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 June 30, 2013March 31, 2014 
    
  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 July 31, 2013April 30, 2014 there were 5,3115,190 million common shares outstanding.
 

 
 
 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.AT&T INC. AT&T INC. 
CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME 
Dollars in millions except per share amountsDollars in millions except per share amounts Dollars in millions except per share amounts 
(Unaudited)(Unaudited) (Unaudited) 
 Three months ended  Six months ended  Three months ended 
 June 30,  June 30,  March 31, 
 2013  2012  2013  2012  2014  2013 
Operating Revenues $32,075  $31,575  $63,431  $63,397  $32,476  $31,356 
  ��     
Operating Expenses                        
Cost of services and sales (exclusive of depreciation                        
and amortization shown separately below)  13,270   12,254   25,824   25,071   13,321   12,554 
Selling, general and administrative  8,121   8,005   16,454   16,349   8,260   8,333 
Depreciation and amortization  4,571   4,499   9,100   9,059   4,617   4,529 
Total operating expenses  25,962   24,758   51,378   50,479   26,198   25,416 
Operating Income  6,113   6,817   12,053   12,918   6,278   5,940 
Other Income (Expense)                        
Interest expense  (825)  (941)  (1,652)  (1,800)  (860)  (827)
Equity in net income of affiliates  218   132   403   355   88   185 
Other income (expense) – net  288   23   320   75   145   32 
Total other income (expense)  (319)  (786)  (929)  (1,370)  (627)  (610)
Income Before Income Taxes  5,794   6,031   11,124   11,548   5,651   5,330 
Income tax expense  1,914   2,066   3,471   3,931   1,917   1,557 
Net Income  3,880   3,965   7,653   7,617   3,734   3,773 
Less: Net Income Attributable to Noncontrolling Interest  (58)  (63)  (131)  (131)  (82)  (73)
Net Income Attributable to AT&T $3,822  $3,902  $7,522  $7,486  $3,652  $3,700 
Basic Earnings Per Share Attributable to AT&T $0.71  $0.67  $1.38  $1.27  $0.70  $0.67 
Diluted Earnings Per Share Attributable to AT&T $0.71  $0.66  $1.38  $1.27  $0.70  $0.67 
Weighted Average Number of Common Shares                
Outstanding – Basic (in millions)  5,381   5,855   5,446   5,886 
Weighted Average Number of Common Shares                
Outstanding – with Dilution (in millions)
  5,397   5,876   5,463   5,907 
Weighted Average Number of Common Shares Outstanding – Basic (in millions)  5,222   5,513 
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)  5,238   5,530 
Dividends Declared Per Common Share $0.45  $0.44  $0.90  $0.88  $0.46  $0.45 
See Notes to Consolidated Financial Statements.                        

 
2 
 

AT&T INC.                  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                
Dollars in millions                  
(Unaudited)                  
 Three months ended  Six months ended  Three months ended 
 June 30,  June 30,  March 31, 
 2013  2012  2013  2012  2014  2013 
Net income $3,880  $3,965  $7,653  $7,617  $3,734  $3,773 
Other comprehensive income, net of tax:                        
Foreign Currency:                        
Translation adjustments (includes $(1), $(1), $(1)
and $0 attributable to noncontrolling interest), net of taxes of
$(127), $(55), $(65) and $76
  (239)  (101)  (118)  142 
Reclassification adjustment included in net income,
net of taxes of $19, $0, $19 and $0
  34   -   34   - 
Foreign currency translation adjustment (includes $0 and $0 attributable to
noncontrolling interest), net of taxes of $(9) and $62
  (20)  121 
Reclassification adjustment included in net income, net of taxes of $14 and $0  25   - 
Available-for-sale securities:                        
Net unrealized gains (losses), net of taxes of $6, $(27), $46
and $27
  11   (52)  86   49 
Reclassification adjustment realized in net income, net of
taxes of $(1), $(3), $(5) and $(6)
  (3)  (6)  (10)  (12)
Net unrealized gains, net of taxes of $10 and $40  16   75 
Reclassification adjustment included in net income, net of taxes of $(7) and $(4)  (11)  (7)
Cash flow hedges:                        
Net unrealized gains (losses), net of taxes of $66, $(58),
$115 and $(58)
  120   (107)  210   (107)
Reclassification adjustment included in net income,
net of taxes of $4, $4, $8 and $7
  8   7   15   13 
Net unrealized gains, net of taxes of $3 and $49  6   90 
Reclassification adjustment included in net income, net of taxes of $4 and $4  7   7 
Defined benefit postretirement plans:                        
Net actuarial gain (loss) from equity method investees arising
during period, net of taxes of $0, $(29), $0 and $(29)
  -   (53)  -   (53)
Reclassification adjustment included in net income, net of
taxes $5, $0, $5, and $0
  8   -   8   - 
Amortization of net prior service credit included in
net income, net of taxes of $(109), $(87), $(218)
and $(171)
  (177)  (137)  (355)  (274)
Other  -   1   -   1 
Other comprehensive loss  (238)  (448)  (130)  (241)
Reclassification adjustment included in net income, net of taxes of $2 and $0  3   - 
Amortization of net prior service credit included in net income, net of taxes of
$(147) and $(109)
  (240)  (178)
Other comprehensive income (loss)  (214)  108 
Total comprehensive income  3,642   3,517   7,523   7,376   3,520   3,881 
Less: Total comprehensive income attributable to
noncontrolling interest
  (57)  (62)  (130)  (131)  (82)  (73)
Total Comprehensive Income Attributable to AT&T $3,585  $3,455  $7,393  $7,245  $3,438  $3,808 
See Notes to Consolidated Financial Statements.                        

 
3 
 

AT&T INC.AT&T INC. AT&T INC. 
CONSOLIDATED BALANCE SHEETSCONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS 
Dollars in millions except per share amountsDollars in millions except per share amounts Dollars in millions except per share amounts 
 June 30,  December 31,  March 31,  December 31, 
 2013  2012  2014  2013 
Assets (Unaudited)     (Unaudited)    
Current Assets            
Cash and cash equivalents $4,548  $4,868  $3,611  $3,339 
Accounts receivable - net of allowances for doubtful accounts of $520 and $547  12,508   12,657 
Accounts receivable - net of allowances for doubtful accounts of $483 and $483  13,120   12,918 
Prepaid expenses  1,038   1,035   1,000   960 
Deferred income taxes  953   1,036   1,171   1,199 
Other current assets  2,381   3,110   5,187   4,780 
Total current assets  21,428   22,706   24,089   23,196 
Property, plant and equipment  276,833   270,907   278,862   274,798 
Less: accumulated depreciation and amortization  (166,099)  (161,140)  (166,053)  (163,830)
Property, Plant and Equipment – Net  110,734   109,767   112,809   110,968 
Goodwill  69,770   69,773   69,720   69,273 
Licenses  53,665   52,352   59,584   56,433 
Customer Lists and Relationships – Net  1,015   1,391 
Other Intangible Assets – Net  5,018   5,032   6,515   5,779 
Investments in and Advances to Equity Affiliates  3,888   4,581 
Investments in Equity Affiliates  3,613   3,860 
Other Assets  6,575   6,713   9,010   8,278 
Total Assets $272,093  $272,315  $285,340  $277,787 
                
Liabilities and Stockholders’ Equity                
Current Liabilities                
Debt maturing within one year $3,256  $3,486  $8,301  $5,498 
Accounts payable and accrued liabilities  19,438   20,494   22,234   21,107 
Advanced billing and customer deposits  4,029   4,225   4,121   4,212 
Accrued taxes  2,065   1,026   2,784   1,774 
Dividends payable  2,401   2,556   2,390   2,404 
Total current liabilities  31,189   31,787   39,830   34,995 
Long-Term Debt  71,917   66,358   71,575   69,290 
Deferred Credits and Other Noncurrent Liabilities                
Deferred income taxes  29,400   28,491   36,448   36,308 
Postemployment benefit obligation  41,994   41,392   30,029   29,946 
Other noncurrent liabilities  11,278   11,592   16,089   15,766 
Total deferred credits and other noncurrent liabilities  82,672   81,475   82,566   82,020 
                
Stockholders’ Equity                
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2013 and        
December 31, 2012: issued 6,495,231,088 at June 30, 2013 and December 31, 2012)  6,495   6,495 
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2014 and        
December 31, 2013: issued 6,495,231,088 at March 31, 2014 and December 31, 2013)  6,495   6,495 
Additional paid-in capital  90,985   91,038   91,027   91,091 
Retained earnings  25,212   22,481   32,402   31,141 
Treasury stock (1,159,998,643 at June 30, 2013 and 913,836,325        
at December 31, 2012, at cost)  (41,819)  (32,888)
Treasury stock (1,300,637,055 at March 31, 2014 and 1,268,914,913        
at December 31, 2013, at cost)  (46,684)  (45,619)
Accumulated other comprehensive income  5,107   5,236   7,666   7,880 
Noncontrolling interest  335   333   463   494 
Total stockholders’ equity  86,315   92,695   91,369   91,482 
Total Liabilities and Stockholders’ Equity $272,093  $272,315  $285,340  $277,787 
See Notes to Consolidated Financial Statements.                

