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T > SEC Filings for T > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for AT&T INC.

Form 10-Q for AT&T INC.


2-Nov-2012

Quarterly Report


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 communications services, local exchange services, long-distance services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale 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 third quarter and for the first nine months of 2012 and 2011 are summarized as follows:

                                                     Third Quarter                           Nine-Month Period
                                                                                                               Percent
                                         2012         2011        Percent Change      2012         2011         Change
Operating Revenues                     $ 31,459     $ 31,478             (0.1) %    $ 94,856     $ 94,220          0.7 %
Operating expenses
Cost of services and sales               12,718       12,656               0.5        38,000       38,225         (0.6 )
Selling, general and administrative       8,192        7,969               2.8        24,330       23,983          1.4
Depreciation and amortization             4,512        4,618             (2.3)        13,571       13,804         (1.7 )
Total Operating Expenses                 25,422       25,243               0.7        75,901       76,012         (0.1 )
Operating Income                          6,037        6,235             (3.2)        18,955       18,208          4.1
 Income Before Income Taxes               5,442        5,585             (2.6)        16,990       16,406          3.6
Net Income                                3,701        3,686               0.4        11,318       10,812          4.7
Net Income Attributable to AT&T        $  3,635     $  3,623               0.3 %    $ 11,121     $ 10,622          4.7 %

Overview
Operating income decreased $198, or 3.2%, in the third quarter and increased $747, or 4.1%, for the first nine months of 2012. Both operating revenues and expenses for the quarter were affected by the May 2012 sale of our Advertising Solutions segment, as discussed below. Operating income in the third quarter and for the first nine months reflects continued growth in wireless service and equipment revenue, driven mostly by data revenue growth, along with increased revenues from AT&T U-verse® (U-verse) services and strategic business services. Growth in wireless and wireline revenues in the third quarter was more than offset by higher expenses driven primarily by increased wireless equipment, commissions and administrative costs. Our operating income margin in the third quarter decreased from 19.8% in 2011 to 19.2% in 2012 and for the first nine months increased from 19.3% in 2011 to 20.0% in 2012.

Operating revenues decreased $19, or 0.1%, in the third quarter and increased $636, or 0.7%, for the first nine months of 2012. The sale of our Advertising Solutions segment reduced revenues $803 in the third quarter and $1,463 in the first nine months. The third-quarter decrease from Advertising Solutions was offset by higher wireless service and equipment revenues and higher wireline data revenues from U-verse and strategic business services. The increase in operating revenues for the first nine months was primarily due to the continued growth in wireless service and equipment revenues and higher wireline data revenues. These increases were partially offset by the Advertising Solutions segment sale and continued declines in wireline voice.


AT&T INC.
SEPTEMBER 30, 2012

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Revenue growth continues to be tempered by declines in our wireline voice revenues. Total switched access lines decreased 12.8% since September 30, 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.

Cost of services and sales expenses increased $62, or 0.5%, in the third quarter and decreased $225, or 0.6%, for the first nine months of 2012. The sale of our Advertising Solutions segment reduced expenses $277 in the third quarter and $499 for the first nine months. The increase in the third quarter was primarily due to higher wireless handset costs related to smartphone sales including the launch of the latest iPhone model and wireline costs attributable to growth in U-verse subscribers, which were mostly offset by lower non-employee related charges and the sale of our Advertising Solutions segment. The decrease for the first nine months is primarily due to the sale of our Advertising Solutions segment and lower non-employee related expenses, partially offset by higher U-verse, wireless handset and wireless network costs.

Selling, general and administrative expenses increased $223, or 2.8%, in the third quarter and $347, or 1.4%, for the first nine months of 2012. The increases were primarily due to higher wireless commissions and administrative costs. The increases were partially offset by decreased sales and advertising costs, employee related expenses, and the sale of our Advertising Solutions segment, which reduced expenses $277 in the third quarter and $435 for the first nine months.

Depreciation and amortization expense decreased $106, or 2.3%, in the third quarter and $233, or 1.7%, for the first nine months of 2012. The sale of our Advertising Solutions segment reduced expenses $94 in the third quarter and $195 for the first nine months. Expenses also decreased due 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 decreased $65, or 7.3%, in the third quarter and increased $41, or 1.6%, for the first nine months of 2012. The decrease in the third quarter was due to our lower average debt balances and interest rates, partially offset by call premiums paid on the early redemption of debt in September 2012. The increase for the first nine months was primarily due to a net charge of approximately $151 related to call premiums paid for the early redemption of debt, which were partially offset by net gains on the settlement of associated interest-rate swaps. The increase from the early debt redemptions was partially offset by lower expense resulting from lower average debt balances and interest rates and an increase in the amount of interest capitalized on wireless spectrum that will be used in the future.

