 2012 and 2011 are summarized as follows:

 
 
First Quarter
 
 
 
2012
   
2011
   
Percent Change
 
 
Operating Revenues
  $ 31,822     $ 31,247       1.8 %
Operating expenses
                       
   Cost of services and sales
    12,913       12,813       0.8  
   Selling, general and administrative
    8,248       8,042       2.6  
   Depreciation and amortization
    4,560       4,584       (0.5 )
Total Operating Expenses
    25,721       25,439       1.1  
Operating Income
    6,101       5,808       5.0  
Income Before Income Taxes
    5,517       5,270       4.7  
Net Income
    3,652       3,468       5.3  
Net Income Attributable to AT&T
  $ 3,584     $ 3,408       5.2 %

Overview
Operating income increased $293, or 5.0%, in the first quarter of 2012. The increase was primarily due to continued growth in wireless service and equipment revenue, driven mostly by subscriber and data revenue growth, along with increased revenues from AT&T U-verse® (U-verse) services and strategic business services. Partially offsetting the increased revenues were higher operating expenses primarily related to growth in U-verse subscribers and commissions on smartphones. Our operating income margin in the first quarter increased from 18.6% in 2011 to 19.2% in 2012. The table above reflects the reclassification of certain cost of services and sales expenses to selling, general and administrative expenses based on an enhanced activity-based expense tracking system. This reclassification was not material and did not impact total operating expenses, operating income or our operating income margin.

Operating revenues increased $575, or 1.8%, in the first quarter of 2012. The increase reflects continued growth in wireless service and equipment revenues, driven by growth in the subscriber base and the increasing percentage of smartphone customers which contribute to higher wireless data revenues. In addition, higher wireline data revenues from U-verse services and strategic business services contributed to the increase. The increases were partially offset by continued declines in Wireline voice and print directory advertising revenues.

Revenue growth continues to be tempered by declines in our voice revenues. Total switched access lines decreased 12.7% since March 31, 2011. Customers disconnecting access lines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data or terminated service permanently as businesses closed or consumers left residences. While we lose wireline voice revenues, we have the opportunity to increase wireless service or wireline data revenues should the customer choose us as their wireless or VoIP provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.
 
 
16 
 

 
AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Cost of services and sales expenses increased $100, or 0.8%, in the first quarter of 2012. The increases were primarily due to increased wireline costs of goods sold attributable to U-verse subscriber growth, higher Universal Service Fund (USF) fees and wireless network costs.

Selling, general and administrative expenses increased $206, or 2.6%, in the first quarter of 2012. The increases were primarily due to higher employee related expenses and increased commissions paid on smartphone upgrades. The increases were partially offset by decreased sales and advertising costs.

Depreciation and amortization expense decreased $24, or 0.5%, in the first quarter of 2012. The decrease is primarily related to lower amortization of intangibles for customer lists related to acquisitions, partially offset by increased depreciation associated with ongoing capital spending for network upgrades and expansion.

Interest expense increased $13, or 1.5%, in the first quarter of 2012. The increase in interest expense was primarily due to higher amortization expense associated with the early redemption of debt.

Equity in net income of affiliates decreased $26, or 10.4%, in the first quarter of 2012 primarily due to the sale of our ownership in Télefonos de México, S.A. de C.V. (Telmex) to América Móvil, S.A. de C.V. (América Móvil) in the fourth quarter of 2011.

Other income (expense) – net We had other income of $52 in the first quarter of 2012, compared to other income of $59 in the first quarter of 2011. Results for first quarter 2012 included a $10 gain on the sale of investments, $33 of leveraged lease income and $15 of interest and dividend income. Results for first quarter 2011 included a $40 net gain on the sale of investments, $7 of leveraged lease income and $13 of interest and dividend income.

Income taxes increased $63, or 3.5%, in the first quarter of 2012. Our effective tax rate was 33.8% for the first quarter 2012, compared to 34.2% for first quarter 2011.

Selected Financial and Operating Data
 
 
   
 
 
   
March 31,
 
   
2012
   
2011
 
Wireless customers (000)
    103,940       97,519  
Network access lines in service (000)
    35,436       40,596  
Total wireline broadband connections (000)1
    16,530       16,486  
Debt ratio2
    38.4 %     36.6 %
Ratio of earnings to fixed charges3
    5.24       5.25  
Number of AT&T employees
    252,330       260,690  
1 Prior-year amounts restated to conform to current-period reporting methodology.
2 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and does not consider cash available to pay
  down debt. See our “Liquidity and Capital Resources” section for discussion.
3 See Exhibit 12.