 
4 
 

AT&T INC.AT&T INC. AT&T INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS 
Dollars in millionsDollars in millions Dollars in millions 
(Unaudited)(Unaudited) (Unaudited) 
 Six months ended  Three months ended 
 June 30,  March 31, 
 2013  2012  2014  2013 
Operating Activities            
Net income $7,653  $7,617  $3,734  $3,773 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  9,100   9,059   4,617   4,529 
Undistributed earnings from investments in equity affiliates  (198)  (355)  17   (185)
Provision for uncollectible accounts  439   572   241   262 
Deferred income tax expense and noncurrent unrecognized tax benefits  926   (639)
Deferred income tax expense  578   433 
Net (gain) loss from sale of investments, net of impairments  (260)  2   (122)  (11)
Changes in operating assets and liabilities:                
Accounts receivable  (290)  (460)  (498)  295 
Other current assets  784   1,468   (340)  864 
Accounts payable and accrued liabilities  (340)  592   1,025   (1,675)
Retirement benefit funding  (140)  - 
Other - net
  (103)  (531)  (313)  (86)
Total adjustments  10,058   9,708   5,065   4,426 
Net Cash Provided by Operating Activities  17,711   17,325   8,799   8,199 
                
Investing Activities                
Construction and capital expenditures:                
Capital expenditures  (9,665)  (8,742)  (5,716)  (4,252)
Interest during construction  (140)  (130)  (55)  (66)
Acquisitions, net of cash acquired  (1,182)  (477)  (662)  (1,045)
Dispositions  825   800   351   5 
Sales (purchases) of securities, net  -   124 
Return of advances to and investments in equity affiliates  301   - 
Other  (4)  -   -   1 
Net Cash Used in Investing Activities  (9,865)  (8,425)  (6,082)  (5,357)
                
Financing Activities                
Net change in short-term borrowings with original maturities of three months or less  (17)  274 
Issuance of other short-term borrowings  1,476   -   -   1,474 
Repayment of other short-term borrowings  (233)  - 
Issuance of long-term debt  6,416   6,935   2,987   4,875 
Repayment of long-term debt  (1,823)  (7,035)  (1,867)  (1,791)
Purchase of treasury stock  (9,217)  (4,623)  (1,237)  (5,911)
Issuance of treasury stock  104   376   13   56 
Dividends paid  (4,930)  (5,187)  (2,398)  (2,502)
Other  41   (534)  74   (310)
Net Cash Used in Financing Activities  (8,166)  (10,068)  (2,445)  (3,835)
Net decrease in cash and cash equivalents  (320)  (1,168)
Net increase (decrease) in cash and cash equivalents  272   (993)
Cash and cash equivalents beginning of year  4,868   3,045   3,339   4,868 
Cash and Cash Equivalents End of Period $4,548  $1,877  $3,611  $3,875 
Cash paid during the six months ended June 30 for:        
        
Cash paid (received) during the three months ended March 31 for:        
Interest $2,002  $2,133  $976  $1,080 
Income taxes, net of refunds $591  $127  $(40) $(1,114)
See Notes to Consolidated Financial Statements.See Notes to Consolidated Financial Statements.         

 
5 
 

AT&T INC.AT&T INC. AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amountsDollars and shares in millions except per share amounts Dollars and shares in millions except per share amounts
(Unaudited)(Unaudited) (Unaudited)
June 30, 2013 March 31, 2014
Shares Amount Shares Amount
Common Stock        
Balance at beginning of year6,495 $6,495  6,495  $ 6,495 
Issuance of stock - -   -    - 
Balance at end of period6,495 $6,495  6,495  $ 6,495 
        
Additional Paid-In Capital        
Balance at beginning of year  $91,038   $ 91,091 
Issuance of treasury stock  (8)     4 
Share-based payments  (45)     (68)
Balance at end of period  $90,985   $ 91,027 
        
Retained Earnings        
Balance at beginning of year  $22,481   $ 31,141 
Net income attributable to AT&T ($1.38 per diluted share)  7,522 
Dividends to stockholders ($0.90 per share)  (4,791) 
Net income attributable to AT&T ($0.70 per diluted share)    3,652 
Dividends to stockholders ($0.46 per share)    (2,391)
Balance at end of period  $25,212   $ 32,402 
        
Treasury Stock        
Balance at beginning of year (914) $(32,888)  (1,269) $ (45,619)
Repurchase of common stock (257) (9,217)  (37)   (1,237)
Issuance of treasury stock11 286  5    172 
Balance at end of period (1,160) $(41,819)  (1,301) $ (46,684)
         
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax        
Balance at beginning of year  $5,236   $ 7,880 
Other comprehensive loss attributable to AT&T   (129)     (214)
Balance at end of period  $5,107   $ 7,666 
         
Noncontrolling Interest         
Balance at beginning of year  $333   $ 494 
Net income attributable to noncontrolling interest   131     82 
Distributions   (128)     (113)
Translation adjustments attributable to noncontrolling interest, net of taxes   (1) 
Balance at end of period  $335   $ 463 
         
Total Stockholders’ Equity at beginning of year  $92,695   $ 91,482 
Total Stockholders’ Equity at end of period  $86,315   $ 91,369 
See Notes to Consolidated Financial Statements.   

 
6 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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, that are 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, 2012.2013. On March 13, 2014, we closed our acquisition of Leap Wireless International, Inc. (Leap) (see Note 7), and we incorporated them into our wireless operations following the date of acquisition.

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 communications services, traditional wireline voice services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale services.

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. We also record our proportionate share of our equity method investees’ other comprehensive income (OCI) items, including actuarial gains and losses on pension and other postretirement benefit obligations.

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

Equipment Installment Plan  Under our AT&T NextSM (AT&T Next) program, we offer our customers the option to purchase certain devices in installments over a period of up to 26 months. Additionally, after a specified period of time they also have the right to trade in the original device for a new device and have the remaining unpaid balance satisfied. For customers that elect these trade-in programs, we recognize revenue at the point of sale for the entire amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. As of March 31, 2014, total equipment installment plan receivables of $2,447 were included on our consolidated balance sheets.

Stock Repurchase Program  In May 2013,During the first quarter of 2014, we completedhad repurchased approximately 37 million shares totaling $1,237 under a repurchase authorization that was approved by our Board of Directors in July 2012.March 2013. In March 2013,2014, our Board of Directors authorized theapproved another authorization to repurchase of up to an additional 300 million shares of our common stock. During the first six months of 2013, we repurchased 257 million shares for $9,217 under these authorizations. At June 30, 2013,March 31, 2014, we had 272425 million shares remaining under the March 2013 authorization.these authorizations. The authorization hasrepurchase authorizations have no expiration date.date, and we expect to make future repurchases opportunistically.

 
7 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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 and six months ended June 30,March 31, 2014 and 2013, and 2012, areis shown in the table below:

Three months ended Six months ended Three months ended 
June 30, June 30, March 31, 
2013 2012 2013 2012 2014  2013 
Numerators                
Numerator for basic earnings per share:                
Net Income$3,880 $3,965 $7,653 $7,617
Net income attributable to noncontrolling interest (58) (63) (131) (131)
Net Income attributable to AT&T 3,822 3,902 7,522 7,486
Net income $3,734  $3,773 
Less: Net income attributable to noncontrolling interest  (82)  (73)
Net income attributable to AT&T  3,652   3,700 
Dilutive potential common shares:                
Share-based payment 2 2 6 6  4   4 
Numerator for diluted earnings per share$3,824 $3,904 $7,528 $7,492 $3,656  $3,704 
Denominators (000,000)                
Denominator for basic earnings per share:                
Weighted average number of common shares outstanding 5,381 5,855 5,446 5,886
Weighted-average number of common shares outstanding  5,222   5,513 
Dilutive potential common shares:                
Share-based payment 16 21 17 21
Share-based payment (in shares)  16   17 
Denominator for diluted earnings per share 5,397 5,876 5,463 5,907  5,238   5,530 
Basic earnings per share attributable to AT&T$0.71 $0.67 $1.38 $1.27 $0.70  $0.67 
Diluted earnings per share attributable to AT&T$0.71 $0.66 $1.38 $1.27 $0.70  $0.67 

At June 30,March 31, 2014 and 2013, and 2012, we had issued and outstanding options to purchase approximately 1312 million and 2215 million shares of AT&T common stock. For the quarter ended June 30,March 31, 2014 and 2013, and 2012, the exercise prices of 23 million and 4 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 June 30, 2013 and 2012, the exercise prices of 11 million and 17 million vested stock options were below market price.
 
 
8 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component ofincluded in accumulated other comprehensive income (OCI) included in accumulated OCI(accumulated OCI) for the sixthree months ended June 30,March 31, 2014 and 2013, are presented below. All amounts are net of tax and exclude noncontrolling interest.