Equity in net income of affiliates decreased $11, or 5.7%, in the third quarter and $112, or 17.3%, for the first nine months of 2012. Decreased equity in net income of affiliates was due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil), resulting from foreign exchange losses and increased taxes. Partially offsetting the decreases were earnings from YP Holdings LLC (YP Holdings).

Other income (expense) - net We had other income of $47 in the third quarter and $122 for the first nine months of 2012, compared to other income of $46 in the third quarter and $132 for the first nine months of 2011. Income in the third quarter and for the first nine months of 2012 included interest and dividend income of $17 and $51, leveraged lease income of $5 and $46 and net gains on the sale of investments of $83 and $82. This income was partially offset by a third-quarter investment impairment of $55.

Other income in the third quarter and for the first nine months of 2011 included interest and dividend income of $13 and $56 and leveraged lease income of $4 and $15, respectively. In addition, third quarter 2011 results included an $8 gain on the sale of nonstrategic assets along with foreign exchange gains of $7, while results for the first nine months of 2011 included a net gain of $66 from sale of investments.

Income taxes decreased $158, or 8.3%, in the third quarter and increased $78, or 1.4%, for the first nine months of 2012. Our effective tax rate was 32.0% for the third quarter and 33.4% for the first nine months of 2012, as compared to 34.0% for the third quarter and 34.1% for the first nine months of 2011. The decrease in effective tax rate in this quarter is due primarily to recognition of benefits related to resolution of audit issues.


AT&T INC.
SEPTEMBER 30, 2012

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Selected Financial and Operating Data
                                                  September 30,
                                               2012          2011
Wireless subscribers (000)                     105,871       100,738
Network access lines in service (000)           33,088        37,956
Total wireline broadband connections (000)      16,392        16,476
Debt ratio1                                       38.6 %        38.5 %
Ratio of earnings to fixed charges2               5.36          5.41
Number of AT&T employees3                      241,130       256,210

1 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 do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.

2 See Exhibit 12.

3 Includes the reduction of approximately 8,200 employees as a result of the sale of our Advertising Solutions segment.

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 three reportable segments: (1) Wireless, (2) Wireline, and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions. On May 8, 2012, we completed the sale of our Advertising Solutions segment and received a 47 percent equity interest in the new entity YP Holdings (see Note 1).

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 reclassified 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 reclassified to exclude the operating results of the home monitoring 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 included our directory operations, which published Yellow and White Pages directories and sold directory advertising and Internet-based advertising and local search.

The Other segment includes our portion of the results from our international equity investments, our 47 percent equity interest in YP Holdings, 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 reclassified to exclude the operating results of customer information services, which are now reported in our Wireline segment's results.


AT&T INC.
SEPTEMBER 30, 2012

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

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, 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."

Wireless
Segment Results
                                                          Third Quarter                           Nine-Month Period
                                                                                                                    Percent
                                               2012         2011       Percent Change       2012         2011        Change

Segment operating revenues
Service                                     $ 14,906     $ 14,261               4.5 %    $ 44,237     $ 42,379          4.4 %
Equipment                                      1,726        1,345              28.3         4,884        4,140         18.0
Total Segment Operating Revenues              16,632       15,606               6.6        49,121       46,519          5.6
Segment operating expenses
Operations and support                        10,549        9,376              12.5        30,337       29,023          4.5
Depreciation and amortization                  1,730        1,620               6.8         5,092        4,741          7.4
Total Segment Operating Expenses              12,279       10,996              11.7        35,429       33,764          4.9
Segment Operating Income                       4,353        4,610             (5.6)        13,692       12,755          7.3
Equity in Net Income (Loss) of Affiliates       (17)          (8)                 -          (45)         (19)            -
Segment Income                              $  4,336     $  4,602             (5.8) %    $ 13,647     $ 12,736          7.2 %


AT&T INC.
SEPTEMBER 30, 2012

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

The following table highlights other key measures of performance for the Wireless segment:

                                                      Third Quarter                               Nine-Month Period
                                           2012        2011       Percent Change        2012          2011        Percent Change
Wireless Subscribers (000)1                                                            105,871       100,738               5.1 %
   Gross Subscriber Additions (000)2       4,914       5,946            (17.4 )%        15,162        17,154             (11.6 )
   Net Subscriber Additions (000)2           678       2,123            (68.1 )          2,670         5,202             (48.7 )
   Total Churn4                             1.34 %      1.28 %           6 BP             1.33 %        1.36 %          (3) BP