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 3 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes. We make our capital allocations decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and other assets needed to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have four reportable segments: (1) Wireless, (2) Wireline, (3) Advertising Solutions and (4) Other.
 
 
17 
 

 
AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services. The Wireless segment results have been restated to include the operating results of a subsidiary that provides services for subscribers to wirelessly monitor their homes that was previously reported in the Wireline segment’s results.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, U-verse TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements. The Wireline segment results have been restated to exclude the operating results of the business moved to our Wireless segment and to include the operating results of customer information services, which were previously reported in our Other segment’s results.

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. In April 2012, we announced an agreement to sell our Advertising Solutions and Interactive businesses (see Note 6).
 
The Other segment includes our portion of the results from our international equity investments and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest cost and expected return on plan assets for our pension and postretirement plans. The Other segment results have been restated to exclude the operating results of customer information services, which are now reported in our Wireline segment’s results.

Operations and support expenses include bad debt expense; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement service costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees. Our Wireless and Wireline segments also include certain network planning and engineering expenses, information technology, our repair technicians and repair services, and property taxes as operations and support expenses.

The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”
 
 
18 
 

 
AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Wireless
 
 
   
 
   
 
 
Segment Results
 
 
   
 
   
 
 
 
 
First Quarter
 
 
 
2012
   
2011
   
Percent Change
 
 
Segment operating revenues
 
 
   
 
   
 
 
      Service
  $ 14,566     $ 13,961       4.3 %
      Equipment
    1,570       1,349       16.4  
Total Segment Operating Revenues
    16,136       15,310       5.4  
Segment operating expenses
                       
      Operations and support
    10,083       9,861       2.3  
      Depreciation and amortization
    1,666       1,506       10.6  
Total Segment Operating Expenses
    11,749       11,367       3.4  
Segment Operating Income
    4,387       3,943       11.3  
Equity in Net Loss of Affiliates
    (13 )     (4)       -  
Segment Income
  $ 4,374     $ 3,939       11.0 %

The following table highlights other key measures of performance for the Wireless segment:
 
 
 
 
   
 
   
 
 
 
 
First Quarter
 
 
 
2012
   
2011
   
Percent Change
 
 
 Wireless Subscribers (000)1
    103,940       97,519       6.6 %
      Gross Subscriber Additions (000)2
    5,278       5,907       (10.6 )
      Net Subscriber Additions (000)2
    726       1,984       (63.4 )
      Total Churn
    1.47 %     1.36 %  
11 BP
 
 
                       
 Postpaid Subscribers (000)
    69,403       68,062       2.0 %
      Net Postpaid Subscriber Additions (000)2
    187       62       -  
      Postpaid Churn
    1.10 %     1.18 %  
(8) BP
 
 
                       
 Prepaid Subscribers (000)
    7,368       6,613       11.4 %
      Net Prepaid Subscriber Additions (000)2
    125       85       47.1  
 
                       
 Reseller Subscribers (000)
    13,869       12,241       13.3 %
      Net Reseller Subscriber Additions (000)2
    184       561       (67.2 )
 
                       
 Connected Device Subscribers (000)3
    13,300       10,603       25.4 %
      Net Connected Device Subscriber Additions (000)
    230       1,276       (82.0 )
1 Represents 100% of AT&T Mobility wireless customers.
 
2 Excludes merger and acquisition-related additions during the period.
 
3 Includes data-centric devices such as eReaders, home security and automobile monitoring systems, and fleet management. Tablets are split between postpaid and prepaid subscribers.
 

Wireless Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices and a wireless network that has sufficient spectrum and capacity to support these innovations and make them available to more subscribers. To attract and retain subscribers, we offer a broad handset line and a wide variety of service plans.
 
 
19 
 

 
AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Our handsets offerings include at least 16 smartphones (handsets with voice and data capabilities using an advanced operating system to better manage data and Internet access) from nine manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models (e.g., various Android, Apple, Windows and other smartphones) or significant revisions of existing models. We believe a broad offering of a wide variety of smartphones reduces dependence on any single operating system or manufacturer as these products continue to evolve in terms of technology and subscriber appeal. In the first quarter of 2012, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid subscriber base, 59.3% use smartphones, up from 46.2% a year earlier. As is common in the industry, most of our phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. From time to time, we offer and have offered attractive handsets on an exclusive basis. As these exclusivity arrangements expire, we expect to continue to offer such handsets (based on historical industry practice), and we believe our service plan offerings will help to retain our subscribers by providing incentives not to move to a new carrier. We do not expect exclusivity terminations to have a material impact on our Wireless segment income, consolidated operating margin or our cash flows from operations.

Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. About 88% of our subscribers are on FamilyTalk® Plans (family plans) or business discount plans, which provide for service on multiple handsets at discounted rates, and such subscribers tend to have higher retention and lower churn rates. During the first quarter of 2011, we introduced our Mobile to Any Mobile feature, which enables our new and existing subscribers with qualifying messaging plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions. We also offer data plans at different price levels (tiered data plans) to attract a wide variety of subscribers and to differentiate us from our competitors. Our postpaid subscribers on data plans increased 15.1% in the first quarter of 2012, 60.9% of which were on tiered data plans as of March 31, 2012, up from 38.3% as of March 31, 2011. A growing percentage of our postpaid subscribers are on tiered data plans. Such offerings intend to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn.

As of March 31, 2012, almost 30% of our postpaid smartphone subscribers use a 4G-capable smartphone. Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any spectrum solution will require that the Federal Communications Commission (FCC) make new or existing spectrum available to the wireless industry to meet the needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.

Wireless Metrics
Subscriber Additions As of March 31, 2012, we served 103.9 million wireless subscribers, an increase of 6.6%. We continue to experience slowing growth in the industry’s subscriber base as reflected in a 10.6% decrease in gross subscriber additions (gross additions) in the first quarter of 2012, primarily related to lower connected device and reseller additions. Lower net subscriber additions (net additions) in the first quarter of 2012 were primarily attributable to lower connected device additions and higher connected device and reseller churn. The increase in net postpaid additions in the first quarter of 2012 reflected an increase in postpaid tablet subscribers as well as lower postpaid churn.

Average service revenue per user (ARPU) from postpaid subscribers increased 1.7% in the first quarter of 2012, driven by an increase in postpaid data services ARPU of 15.3% reflecting greater use of smartphones and data-centric devices. The growth in postpaid data services ARPU in the first quarter of 2012 was partially offset by a 6.2% decrease in postpaid voice and other service ARPU in the first quarter. Postpaid voice and other service ARPU declined due to lower access and airtime charges, triggered in part by continued growth in our family plans subscriber base, which generates lower ARPU compared to ARPU for our traditional postpaid subscribers, and lower roaming revenues. About 88% of our postpaid smartphone subscribers are on family plans or business discount plans.
 
 
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AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Total ARPU declined 2.7% in the first quarter of 2012, reflecting growth in connected device, tablet and reseller subscribers. Connected devices and other data-centric devices, such as tablets, have lower-priced data-only plans compared with our postpaid smartphone plans, which have voice and data features. Accordingly, ARPU for these subscribers is typically lower compared to that generated from our smartphone subscribers on postpaid and other plans. Data services ARPU increased 11.9% in the first quarter of 2012, reflecting greater smartphone and data-centric device use. We expect continued revenue growth from data services as more subscribers use smartphones and data-centric devices, and as we continue to expand our network. Voice and other service ARPU declined 11.1% in the first quarter of 2012 due to voice access and usage trends and a shift toward a greater percentage of data-centric devices. We expect continued pressure on voice and other service ARPU.

Churn  The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Churn rate is calculated by dividing the aggregate number of wireless subscribers who canceled service during a period by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period. The total churn rate was higher due to connected device and reseller churn rates in the first quarter of 2012 due to adjustments for zero-revenue devices. Postpaid churn was higher last year due to integration efforts connected to a prior merger.

Operating Results
Our Wireless segment operating income margin in the first quarter increased from 25.8% in 2011 to 27.2% in 2012. The margin increase in the first quarter reflected higher data revenues generated by our postpaid subscribers and operating efficiencies.

Service revenues are comprised of local voice and data services, roaming, long-distance and other revenue. Service revenues increased $605, or 4.3%, in the first quarter of 2012. The first-quarter increase consisted of the following:
·  
Data service revenues increased $1,018, or 19.9%, in the first quarter of 2012. The increase was primarily due to the increased number of subscribers and increased Internet access by subscribers using smartphones and data-centric devices, such as eReaders, tablets, and mobile navigation devices. Data service revenues accounted for 42.1% of our wireless service revenues for the first quarter of 2012, compared to 36.6% last year.
·  
Voice and other service revenues decreased $413, or 4.7%, in the first quarter of 2012. While we had a 6.6% year-over-year increase in the number of wireless subscribers, ARPU continues to decline for voice and other non-data wireless services due to voice access and usage trends.