                
At March 31, 2014 and for the period ended:            
 
Foreign
 Currency
 Translation
 Adjustment
 
Net Unrealized
 Gains (Losses)
 on Available-
for-Sale
Securities
 
Net Unrealized
 Gains (Losses)
 on Cash Flow
 Hedges
 
Defined Benefit
 Postretirement
 Plans
 
Accumulated
 Other
 Comprehensive
 Income
Balance as of December 31, 2013$ (367) $ 450  $ 445  $ 7,352  $ 7,880 
Other comprehensive income
   (loss) before reclassifications
  (20)   16    6    -    2 
Amounts reclassified
   from accumulated OCI
 
 251 
  
 (11)2 
  
 73 
  
 (237)4 
   (216)
Net other comprehensive
   income (loss)
  5    5    13    (237)   (214)
Balance as of March 31, 2014$ (362) $ 455  $ 458  $ 7,115  $ 7,666 
                
At March 31, 2013 and for the period ended:            
 
Foreign
 Currency
 Translation
 Adjustment
 
Net Unrealized
 Gains (Losses)
 on Available-
for-Sale
Securities
 
Net Unrealized
 Gains (Losses)
 on Cash Flow
 Hedges
 
Defined Benefit
 Postretirement
 Plans
 
Accumulated
 Other
 Comprehensive
 Income
Balance as of December 31, 2012$ (284) $ 272  $ (110) $ 5,358  $ 5,236 
Other comprehensive income
   before reclassifications
  121    75    90    -    286 
Amounts reclassified
   from accumulated OCI
 
 - 1 
  
 (7)2 
  
 73 
  
 (178)4 
   (178)
Net other comprehensive
   income (loss)
  121    68    97    (178)   108 
Balance as of March 31, 2013$ (163) $ 340  $ (13) $ 5,180  $ 5,344 
 1  Pre-tax translation loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
 2  Realized gains (losses) are included in Other income (expense) - net in the consolidated statements of income.
 3  Realized (gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
 4 
 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5). Actuarial loss
  reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.
At June 30, 2013 and for the period ended:
 
            
  
Foreign
Currency
Translation
Adjustment
  
Net
Unrealized
Gain (Loss)
on Available-
for-Sale
Securities
  
Net
Unrealized
Gains
(Losses) on
Cash Flow
Hedges
  
Defined Benefit
Postretirement
Plans
  
Accumulated
Other
Comprehensive
Income
Balance as of January 1, 2013$ (284) $ 272 $ (110) $ 5,358 $ 5,236
Other comprehensive income
   (loss) before reclassifications
  (117)   86   210   -   179
Amounts reclassified
   from accumulated OCI
  341  (10)2  153  (347)4  (308)
Net other comprehensive
   income (loss)
  (83)   76   225   (347)   (129)
Balance as of June 30, 2013$ (367) $ 348 $ 115 $ 5,011 $ 5,107
 1 Pre-tax translation loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
 2 Pre-tax gains are included in Other income (expense) - net in the consolidated statements of income.
 3 (Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
 4 Prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative
  in the consolidated statements of income (see Note 5). Actuarial loss reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated
  statements of income.
9 
AT&T INC.
MARCH 31, 2014

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


NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on theour strategic needsdirection of the business, needs of the network (wireless or wireline) providedproviding services and demands 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. Therefore, these items are not included in each segment’s reportable segment’s results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have threetwo reportable segments: (1) Wireless and (2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included our Advertising Solutions segment, which was subsequently sold.Wireline.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment includes our portion of the results from our mobile payment joint venture marketed as the Isis Mobile WalletTM (ISIS), which is accounted for as an equity method investment.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, AT&T U-verse® high-speed broadband,high speed Internet, video and voiceVoIP services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements.
9 
AT&T INC.
JUNE 30, 2013

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


The Corporate and Other segmentcolumn includes our portion of the results from our international equity investments, our equity interest in YP Holdings LLC (YP Holdings), andunallocated corporate expenses, which includes costs to support corporate-driven activities and operations. Also included in the Other segment areoperations, impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.plans as well as our actuarial gains and losses on our pension and postretirement plan valuations. Results from equity method investments in América Móvil, S.A. de C.V. and YP Holdings LLC are also excluded from our segment results as those results are nonoperational and not considered in our assessment of segment performance. We have revised our prior-period presentation to conform to our current reporting.
10 
AT&T INC.
MARCH 31, 2014

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


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

For the three months ended June 30, 2013   
 Advertising
Solutions
     
 Consolidated
Results
For the three months ended March 31, 2014:For the three months ended March 31, 2014:          
  Wireless  Wireline 
 Advertising
Solutions
  Other  Consolidations 
 Consolidated
Results
 Wireless  Wireline  
Corporate
and Other
  
Consolidated
Results
 
Data$ 5,356 $ 8,400 $ $ - $ - $
Voice, text and other  10,014  5,141  -  -  -  15,155
Equipment and other  1,921  1,232  -  11  -  3,164
Service $15,387  $14,389  $-  $29,776 
Equipment  2,479   212   9   2,700 
Total segment operating revenues  17,291  14,773  -  11  -  32,075  17,866   14,601   9   32,476 
Operations and support expenses  10,770  10,417  -  204  -  21,391  10,882   10,457   242   21,581 
Depreciation and amortization expenses  1,843  2,722  -  6  -  4,571  1,931   2,684   2   4,617 
Total segment operating expenses  12,613  13,139  -  210  -  25,962  12,813   13,141   244   26,198 
Segment operating income (loss)  4,678  1,634  -  (199)  -  6,113  5,053   1,460   (235)  6,278 
Interest expense  -  -  -  -  825  825  -   -   860   860 
Equity in net income (loss) of affiliates  (19)  -  -  237  -  218  (20)  1   107   88 
Other income (expense) – net  -  -  -  -  288  288  -   -   145   145 
Segment income (loss) before
income taxes
$ 4,659 $ 1,634 $ - $ 38 $ (537) $ 5,794 $5,033  $1,461  $(843) $5,651 
                            
For the six months ended June 30, 2013    Advertising Solutions      Consolidated Results
For the three months ended March 31, 2013:For the three months ended March 31, 2013:             
  Wireless  Wireline  Advertising Solutions  Other  Consolidations  Consolidated Results Wireless  Wireline  
Corporate
and Other
  
Consolidated
Results
 
Data$ 10,481 $ 16,562 $ $ - $ - $
Voice, text and other  19,951  10,447  -  -  -  30,398
Equipment and other  3,550  2,419  -  21  -  5,990
Service $15,062  $14,381  $-  $29,443 
Equipment  1,629   274   10   1,913 
Total segment operating revenues  33,982  29,428  -  21  -  63,431  16,691   14,655   10   31,356 
Operations and support expenses  20,950  20,752  -  576  -  42,278  10,180   10,335   372   20,887 
Depreciation and amortization expenses  3,678  5,410  -  12  -  9,100  1,835   2,688   6   4,529 
Total segment operating expenses  24,628  26,162  -  588  -  51,378  12,015   13,023   378   25,416 
Segment operating income (loss)  9,354  3,266  -  (567)  -  12,053  4,676   1,632   (368)  5,940 
Interest expense  -  -  -  -  1,652  1,652  -   -   827   827 
Equity in net income (loss) of affiliates  (37)  1  -  439  -  403  (18)  1   202   185 
Other income (expense) – net  -  -  -  -  320  320  -   -   32   32 
Segment income (loss) before
income taxes
$ 9,317 $ 3,267 $ - $ (128) $ (1,332) $ 11,124 $4,658  $1,633  $(961) $5,330 

10 
AT&T INC.
JUNE 30, 2013

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


For the three months ended June 30, 2012     
 Advertising
Solutions
        
 Consolidated
Results
   Wireless   Wireline     Other   Consolidations  
Data$ 4,471 $ 7,935 $ - $ - $ - $ 12,406
Voice, text and other  10,294   5,696   -   -   -   15,990
Equipment and other  1,588   1,276   305   10   -   3,179
Total segment operating revenues  16,353   14,907   305   10   -   31,575
Operations and support expenses  9,590   10,201   226   242   -   20,259
Depreciation and amortization expenses  1,696   2,766   29   8   -   4,499
Total segment operating expenses  11,286   12,967   255   250   -   24,758
Segment operating income (loss)  5,067   1,940   50   (240)   -   6,817
Interest expense  -   -   -   -   941   941
Equity in net income (loss) of affiliates  (15)   (1)   -   148   -   132
Other income (expense) – net  -   -   -   -   23   23
Segment income (loss) before
   income taxes
$ 5,052 $ 1,939 $ 50 $ (92) $ (918) $ 6,031
                  
For the six months ended June 30, 2012      Advertising Solutions         Consolidated Results
   Wireless   Wireline     Other   Consolidations  
Data$ 8,706 $ 15,735 $ - $ - $ - $ 24,441
Voice, text and other  20,625   11,588   -   -   -   32,213
Equipment and other  3,158   2,513   1,049   23   -   6,743
Total segment operating revenues  32,489   29,836   1,049   23   -   63,397
Operations and support expenses  19,568   20,603   773   476   -   41,420
Depreciation and amortization expenses  3,362   5,574   106   17   -   9,059
Total segment operating expenses  22,930   26,177   879   493   -   50,479
Segment operating income (loss)  9,559   3,659   170   (470)   -   12,918
Interest expense  -   -   -   -   1,800   1,800
Equity in net income (loss) of affiliates  (28)   (1)   -   384   -   355
Other income (expense) – net  -   -   -   -   75   75
Segment income (loss) before
   income taxes
$ 9,531 $ 3,658 $ 170 $ (86) $ (1,725) $ 11,548

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance, and death 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. During

On September 9, 2013, we have a required contribution to our pension plans of approximately $175.

In October 2012, we filed an application with the U.S. Department of Labor for approval to makemade a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our Mobilitywireless business, to the trust used to pay qualified pension benefits under plans sponsored by AT&T. At the time we filed the application, theour qualified pension plans. The preferred equity interest had a fair market value of $9,500.$9,222 at March 31, 2014. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as contributions. We anticipate approval in 2013, and expectdistributed $140 to the trust during the three months ended March 31, 2014. So long as we make the contribution at that time. As currently proposed,distributions, we will have no limitations on our ability to declare a dividend, or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan’s separate financial statements. However, because the preferred equity interest will constitute a qualified plan asset for ERISA funding purposes, but mayis not be includedunconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements uponand instead has been eliminated in consolidation.
11 
AT&T INC.
MARCH 31, 2014

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

On September 9, 2013, the Department of Labor (DOL) published a proposed exemption that authorized retroactive approval of this voluntary contribution. Final determination of whether it will qualify asThe proposal was open for public comment and we are currently awaiting a plan asset for financial reporting purposes isfinal decision by the DOL. Our retirement benefit plans, including required contributions, are subject to the final termsprovisions of the preferred equity interest.ERISA.