Postpaid Subscribers (000)                                                              69,747        68,614               1.7 %
   Net Postpaid Subscriber Additions
(000)2                                       151         319            (52.7 )%           658           712              (7.6 )
   Postpaid Churn4                          1.08 %      1.15 %         (7) BP             1.05 %        1.16 %         (11) BP

Prepaid Subscribers (000)                                                                7,545         7,059               6.9 %
   Net Prepaid Subscriber Additions
(000)2                                        77         293            (73.7 )%           294           515             (42.9 )

Reseller Subscribers (000)                                                              14,573        13,028              11.9 %
   Net Reseller Subscriber Additions
(000)2                                       137         473            (71.0 )%           793         1,282             (38.1 )

Connected Device Subscribers (000)3                                                     14,006        12,037              16.4 %
   Net Connected Device
Subscriber Additions (000)                   313       1,038            (69.8 )%           925         2,693             (65.7 )

1 Represents 100% of AT&T Mobility 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 primarily reflected in our prepaid subscriber category, with the remainder in postpaid.

4 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided 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.

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.


AT&T INC.
SEPTEMBER 30, 2012

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Our handset 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 nine months of 2012, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid subscriber base, 63.8% (or 44.5 million subscribers) use smartphones, up from 52.6% (or 36.1 million subscribers) a year earlier. As is common in the industry, most of our subscribers' 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 migrate to a different 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 89% of our postpaid smartphone subscribers are on FamilyTalk® Plans (family plans), Mobile Share plans or business discount plans (discount plans), which provide for service on multiple devices 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 (usage-based data plans) to attract a wide variety of subscribers and to differentiate us from our competitors. Our postpaid subscribers on data plans increased 10.8% year over year. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with 63.9% (or 28.5 million subscribers) on these plans as of September 30, 2012, up from 49.8% (or 18.0 million subscribers) as of September 30, 2011. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn. In late August 2012, we launched new Mobile Share data plans (which allow postpaid subscribers to share data at discounted prices among devices covered by their plan), and early sales results have been positive.

As of September 30, 2012, more than 40% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or Long Term Evolution (LTE) network). 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 long-term 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.

Also as part of our efforts to improve our network performance and help address the need for additional spectrum capacity, we intend to redeploy spectrum currently used for basic 2G services to support more advanced mobile Internet services on our 3G and 4G networks. We will manage this process consistent with previous network upgrades and will transition customers on a market-by-market basis from our Global System for Mobile Communications (GSM) and Enhanced Data rates for GSM Evolution (EDGE) networks (referred to as 2G networks) to our more advanced 3G and 4G networks. We expect to fully discontinue service on our 2G networks by approximately January 1, 2017. As of September 30, 2012, about 10% of AT&T's postpaid subscribers were using 2G-capable handsets. We do not expect this transition to have a material impact on our operating results, but will continue to evaluate the financial impact of transitioning customers from 2G devices to 3G or 4G devices.


AT&T INC.
SEPTEMBER 30, 2012

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
Dollars in millions except per share amounts

Wireless Metrics
Subscriber Additions As of September 30, 2012, we served 105.9 million wireless subscribers, an increase of 5.1%. We continue to see a declining rate of growth in the industry's subscriber base compared to prior years, as reflected in a 17.4% decrease in gross subscriber additions (gross additions) in the third quarter and an 11.6% decrease for the first nine months of 2012. Lower net subscriber additions (net additions) in the third quarter and in the first nine months were primarily attributable to lower connected device and reseller additions when compared to the prior year, which reflected higher churn rates for customers not using such devices (zero-revenue customers). Lower net prepaid additions in the third quarter reflected a decrease in net prepaid tablet additions, as the introduction of our Mobile Share plans has accelerated a shift from prepaid to postpaid tablet subscribers. Postpaid subscriber additions in the third quarter of 2012 reflected, in part, inventory shortages of the latest iPhone model following its September launch.

Average service revenue per user (ARPU) - Postpaid increased 2.4% in the third quarter and 1.9% for the first nine months of 2012, driven by an increase in data services ARPU of 14.6% in the third quarter and for the first nine months, reflecting greater use of smartphones and data-centric devices. The growth in data services ARPU was partially offset by a 5.6% decrease in voice and other service ARPU in the third quarter and a 6.0% decrease for the first nine months. Voice and other service ARPU declined due to lower access and airtime charges, triggered in part by continued growth in our discount plans, which generates lower ARPU compared to our traditional postpaid subscribers, and lower roaming revenues.

ARPU - Total declined 1.3% in the third quarter and 2.1% for the first nine . . .

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