Equipment revenues increased $221, or 16.4%, in the first quarter of 2012 due to a year-over-year increase in smartphone sales as a percentage of total device sales to postpaid subscribers. During the first quarter of 2012, we introduced an increase in the handset upgrade fee, which also contributed to the year-over-year increase in equipment revenues.

Operations and support expenses increased $222, or 2.3%, in the first quarter of 2012. The first-quarter increase was primarily due to the following:
·  
Commission expenses increased $210 due to a year-over-year increase in smartphone sales as a percentage of total device sales.
·  
Network system, interconnect, and long-distance costs increased $106 due to higher network traffic, personnel-related network support costs in conjunction with our network enhancement efforts, and higher leasing costs.
·  
USF fees increased $57 primarily due to federal rate increases.

Partially offsetting these increases were the following:
·  
Incollect roaming fees decreased $66 due to lower access and airtime charges.
·  
Selling expenses (other than commissions) and administrative expenses decreased $51 due primarily to a $114 decline in advertising costs, partially offset by a $81 increase in bad debt expense due to higher write-offs.
·  
Equipment costs decreased $42 reflecting the overall decline in upgrade activity, which was partially offset by sales of the more expensive smartphones.

Depreciation and amortization expenses increased $160, or 10.6%, in the first quarter of 2012. Depreciation expense increased $240, or 18.8%, in the first quarter primarily due to ongoing capital spending for network upgrades and expansion. Amortization expense decreased $80, or 34.5%, in the first quarter primarily due to lower amortization of intangibles for customer lists related to acquisitions.
 
 
21 
 

 
AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Wireline
 
 
   
 
   
 
 
Segment Results
 
 
   
 
   
 
 
 
 
First Quarter
 
 
 
2012
   
2011
   
Percent
Change
 
 
Segment operating revenues
 
 
   
 
   
 
 
   Data
  $ 7,795     $ 7,171       8.7 %
   Voice
    5,893       6,550       (10.0 )
   Other
    1,240       1,330       (6.8 )
Total Segment Operating Revenues
    14,928       15,051       (0.8 )
Segment operating expenses
                       
   Operations and support
    10,297       10,312       (0.1 )
   Depreciation and amortization
    2,808       2,958       (5.1 )
Total Segment Operating Expenses
    13,105       13,270       (1.2 )
Segment Income
  $ 1,823     $ 1,781       2.4 %

Operating Results
Our Wireline segment operating income increased $42, or 2.4%, in the first quarter of 2012. Segment operating income margin in the first quarter increased from 11.8% in 2011 to 12.2% in 2012. Our increased operating margins reflect increased data revenue growth and lower depreciation and amortization expenses. Our operating income and margins continued to be pressured by access line declines as our consumer and business customers either reduced usage or disconnected traditional landline services and switched to alternative technologies, such as wireless and VoIP. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video, and U-verse voice. Additionally, we have the opportunity to increase Wireless segment revenues if customers choose AT&T Mobility as an alternative provider.

Data revenues increased $624, or 8.7%, in the first quarter of 2012. Data revenues accounted for approximately 52% of wireline operating revenues in the first quarter of 2012 and 48% in the first quarter of 2011. Data revenues include strategic business, IP and traditional data services.
·  
Strategic business services, which include Ethernet, Virtual Private Networks (VPN), Hosting, IP Conferencing and application services, increased $248, or 19.0%, in the first quarter, primarily driven by VPN and Ethernet revenue which increased by $160 and $74, respectively.
·  
IP data revenues (excluding strategic services) increased $476, or 14.9%, in the first quarter primarily driven by higher U-verse penetration and broadband additions. In the first quarter, U-verse video revenues increased $258, broadband high-speed Internet access revenue increased $127 and U-verse voice revenue increased $61. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based services. New and existing U-verse customers are shifting from traditional landlines and DSL to our U-verse Voice and High Speed Internet access offerings.
·  
Traditional data revenues, which include transport (excluding Ethernet) and packet-switched data services, decreased $100, or 3.8%, in the first quarter. This decrease was primarily due to lower demand as customers continue to shift to IP-based technology such as VPN, U-verse High Speed Internet access and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.