We recognize actuarial 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. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income.
11 
AT&T INC.
JUNE 30, 2013

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


In the following table,income, expense credits are denoted with parentheses. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded.

Three months ended Six months ended Three months ended 
June 30, June 30, March 31, 
2013 2012 2013 2012 2014  2013 
Pension cost:                
Service cost – benefits earned during the period$330 $304 $660 $614 $282  $330 
Interest cost on projected benefit obligation 607 700 1,214 1,400  661   607 
Expected return on assets (828) (880) (1,656) (1,760)  (849)  (828)
Amortization of prior service (credit) (23) (4) (46) (8)
Amortization of prior service credit  (24)  (23)
Net pension cost$86 $120 $172 $246 $70  $86 
                
Postretirement cost:                
Service cost – benefits earned during the period$96 $82 $191 $166 $58  $95 
Interest cost on accumulated postretirement benefit obligation 389 447 779 894  365   390 
Expected return on assets (178) (201) (356) (401)  (164)  (178)
Amortization of prior service (credit) (262) (215) (525) (432)
Net postretirement cost$45 $113 $89 $227
Amortization of prior service credit  (362)  (263)
Net postretirement (credit) cost $(103) $44 
                
Combined net pension and postretirement cost$131 $233 $261 $473
Combined net pension and postretirement (credit) cost $(33) $130 

Our combined net pension and postretirement cost decreased $102$163 in the secondfirst quarter and $212 for the first six months of 2013.2014. The decrease reflects lower interest costs, which are driven by the prior year’s declining bond rates and reflects higher amortization of prior service credits due to plan changes, including changes to retireefuture costs for continued retiree healthcare coverage. The decrease also reflects increasing corporate bond rates, which contributed to lower service cost and higher interest costs.

Due in part to our 2013 enhanced retirement offer and projected distribution levels, we expect that lump sum distributions from the plan during 2014 could exceed service and interest costs, resulting in settlement accounting for a portion of our pension plan. This decrease is partially offset by lower expected long-term return on planwould result in remeasurement of the plans assets reflectingand obligations, with remeasurement for each plan’s asset mix and continued uncertainty in the securities markets and the U.S. economy.interim period thereafter.

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 $28$29 in the secondfirst quarter of 2014, of which $27 was interest cost, and $27 for the first quarter of 2013, of which $26 was interest cost, and $55 for the first six months, of which $51 was interest cost. In 2012, net supplemental retirement pension benefits cost was $32 in the second quarter, of which $29 was interest cost, and $63 for the first six months, of which $58$25 was interest cost.

 
12 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

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

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

Level 2Inputs 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 3Inputs 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 measurements 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, 2012.2013.

Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:

June 30, 2013 December 31, 2012  March 31, 2014     December 31, 2013
Carrying Fair Carrying Fair  Carrying   Fair   Carrying   Fair 
Amount Value Amount Value  Amount   Value   Amount   Value 
Notes and debentures$ 73,664 $ 79,581 $ 69,578 $ 81,310 $79,552  $85,698  $74,484  $79,309 
Commercial paper  1,243  1,243  -  -  -   -   20   20 
Bank borrowings  1  1  1  1  4   4   1   1 
Investment securities  2,407  2,407  2,218  2,218  2,609   2,609   2,450   2,450 

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 2.2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
 
 
13 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities werewas 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).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 of $113$116 have maturities of less than one year, $278$515 within one to three years, $184$65 within three to five years, and $256$251 for five or more years, which approximate fair value.years.

Our short-term investments (including money market securities) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Our investment securities are recorded in “Other Assets” on the consolidated balance sheets.

Following is the fair value leveling for available-for-sale securities and derivatives as of June 30, 2013March 31, 2014 and December 31, 2012:2013:

 June 30, 2013   March 31, 2014
 Level 1 Level 2 Level 3 Total Level 1  Level 2     Level 3  Total 
Available-for-Sale SecuritiesAvailable-for-Sale Securities                    
Domestic equities Domestic equities$ 1,015 $ - $ - $ 1,015 $1,055  $-  $-  $1,055 
International equities International equities  498  -  -  498  543   -   -   543 
Fixed income bonds Fixed income bonds  -  831  -  831  -   947   -   947 
Asset Derivatives1
Asset Derivatives1
                        
Interest rate swaps Interest rate swaps  -  210  -  210  -   176   -   176 
Cross-currency swaps Cross-currency swaps  -  668  -  668  -   2,020   -   2,020 
Liability Derivatives1
Liability Derivatives1
                        
Interest rate swaps Interest rate swaps  -  (9)  -  (9)  -   (8)  -   (8)
Cross-currency swaps Cross-currency swaps  -  (750)  -  (750)  -   (534)  -   (534)
                         
 December 31, 2012  December 31, 2013
 Level 1 Level 2 Level 3 Total Level 1  Level 2  Level 3  Total 
Available-for-Sale SecuritiesAvailable-for-Sale Securities                        
Domestic equities Domestic equities$ 873 $ - $ - $ 873 $1,049  $-  $-  $1,049 
International equities International equities  469  -  -  469  563   -   -   563 
Fixed income bonds Fixed income bonds  -  837  -  837  -   759   -   759 
Asset Derivatives1
Asset Derivatives1
                        
Interest rate swaps Interest rate swaps  -  287  -  287  -   191   -   191 
Cross-currency swaps Cross-currency swaps  -  752  -  752  -   1,951   -   1,951 
Foreign exchange contracts  -  1  -  1
Liability Derivatives1
Liability Derivatives1
                        
Interest rate swaps  -   (7)  -   (7)
Cross-currency swaps Cross-currency swaps  -  (672)  -  (672)  -   (519)  -   (519)
1 Derivatives designated as hedging instruments are reflected as Other assets, Other noncurrent liabilities and, for a portion of interest rate swaps, Other current assets.
1 Derivatives designated as hedging instruments are reflected as Other assets, Other noncurrent liabilities and, for a portion of interest rate swaps, Other current assets. 1 Derivatives designated as hedging instruments are reflected as Other assets, Other noncurrent liabilities and, for a portion of interest rate swaps, Other current assets. 

 
14 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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 onin 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 valuevalues of the interest rate swaps are exactly offset by 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.underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the sixthree months ended June 30,March 31, 2014 and March 31, 2013, and June 30, 2012, no ineffectiveness was measured.measured on interest rate swaps designated as fair value hedges.

Cash Flow Hedging  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, British pound sterling and Canadian dollar 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.

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 sixthree months ended June 30,March 31, 2014 and March 31, 2013, and June 30, 2012, no ineffectiveness was measured.measured on cross-currency swaps designated as cash flow hedges.

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 “Other income (expense) – net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $45$43 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We may 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 “Otherother income (expense) – net” in the consolidated statements of income. In the sixthree months ended June 30,March 31, 2014 and March 31, 2013, and June 30, 2012, no ineffectiveness was measured.measured on foreign exchange contracts designated as cash flow hedges.
 
 
15
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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 June 30, 2013,March 31, 2014, we had posted collateral of $35$28 (a deposit asset) and held collateral of $708$1,752 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Moody’s Investors Service and StandardsStandard & Poor’s and two rating levels by Fitch, Inc., before the final collateral exchange in June,March, we would have been required to post additional collateral of $169.$51. At December 31, 2012,2013, we had posted collateral of $22$8 (a deposit asset) and held collateral of $543$1,600 (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:

 June 30,  December 31, March 31, December 31, 
 2013  2012 2014 2013 
Interest rate swaps $4,250  $3,000  $6,100  $4,750 
Cross-currency swaps  14,136   12,071   17,787   17,787 
Foreign exchange contracts  4   51 
Total $18,390  $15,122  $23,887  $22,537 

Following is the related hedged items affecting our financial position and performance:Following is the related hedged items affecting our financial position and performance: Following is the related hedged items affecting our financial position and performance: 
                  
Effect of Derivatives on the Consolidated Statements of IncomeEffect of Derivatives on the Consolidated Statements of Income               
Fair Value Hedging RelationshipsThree months ended Six months ended 
 Three months ended
 March 31,  March 31, 
Fair Value Hedging RelationshipsJune 30, 2013 June 30, 2012 June 30, 2013 June 30, 2012  2014  2013 
 
Gain (Loss) on interest rate swaps $(63) $(76) $(87) $(137) $(11) $(24)
Gain (Loss) on long-term debt  63   76   87   137   11   24 

In addition, the net swap settlements that accrued and settled in the quarter ended June 30March 31 were offset against interest expense.

 Three months ended 
 Three months ended  Six months ended  March 31,  March 31, 
Cash Flow Hedging Relationships June 30, 2013  June 30, 2012  June 30, 2013  June 30, 2012  2014  2013 
Cross-currency swaps:                  
Gain (Loss) recognized in accumulated OCI $184  $(160) $325  $(165) $11  $141 
                
Interest rate locks:                        
Interest income (expense) reclassified from
accumulated OCI into income
  (12)  (11)  (23)  (20)  (11)  (11)
                
Foreign exchange contracts:                        
Gain (Loss) recognized in accumulated OCI  2   (5)  -   -   (2)  (2)

 
16 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


NOTE 7. SUBSEQUENT EVENTSACQUSISTIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions
Leap  On July 12, 2013,March 13, 2014, we announced an agreement to acquireacquired Leap, Wireless International, Inc. (Leap), a provider of prepaid wireless service, for fifteen dollars per outstanding share of Leap’s common stock, or approximately $1,260,$1,248 (excluding Leap’s cash on hand), plus one non-transferablenontransferable contingent value right that entitles(CVR) per share. The CVR will entitle each Leap stockholder to a pro rata share of the net proceeds of the future sale of the Chicago 700 MHz A-band FCCFederal Communications Commission (FCC) license held by Leap. As of June 30, 2013, Leap had approximately $2,700 of debt, net of cash.

UnderThe preliminary values of assets acquired under the terms of the agreement were: $3,070 in licenses, $520 in property, plant and equipment, $490 of customer lists, $340 for trade names and $346 of goodwill. The estimated fair value of debt associated with the acquisition of Leap was $3,889.

In connection with the acquisition, we will acquire all ofretired Leap’s stockterm and thereby, acquire all of its wireless properties,other loans and paid $1,869, including spectrum licenses, network assets, retail storesaccrued interest in March 2014. In April 2014, we paid $1,889, including accrued interest and approximately 5 million subscribers. Theredemption premiums, to redeem additional Leap notes outstanding.
Pending Disposition
Connecticut Wireline  In December 2013, we entered into an agreement must be approved by Leap’s stockholders.to sell our incumbent local exchange operations in Connecticut for $2,000 in cash. The transaction also is subject to review by the FCC and the Department of JusticeConnecticut Public Utilities Regulatory Authority and to other customary closing conditions and is expectedstate regulatory authorities. We expect the deal to close in approximately sixthe fourth quarter of 2014, subject to nine months fromcustomary closing conditions.

We applied held-for-sale treatment to the announcement. The agreement also provides both parties with certain termination rights ifassets and liabilities of the transactionConnecticut operations, and, accordingly, included the assets in “Other current assets,” and the related liabilities in “Accounts payable and accrued liabilities,” on our consolidated balance sheets. However, the business does not close by July 11, 2014, extendable by either partyqualify as discontinued operations as we expect significant continuing direct cash flows related to January 11, 2015 if required regulatory approvals have not been obtained. Under certain circumstances, Leap may be required to pay a termination fee or AT&T may be required to provide a three-year roaming agreement to Leap for LTE data coverage if the transaction does not close. If Leap enters intodisposed operations. Assets and liabilities of the roaming agreement, AT&T may purchase, or may be required by Leap to purchase, specified Leap spectrum assets.Connecticut operations included the following:

  March 31,  December 31, 
  2014  2013 
Assets held for sale:      
Current assets $146  $155 
Property, plant and equipment - net  1,323   1,289 
Goodwill  799   799 
Other assets  18   17 
Total assets $2,286  $2,260 
         
Liabilities related to assets held for sale:        
Current liabilities $122  $128 
Noncurrent liabilities  567   480 
Total liabilities $689  $608 

 
17 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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 in the United States and internationally, providing wireless and wireline telecommunicationtelecommunications services and equipment. 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, 2012.2013. 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. Certain amounts have been reclassified to conform to the current period’s presentation.

Consolidated Results  Our financial results in the secondfirst quarter of 2014 and for the first six months of 2013 and 2012 are summarized as follows:

 Second Quarter  Six-Month Period  First Quarter 
 2013  2012  
Percent
Change
  2013  2012  
Percent
Change
  2014  2013  
Percent
Change
 
Operating Revenues $32,075  $31,575   1.6% $63,431  $63,397   0.1% $32,476  $31,356   3.6%
Operating expenses                                    
Cost of services and sales  13,270   12,254   8.3   25,824   25,071   3.0   13,321   12,554   6.1 
Selling, general and administrative  8,121   8,005   1.4   16,454   16,349   0.6   8,260   8,333   (0.9)
Depreciation and amortization  4,571   4,499   1.6   9,100   9,059   0.5   4,617   4,529   1.9 
Total Operating Expenses  25,962   24,758   4.9   51,378   50,479   1.8   26,198   25,416   3.1 
Operating Income  6,113   6,817   (10.3)   12,053   12,918   (6.7)   6,278   5,940   5.7 
Income Before Income Taxes  5,794   6,031   (3.9)   11,124   11,548   (3.7)   5,651   5,330   6.0 
Net Income  3,880   3,965   (2.1)   7,653   7,617   0.5   3,734   3,773   (1.0)
Net Income Attributable to AT&T $3,822  $3,902   (2.1)% $7,522  $7,486   0.5% $3,652  $3,700   (1.3) %

Overview
Operating income decreased $704,increased $338, or 10.3%5.7%, in the secondfirst quarter of 2014 and $865, or 6.7%, for the first six months of 2013. Both operating revenues and expenses in 2012 include results for our sold Advertising Solutions segment, which had a negative impact on comparisons to 2013 operating income. The decline in operating income also reflected increased handset upgrades, which contributed to higher wireless equipment and commission costs, increased expenses supporting AT&T U-verse® (U-verse) subscriber growth and declines in wireline voice and wireless voice and text revenues. Wireless data and equipment revenues and wireline data revenues helped to offset these impacts. Our operating income margin increased from 18.9% in 2013 to 19.3% in 2014. Operating income in the secondfirst quarter decreased from 21.6%reflects higher equipment revenue recorded for device sales under our wireless device installment program as well as continued growth in 2012 to 19.1%our AT&T U-verse® (U-verse) and strategic business services. This growth was partially offset by the continued decline in 2013legacy voice and for thedata products as well as higher wireless handset expenses and U-verse content costs. The operating results of Leap Wireless International, Inc. (Leap) (see Other Business Matters) acquired on March 13, 2014 did not have a meaningful impact on our first six months decreased from 20.4% in 2012 to 19.0% in 2013.quarter operating results and accordingly are not discussed.

Operating revenues increased $500,$1,120, or 1.6%3.6%, in the secondfirst quarter and $34, or 0.1%, forof 2014. Growth in wireless revenues was driven by device sales under our new wireless device installment program as well as the first six months of 2013. Wireless dataoverall growth in our net subscriber base and equipment revenues increased, reflecting the increasing percentage of wireless subscribers choosing smartphones. Continued growth insmartphone customers. Wireline service revenues were essentially flat and continue to be driven by our U-verse services from residential customers and strategic business services, also contributed to higher operating revenues. The revenue increases were partiallywhich offset by the sale of the Advertising Solutions segment and continued declines in wirelinedecreases from our legacy voice and wireless voice and text revenues.data products.

As theThe telecommunications industry continues to evolveis rapidly evolving from fixed location, voice-oriented services into an industry driven by customer demand for instantly available, data-based services technology, and efficiencies, our(including video). Our products, services and plans have also changedare changing as we transition from traditional voice and basic data services to sophisticated, high-speed, IP-based alternatives. This transitionWe are also re-designing our networks to accommodate these new demands and to take advantage of our offerings will result inrelated technological efficiencies. We expect continued growth in our wireless and wireline IP-based data revenuesservices as we bundle and price plans with greater focus on the data services that our customers desire, provide new products and services, and transition customers from their current traditional services.video offerings. We expect continued declines in voice revenuesservices and our basic wireline data services as customers choose these next-generation services.
 
 
18
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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 $1,016,$767, or 8.3%6.1%, in the secondfirst quarter and $753, or 3.0%, for the first six months of 2013.2014. The increases wereincrease was primarily due to increasedhigher wireless equipment costs related to handset upgrades,resulting from customers choosing higher-priced devices, increased wirelinewireless network costs, higher expenses attributable to U-verse subscriber growth, and wireless network costs. The increases were partially offset by the sale of the Advertising Solutions segment, decreased wireless interconnect and long-distance costs and lower costs associated withgrowth in Universal Service Fund (USF) fees. These increases were slightly offset by lower interconnect/long-distance costs.

Selling, general and administrative expenses increased $116,decreased $73, or 1.4%0.9%, in the secondfirst quarter and $105, or 0.6%, for the first six months of 2013.2014. The increases were primarilydecrease was due to increasedlower employee related costs and lower wireless commissions, related to smartphone upgrades and higher advertising expenses,which were partially offset by the sale of the Advertising Solutions segment, decreased employee relatedincreases in our sales, advertising and marketing expenses resulting from increased competition and lower financing-relatedother administrative costs associated with our pension and postretirement benefits (referred to as Pension/OPEB expenses).wireless segment.

Depreciation and amortization expense increased $72,$88, or 1.6%1.9%, in the secondfirst quarter and $41, or 0.5%, for the first six months of 2013.2014. Expenses increased due to ongoing capital spending for network upgrades and expansion, partially offset by assets becoming fully depreciated assets and lower amortization of intangibles for customer lists related to acquisitions. The sale of our Advertising Solutions segment also contributed to lower depreciation and amortization expenses.

Interest expense decreased $116,increased $33, or 12.3%4.0%, in the secondfirst quarter and $148, or 8.2%, for the first six months of 2013. Interest2014. The increase in interest expense in 2012 was higherprimarily due to charges associated with the early redemption of debt.higher interest related to our December 2013 tower transaction. The decrease in 2013 also reflects lower average interest rates,increase was partially offset by higher average debt balances.lower interest incurred as a result of 2013 refinancing activity.

Equity in net income of affiliates increased $86,decreased $97, or 65.2%52.4%, in the secondfirst quarter and $48, or 13.5%, for the first six months of 2013. Increased equity in net income of affiliates in the second quarter was2014 primarily due to increased earnings atlower equity income from América Móvil, S.A. de C.V. (América Móvil) and YP Holdings LLC (YP Holdings). Increased equity in net income of affiliates for the first six months was primarily due to increased earnings from YP Holdings, partially offset by foreign exchange impacts at América Móvil.