Voice revenues decreased $657, or 10.0%, in the first quarter of 2012 primarily due to declining demand for traditional voice services by our consumer and business customers. Included in voice revenues are revenues from local voice, long-distance (including international) and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.
·  
Local voice revenues decreased $402, or 10.0%. The decrease was driven primarily by a 12.7% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by increased competition from alternative technologies and the disconnection of additional lines.
·  
Long-distance revenues decreased $246, or 11.0%. Lower demand for long-distance service from global businesses and consumer customers decreased revenues $201 in the first quarter. Additionally, expected declines in the number of our national mass-market customers decreased revenues $45 in the first quarter.
 
 
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AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Other operating revenues decreased $90, or 6.8%, in the first quarter of 2012. Major items included in other operating revenues are integration services and customer premises equipment, government-related services and outsourcing, which account for approximately 60% of total other revenue for both periods.

Operations and support expenses decreased $15, or 0.1%, in the first quarter of 2012. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

The first quarter decrease was primarily due to lower operating tax expense of $56, nonemployee-related expense of $51, decreased traffic compensation expense of $49, decreased employee related expense of $45, reflecting ongoing workforce reductions initiatives, and lower bad debt expense of $32 due to lower revenue and improvements in cash collections. These decreases were partially offset by increased cost of sales of $123, primarily related to U-verse related expenses, increased agent commission expense of $52 and increased USF fees of $44.

Depreciation and amortization expenses decreased $150, or 5.1%, for the first quarter of 2012. Depreciation decreased $82, or 3.0%, primarily due to assets becoming fully depreciated. Amortization decreased $68, or 29.3%, primarily related to lower amortization of intangibles for the customer lists associated with acquisitions.

 
23 
 

 
AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Supplemental Information

Telephone, Wireline Broadband and Video Connections Summary
Our switched access lines and other services provided by our local exchange telephone subsidiaries at March 31, 2012 and 2011 are shown below.

   
March 31,
   
March 31,
   
Percent
 
(in 000s) 
 
2012
   
2011
   
Change
 
Switched Access Lines
 
 
   
 
   
 
 
Retail Consumer
    18,095       21,618       (16.3) %
Retail Business1
    15,256       16,649       (8.4)  
Retail Subtotal1
    33,351       38,267       (12.8)  
                         
Wholesale Subtotal1
    2,042       2,271       (10.1)  
                         
Total Switched Access Lines2
    35,436       40,596       (12.7) %
                         
Total Retail Consumer Voice Connections5
    20,537       23,479       (12.5) %
                         
Total Wireline Broadband Connections1,3,6
    16,530       16,486       0.3 %
                         
Satellite service4
    1,732       1,886       (8.2) %
U-verse video
    3,991       3,205       24.5  
Video Connections
    5,723       5,091       12.4 %
1 Prior-period amounts restated to conform to current-period reporting methodology.
2 Total switched access lines include payphone access lines of 43 at March 31, 2012 and 58 at March 31, 2011.
3 Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband.
4 Satellite service includes connections under our agency and resale agreements.
5 Includes consumer U-verse VoIP connections of 2,442 at March 31, 2012 and 1,861 at March 31, 2011.
6 Includes U-verse High Speed Internet connections of 5,941 at March 31, 2012 and 3,693 at March 31, 2011.
 
Advertising Solutions
 
 
   
 
   
 
 
Segment Results
 
 
   
 
   
 
 
 
First Quarter
 
 
2012
 
2011
   
Percent Change
 
Total Segment Operating Revenues
  $ 744     $ 868       (14.3) %
Segment operating expenses
                       
   Operations and support
    547       572       (4.4)  
   Depreciation and amortization
    77       106       (27.4)  
Total Segment Operating Expenses
    624       678       (8.0)  
Segment Income
  $ 120     $ 190       (36.8) %

Operating Results
Our Advertising Solutions segment operating income margin decreased from 21.9% in the first quarter of 2011 to 16.1% in the first quarter 2012. The declines were primarily attributable to decreased print advertising revenue. On April 9, 2012, we announced an agreement to sell our Advertising Solutions business unit. As part of the terms of the transaction, we will receive a 47% equity interest in the new entity. The transaction is expected to close in mid-year 2012 (See Note 6).
 
 
24 
 

 
AT&T INC.
MARCH 31, 2012
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Operating revenues decreased $124, or 14.3%, in the first quarter of 2012, reflecting migration from print to online search.

Operating expenses decreased $54, or 8.0%, in the fi