  First Quarter 
  2014  2013 
América Móvil $54  $151 
YP Holdings LLC (YP Holdings)  54   52 
Isis Mobile WalletTM (ISIS)
  (20)  (18)
Equity in Net Income of Affiliates $88  $185 

Other income (expense) – net We had other income of $288$145 in the secondfirst quarter and $320 for the first six months of 2013,2014, compared to other income of $23$32 in the secondfirst quarter and $75of 2013. Results for the first six months of 2012. Results in the second quarter and for the first six months of 20132014 included a net gain on the sale of América Móvil shares and other investments of $249 and $260,$122, interest and dividend income of $23 and $40$13 and leveraged lease income of $10 and $15, respectively.

Other income in the second$6. Results for first quarter and for the first six months of 20122013 included interest and dividend income of $19 and $34 and leveraged lease income of $8 and $41 and a net lossgain on the sale of investments of $11, interest and $1, respectively.dividend income of $17 and leveraged lease income of $5.

Income taxesdecreased $152, increased $360, or 7.4%23.1%, in the secondfirst quarter and $460, or 11.7%, for the first six months of 2013.2014. Our effective tax rate was 33.0% for the second quarter and 31.2%33.9% for the first six months of 2013, asquarter 2014, compared to 34.3%29.2% for the secondfirst quarter and 34.0% for the first six months of 2012.2013. The decreaseincrease in effective tax rate for both the second quarter and the first six monthsquarter was primarily due to recognition of benefits related to tax audit settlements.settlements in the first quarter of 2013.

 
19 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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         
June 30, March 31,
2013 2012 2014 2013
Wireless subscribers (000)107,884 105,206  116,014   107,251 
Network access lines in service (000)26,849 31,604  23,582   28,043 
Total wireline broadband connections (000)16,453 16,434  16,503   16,514 
Debt ratio1
46.6% 38.4%  46.6%  45.6%
Ratio of earnings to fixed charges2
5.45 5.36  5.50   5.25 
Number of AT&T employees245,350 242,380  246,730   243,340 
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 12Exhibit 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 are presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on theour strategic needsdirection of the business, needs of the network (wireless or wireline) providedproviding services and demands to provide emerging services to our customers. Actuarial gains and losses from pension and other postemploymentpostretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each segment’s reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have threetwo reportable segments: (1) Wireless and (2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions, which was previously a reportable segment.Wireline.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment includes our portion of the results from our mobile payment joint venture marketed as the ISISIsis Mobile WalletTM(ISIS), which is accounted for as an equity method investment.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, U-verse high-speed broadband,high speed Internet, video voiceand VoIP services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements.

The Advertising Solutions segment included our directory operations, which published Yellow and White Pages directories and sold directory advertising, Internet-based advertising and local search through May 8, 2012.

The Other segment includes our portion of the results from our international equity investments, our equity interest in YP Holdings, and costs to support corporate-driven activities and 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 costs and expected return on plan assets for our pension and postretirement benefit plans.

The following sections discuss our operating results by segment. Operations and support expenses include certain network planning and engineering expenses; information technology; our repair technicians and repair services; property taxes; 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 employees who perform these functions.

We discuss capital expenditures for each segment in “Liquidity and Capital Resources.”

 
20 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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 
  2014  2013  
Percent
Change
 
 
Segment operating revenues         
      Service $15,387  $15,062    2.2%
      Equipment  2,479   1,629    52.2 
Total Segment Operating Revenues
  17,866   16,691    7.0 
Segment operating expenses            
      Operations and support  10,882   10,180    6.9 
      Depreciation and amortization  1,931   1,835    5.2 
Total Segment Operating Expenses  12,813   12,015    6.6 
Segment Operating Income  5,053   4,676    8.1 
Equity in Net Income (Loss) of Affiliates  (20)  (18)   (11.1)
Segment Income $5,033  $4,658    8.1%

Wireless                  
Segment Results                  
  Second Quarter  Six-Month Period 
  2013  2012  
Percent
Change
  2013  2012  
Percent
Change
 
 
Segment operating revenues                  
   Data $5,356  $4,471   19.8% $10,481  $8,706   20.4%
   Voice, text and other service  10,014   10,294   (2.7)   19,951   20,625   (3.3) 
   Equipment  1,921   1,588   21.0   3,550   3,158   12.4 
Total Segment Operating Revenues  17,291   16,353   5.7   33,982   32,489   4.6 
Segment operating expenses                        
   Operations and support  10,770   9,590   12.3   20,950   19,568   7.1 
   Depreciation and amortization  1,843   1,696   8.7   3,678   3,362   9.4 
Total Segment Operating Expenses  12,613   11,286   11.8   24,628   22,930   7.4 
Segment Operating Income  4,678   5,067   (7.7)   9,354   9,559   (2.1) 
Equity in Net Loss of Affiliates  (19)   (15)   (26.7)   (37)   (28)   (32.1) 
Segment Income $4,659   5,052   (7.8)% $9,317  $9,531   (2.2)%

 
21 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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: 
  
  First Quarter 
  2014  2013  
Percent
Change
 
(in 000s)
Wireless Subscribers 1 
  116,014   107,251    8.2%
   Postpaid smartphones  53,020   48,302    9.8 
   Postpaid feature phones and data-centric devices  20,271   22,447    (9.7)
Postpaid  73,291   70,749    3.6 
Prepaid  11,812   7,104    66.3 
Reseller  13,886   14,702    (5.6)
Connected devices 2 
  17,025   14,696    15.8 
Total Wireless Subscribers  116,014   107,251    8.2 
             
Net Additions 3 
            
   Postpaid  625   296    - 
   Prepaid  (50)  (184)   72.8 
   Reseller  (206)  (252)   18.3 
   Connected devices2 
  693   431    60.8 
Net Subscriber Additions  1,062   291    - 
             
Mobile Share connections  32,585   9,989    - 
Smartphones sold under our installment program during period  2,868   -    - 
             
Total Churn4 
  1.39%   1.38%  1 BP 
Postpaid Churn4 
  1.07%   1.04%  3 BP 
The following table highlights other key measures of performance for the Wireless segment:
                   
  Second Quarter  Six-Month Period 
  2013  2012  
Percent
Change
  2013  2012  
Percent
Change
 
(Subscribers in 000s)
Wireless Subscribers1
           107,884   105,206   2.5%
   Gross Subscriber Additions2
  5,000   4,970   0.6%  9,727   10,248   (5.1) 
   Net Subscriber Additions2
  632   1,266   (50.1)   923   1,992   (53.7) 
   Total Churn3
  1.36%   1.18%  18 BP   1.37%   1.32%  5 BP 
                         
Postpaid Smartphone Subscribers              49,462   43,131   14.7%
Postpaid Data-Centric Device and Other
   Phone Subscribers
              21,816   26,535   (17.8) 
Total Postpaid Subscribers              71,278   69,666   2.3 
   Net Postpaid Subscriber Additions2
  551   320   72.2%  847   507   67.1 
   Postpaid Churn3
  1.02%   0.97%  5 BP   1.03%   1.03%  0 BP 
                         
Prepaid Subscribers              7,084   7,473   (5.2)%
   Net Prepaid Subscriber Additions2
  11   92   (88.0)%  (173)   217   - 
                         
Reseller Subscribers              14,330   14,382   (0.4)%
   Net Reseller Subscriber Additions2
  (414)   472   -   (666)   656   - 
                         
Connected Device Subscribers4
              15,192   13,685   11.0%
   Net Connected Device Subscriber
      Additions
  484   382   26.7%  915   612   49.5 
1
1 Represents 100% of AT&T Mobility wireless subscribers.
2
 Includes data-centric devices (eReaders and automobile monitoring systems). Excludes tablets, which are primarily included in postpaid.
2
3
 Excludes merger and acquisition-related additions during the period.
3
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.
4 Includes data-centric devices such as eReaders, automobile monitoring systems, and fleet management - excludes tablet, subscribers, which are primarily reflected in our postpaid subscriber
 category, with the remainder in prepaid.

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, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations and make them available to more subscribers.on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we offer a broad handset line andhave launched a wide variety of service plans.plans, including Mobile Share and AT&T NextSM (AT&T Next). While we have historically focused on attracting and retaining postpaid subscribers, we have recently increased our focus on prepaid subscribers with our acquisition of Leap.

As technology evolves, rapid changes are occurring inAt March 31, 2014, we served 116.0 million subscribers (including approximately 4.5 million from Leap), an increase of 8.2% from the handset and device industry with the continual introduction of new models 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 six months of 2013, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid phoneprior year. Our subscriber base 73.3% (or 49.5 million subscribers) use smartphones, upconsists primarily of postpaid accounts. Our prepaid services, which include results from 64.0% (or 43.1 million subscribers) a year earlier. As is common inservices sold under the industry, mostCricket brand following our March 13, 2014 acquisition of our subscribers’ phonesLeap, 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.monthly, pay-as-you-go services.

 
22 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


Our
ARPU
Total ARPU (average service revenue per average wireless subscribers) was down 1.9% and postpaid ARPU was down 1.3% when compared to the first quarter of 2013, reflecting the increasing number of lower-ARPU but higher margin tablets and the attractive Mobile Share pricing for customers who move off the traditional device subsidization model. As we adjust our service offerings and pricing structures, management believes that postpaid phone-only ARPU plus Next subscriber installment billings (postpaid phone-only ARPU plus AT&T Next) is a better representation of the monthly economic value per postpaid subscriber. Postpaid phone-only ARPU increased 0.4% versus the year-earlier quarter and postpaid phone-only ARPU plus AT&T Next increased 2.0%.

Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total and postpaid churn rates were slightly higher for the first quarter of 2014 when compared to the first quarter of 2013, reflecting increased competition, especially for price-conscious customers.

Postpaid
Postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees.increased 3.6% in the first quarter of 2014. At March 31, 2014, 78% of our postpaid phone subscriber base used smartphones, compared to 72% at March 31, 2013. About 90%94% of our postpaid smartphone subscribers are on FamilyTalk® Plans (family plans), Mobile Share plans or business plans, whichthat provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. We offer our Mobile to Any Mobile feature, which enables our subscribers on these and other qualifying 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 11.5% year over year. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with 71.0% (or 35.1 million)approximately 81% on these plans as compared to 69% in the prior year, and about 46% of June 30, 2013, up from 61.6% (or 26.6 million) as of June 30, 2012. About 80% ofour Mobile Share subscribers on usage-based data plans have chosen the higher-priced10 gigabyte or higher plans. We recently expanded our Mobile Share data plans (which allow postpaid subscribers to share data at discounted prices among devices covered by their plan) to include additional, larger usage levels. Participation in these plans continues to increase. 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.

As of June 30, 2013, about 65%March 31, 2014, approximately 81% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or LTE network), and more than 35%55% of our postpaid smartphone subscribers use an LTE device. Due

Historically, our postpaid customers have signed two-year service contracts for subsidized handsets. However, through our Mobile Share plans, we have recently begun offering postpaid services at lower prices for those customers who either bring their own devices or participate in our AT&T Next program. Our AT&T Next program allows for postpaid subscribers to substantial increasespurchase certain devices in installments over a period of up to 26 months. Additionally, after a specified period of time they also have the right to trade in the demandoriginal device for wireless service ina new device and have the United States, AT&T is facingremaining unpaid balance satisfied. For customers that elect these trade-in programs, at the time of the sale, we recognize equipment revenue for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A 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 expanding needspercentage of our customers on the AT&T Next program pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.

Wireless Metrics
Subscriber Additions As of June 30, 2013, we served 107.9 million wireless subscribers, an increase of 2.5%. Market saturation and competition in the wireless industry will continue to limit the rate of growth in the industry’s subscriber base, which has contributed to the modest 0.6% increase in gross subscriber additions (gross additions) when compared toIn the second quarter of 20122014, we began offering the AT&T Next program through other distributors and a 5.1% decrease whenwe plan to expand the offering to additional distributors, which is expected to further accelerate the impacts on service revenues.

Prepaid
In March 2014, we completed our acquisition of Leap, which included 4.5 million prepaid subscribers. Excluding merger and acquisition related additions, prepaid subscribers increased 2.4% as of March 31, 2014 compared to the prior year period.

Operating Results
Our Wireless segment operating income margin in the first six monthsquarter increased from 28.0% in 2013 to 28.3% in 2014. Our Wireless segment operating income increased $377, or 8.1%, in the first quarter of 2012. Lower net subscriber additions (net additions) were primarily attributable to losses in reseller low-revenue accounts.2014. The increases in net postpaid additions reflect the migration of prepaid tablet subscribers to our postpaid plans, contributing to an increase in postpaid tabletoperating margin and income reflected the impact of AT&T Next sales and further revenue growth from the company’s base of high-value smartphone subscribers, of 398,000 in the second quarterslightly offset by promotional activities and 763,000 for the first six months of 2013.new business initiatives.

Average service revenue per user (ARPU) – Postpaid increased 1.8% in the second quarter and 1.3% for the first six months of 2013. Postpaid data services ARPU increased 17.6% in the second quarter and 17.8% for the first six months of 2013, reflecting greater use of smartphones and data-centric devices by our subscribers.

The growth in postpaid data services ARPU was partially offset by a 4.8% decrease in postpaid voice, text and other service ARPU in the second quarter and 5.4% decrease for the first six months of 2013. Voice, text and other service ARPU declined due to lower access and airtime charges, triggered in part by postpaid subscribers on our discount plans and lower roaming revenues.

ARPU – Total increased 1.3% in the second quarter and 0.7% for the first six months of 2013, reflecting growth in data services as more subscribers are using smartphones and tablets and choosing higher-priced usage-based data plans. Data services ARPU increased 16.6% in the second quarter and 16.8% for the first six months of 2013. Voice, text and other service ARPU declined 5.4% in the second quarter and 6.2% for the first six months of 2013 primarily due to voice access and usage trends and a shift toward a greater percentage of data-centric devices, as well as lower regulatory fees. We expect continued growth in data services ARPU as more subscribers use smartphones and data-centric devices and continue to choose higher-priced usage-based data plans. As we continue to expand our network, we also expect continued pressure on voice, text and other service ARPU.
 
23 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


Churn  ServiceThe effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. The total churn rate was higher in the second quarter and for the first six months of 2013, primarily associated with the disconnection of reseller low-revenue accounts. The postpaid churn rate was slightly higher in the second quarter and flat for the first six months of 2013.

Operating Results
Our Wireless segment operating income margin in the second quarter decreased from 31.0% in 2012 to 27.1% in 2013 and for the first six months decreased from 29.4% in 2012 to 27.5% in 2013. Wireless segment operating income decreased $389, revenues increased $325, or 7.7%2.2%, in the secondfirst quarter and $205, or 2.1%, for the first six months of 2013. The decreases in operating margin and income reflected higher costs associated with upgrade activity and subsidies associated with growing smartphone sales, partially offset by continuing data revenue growth.

Voice, text and other2014. Wireless service revenues decreased $280, or 2.7%, in the second quarter and $674, or 3.3%, for the first six months of 2013. While we had a 2.5% year-over-year increase in the number of wireless subscribers, these revenues continue to decline due to lower access and airtime charges.

Data service revenues increased $885, or 19.8%, in the second quarter and $1,775, or 20.4%, for the first six months of 2013. The increases were primarily due to the increased number of subscribers usingmoving to smartphones with larger data plans. Service revenue growth was lessened by, and data-centric devices, such as eReaders, tablets, and mobile navigation devices. Datawill continue to reflect, the discounted monthly service revenues accounted for 34.4% ofcharges subscribers pay under our wireless service revenues for the first six months of 2013, compared to 29.7% last year.Mobile Share plans.

Equipment revenues increased $333,$850, or 21.0%52.2%, in the secondfirst quarter and $392, or 12.4%,of 2014. The increase was primarily due from devices sold under our AT&T Next program. While we expect equipment revenues to increase under this program, we expect monthly services revenues will be pressured for the first six months of 2013 due to year-over-year increases in smartphone sales as a percentage of total device sales to postpaid subscribers and higher device upgrades.these subscribers.

Operations and support expenses increased $1,180,$702, or 12.3%6.9%, in the secondfirst quarter and $1,382, or 7.1%, for the first six months of 2013.2014. The increases in the second quarter and for the first six months werefirst-quarter increase was primarily due to the following:
·  Equipment costs increased $875 and $1,005$369 reflecting an increase in upgrade activity and total device sales, as well as the sales of more expensive smartphones.
·  
Commission expenses increased $258 and $211 due primarily to higher upgrade activity and total device sales and a year-over-year increase in smartphone sales as a percentage of total device sales.
·  Selling expenses (other than commissions) and administrative expenses increased $143 and $341$283 due primarily to increases of: $85 and $162 in employee-related costs; $79 and $147a $93 increase in advertising costs; and $28 and $108expense, $60 increase in customer service expense, $45 increase in sales expense, $36 increase in information technology costs in conjunction with ongoing support systems development. Partially offsetting these increases were bad debt expense declines of $47development and $102.a $26 increase in marketing expense.
·  Network system costs increased $66 and $155$111 due to higher network traffic and personnel-related network support costs and cell site related costs in conjunction with our network enhancement efforts.
·  Handset insurance cost increased $79 due to an increase in the cost of replacement phones.

Partially offsetting these increases were the following:
·  Commission expenses decreased $100 primarily due to the decline in upgrade transactions and lower average commission rates.
·  Interconnect and long-distance costs decreased $108 and $212$21 due to third-party credits and lower usageaccess costs in the current period.
·  USF fees decreased $33 and $98 primarily due to federal rate decreases, which are offset by lower USF revenues.

Equity in net income (loss) of affiliates for the Wireless segment includes expenses for ISIS, our mobile payment joint venture with other wireless providers.

Depreciation and amortization expenses increased $147,$96, or 8.7%5.2%, in the secondfirst quarter and $316, or 9.4%, for the first six months of 2013.2014. Depreciation expense increased $216,$146, or 13.8%8.3%, in the secondfirst quarter and $457, or 14.8%, for the first six months primarily due to ongoing capital spending for network upgrades and expansion.expansion, partially offset by fully depreciated assets. Amortization expense decreased $69,$50, or 52.7%64.1%, in the secondfirst quarter and $141, or 50.2%, for the first six months primarily due to lower amortization of intangibles for customer lists related to acquisitions.

 
24 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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                           
 Second Quarter  Six-Month Period  First Quarter 
 2013  2012  
Percent
Change
  2013  2012  
Percent
Change
  2014  2013  
Percent
Change
 
Segment operating revenues                           
Data $8,400  $7,935   5.9% $16,562  $15,735   5.3%
Voice  5,141   5,696   (9.7)   10,447   11,588   (9.8) 
Other  1,232   1,276   (3.4)   2,419   2,513   (3.7) 
Service $14,389  $14,381   0.1 %
Equipment  212   274   (22.6)
Total Segment Operating Revenues  14,773   14,907   (0.9)   29,428   29,836   (1.4)   14,601   14,655   (0.4)
Segment operating expenses                                    
Operations and support  10,417   10,201   2.1   20,752   20,603   0.7   10,457   10,335   1.2 
Depreciation and amortization  2,722   2,766   (1.6)   5,410   5,574   (2.9)   2,684   2,688   (0.1)
Total Segment Operating Expenses  13,139   12,967   1.3   26,162   26,177   (0.1)   13,141   13,023   0.9 
Segment Operating Income  1,634   1,940   (15.8)   3,266   3,659   (10.7)   1,460   1,632   (10.5)
Equity in Net Income (Loss) of
Affiliates
  -   (1)   -   1   (1)   - 
Equity in Net Income of Affiliates  1   1   - 
Segment Income $1,634  $1,939   (15.7)% $3,267  $3,658   (10.7)% $1,461  $1,633   (10.5)%

Operating Results
Our Wirelinebroadband, switched access lines and other services provided by our local exchange telephone subsidiaries at March 31, 2014 and 2013 are shown below and trends are addressed throughout this segment operating income margin in the second quarter decreased from 13.0% in 2012 to 11.1% in 2013, and for the first six months decreased from 12.3% in 2012 to 11.1% in 2013. Segment operating income decreased $306, or 15.8%, in the second quarter and $393, or 10.7%, for the first six months of 2013. The decrease in operating margins and income was driven primarily by lower voice revenue and higher operations and support expense, partially offset by data revenue growth and lower depreciation and amortization expenses.discussion.

Data revenues increased $465, or 5.9%, in the second quarter and $827, or 5.3%, for the first six months of 2013. Data revenues accounted for approximately 56% of wireline operating revenues for the first six months of 2013 and 53% for the first six months of 2012. Data revenue includes IP, strategic business and traditional data services.
  March 31,  March 31,  Percent 
(in 000s) 2014  2013  Change 
U-verse high speed Internet1 
  11,009   8,449   30.3 %
DSL and other broadband connections1 
  5,494   8,065   (31.9)
Total Wireline Broadband Connections2 
  16,503   16,514   (0.1)
             
Total U-verse Video Connections  5,661   4,768   18.7 
             
Retail consumer switched access lines  11,655   14,840   (21.5)
U-verse consumer VoIP connections  4,120   3,120   32.1 
Total Retail Consumer Voice Connections  15,775   17,960   (12.2)
             
Switched Access Lines            
Retail consumer3 
  11,655   14,840   (21.5)
Retail business3 
  10,088   11,185   (9.8)
Retail Subtotal3 
  21,743   26,025   (16.5)
             
Wholesale Subtotal1,3
  1,605   1,726   (7.0)
             
Total Switched Access Lines3 
  23,582   28,043   (15.9)%
·  
1
IP data revenues (excluding strategic business services below) increased $410, or 11.2%, in the second quarter and $809, or 11.3%, for the first six months of 2013 primarily driven by higher U-verse penetration, customer additions, and migration from our legacy voice and DSL services. In the second quarter and for the first six months U-verse revenue from consumer customers increased $312 and $639 for high speed Internet access, $246 and $492 for video and $74 and $122 for voice, respectively. These increases were partially offset by a decrease of $186 and $366 in DSL revenue as customers continue Prior-period amounts restated to shiftconform to our strategic high speed Internet access offerings. We expect DSL revenue to continue to decline as a percentage of our overall data revenues.current-period reporting methodology.
·  
2
Strategic business services, which
 Total wireline broadband connections include VPNs, Ethernet, hosting, IP conferencing, VoIP, Ethernet-access to ManagedDSL, U-verse high speed Internet Service (EaMIS), security services, and U-verse services provided to business customers, increased $287, or 15.8%, in the second quarter and $479, or 13.3%, for the first six months of 2013 primarily driven by migration from our legacy services. In the second quarter and for the first six months revenue from Ethernet increased $76 and $139, VPN increased by $87 and $135, U-verse services increased $46 and $71, and EaMIS increased $28 and $56, respectively.satellite broadband.
·  
3
Traditional data revenues, which
 Total switched access lines include circuit-basedaccess lines provided to national mass markets and packet-switched data services, decreased $234, or 9.5%, in the second quarterprivate payphone service providers of 234 at March 31, 2014 and $468, or 9.4%, for the first six months of292 at March 31, 2013. This decrease was primarily due to lower demand as customers continue to shift to more advanced IP-based technology such as Ethernet, 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.
 
 
25 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


Voice revenues
Operating Results
Our Wireline segment operating income margin in the first quarter decreased $555,from 11.1% in 2013 to 10.0% in 2014. Our Wireline segment operating income decreased $172, or 9.7%10.5%, in the secondfirst quarter of 2014. The decrease in operating margin and $1,141, or 9.8%, forincome was driven primarily by the first six months of 2013 primarily due to declining demand for traditionalcontinued decrease in our legacy voice servicesand data products and increased U-verse content costs, largely offset by our consumer and business customers. Included in voice revenues areincreased revenues from local voice, long-distance (including international)our U-verse and local wholesalestrategic business services. Voice revenues do not include VoIP revenues, which are included in data revenues.
·  Local voice revenues decreased $350, or 10.0%, in the second quarter and $710, or 9.9%, for the first six months of 2013. The decrease was driven primarily by a 15.0% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by competition from alternative technologies and continued declines in switched access lines.
·  Long-distance revenues decreased $202, or 10.5%, in the second quarter and $425, or 10.8%, for the first six months of 2013. Lower demand for long-distance service from our business and consumer customers decreased revenues $167 in the second quarter and $356 for the first six months of 2013. Additionally, expected declines in the number of our national mass-market customers decreased revenues $35 in the second quarter and $70 for the first six months of 2013.

OtherService operating revenues decreased $44,increased $8, or 3.4%0.1%, in the secondfirst quarter of 2014. Increased service revenues from our residential customers were mostly offset by lower service revenues from business customers, which include integration, government-related and $94,outsourcing services.

Business
Service revenues from business customers decreased $182, or 3.7%2.1%, forin the first six monthsquarter of 2013. Major items included2014. The revenue decrease was due to a $149 decrease in other operatinglong-distance and local voice revenues and a $315 decrease in traditional data revenues, which include circuit-based and packet-switched data services. This decrease was primarily due to lower demand as customers continue to shift to our most advanced IP-based offerings such as Ethernet, VPN, U-verse high speed Internet access and managed Internet services. The lower traditional service revenues were largely offset by higher demand for our next generation services. Strategic business service revenues, which include VPNs, Ethernet, hosting, IP conferencing, VoIP, Ethernet-access to Managed Internet Service (EaMIS), security services, and U-verse services provided to business customers increased $318, or 16.1%, in the first quarter. Revenue from VPN increased $100, Ethernet increased $80, U-verse services increased $44 and EaMIS increased $36.

Consumer
Service revenues from residential customers increased $241, or 4.4%, in the first quarter of 2014. The increase was driven by higher IP data revenue reflecting increased U-verse penetration, customer additions, and migration from our legacy voice and DSL services. In the first quarter, U-verse revenue from consumers increased $361 for high-speed Internet access, $276 for video and $111 for voice. These increases were partially offset by a decrease of $165 in DSL revenue as customers continue to shift to our strategic high-speed Internet access offerings, and a $353 decrease in traditional voice revenues.

Equipment revenues decreased $62, or 22.6%, in the first quarter of 2014. Our equipment revenues are integration services and customer premises equipment, government-related services and outsourcing, which account for approximately 60% of total other revenue for the periods reported.mainly attributable to our business customers.

Operations and support expenses increased $216,$122, or 2.1%1.2%, in the secondfirst quarter and $149, or 0.7%, for the first six months of 2013.2014. 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 increase in the secondfirst quarter of 2013 was primarily due to increased cost of sales of $203, primarily$142, related to U-verse related expenses, contract servicescontent fees; higher USF fees of $96, advertising expense$59, which are offset by higher USF revenues; higher traffic compensation costs of $53$40; and higher materials and supplies expenseenergy costs of $42.$40. These increases were partially offset by lower employee related expenses of $151 and USF fees of $43, which are offset by lower USF revenue.

The increase for the first six months of 2013 was primarily due to increased cost of sales of $366, primarily related to U-verse related expenses, and advertising expense of $115. These increases were partially offset by lower employee related expenses of $244 and USF fees of $118, which are offset by lower USF revenue.$209, reflecting ongoing workforce reduction initiatives.

Depreciation and amortization expenses decreased $44,$4, or 1.6%, in the second quarter and $164, or 2.9%0.1%, for the first six monthsquarter of 2013. The decrease was2014. Amortization decreased $36, or 29.8%, primarily related to lower amortization of intangibles for the customer lists associated with acquisitionsacquisitions. Depreciation increased $32, or 1.2%, primarily due to ongoing capital spending for network upgrades and lower depreciation as assets become fully depreciated.expansion.

 
26 
 
AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


Supplemental Information

Wireline Broadband, Telephone and Video Connections Summary
Our broadband, switched access lines and other services provided at June 30, 2013 and 2012 are shown below and trends are addressed throughout this segment discussion.

  June 30,  June 30,  Percent 
(in 000s) 2013  2012  Change 
U-verse High Speed Internet  9,090   6,494   40.0%
DSL and Other Broadband Connections  7,363   9,940   (25.9) 
Total Wireline Broadband Connections1
  16,453   16,434   0.1 
             
Total U-verse Video Connections  5,001   4,146   20.6 
             
Retail Consumer Switched Access Lines  13,983   17,298   (19.2) 
U-verse Consumer VoIP Connections  3,379   2,567   31.6 
Total Retail Consumer Voice Connections  17,362   19,865   (12.6) 
             
Switched Access Lines            
Retail Consumer  13,983   17,298   (19.2) 
Retail Business  10,905   12,115   (10.0) 
Retail Subtotal  24,888   29,413   (15.4) 
             
Wholesale Subtotal  1,685   1,860   (9.4) 
             
Total Switched Access Lines2
  26,849   31,604   (15.0)%
1
  Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband.
2
  Total switched access lines includes access lines provided to national mass markets and private payphone service providers of 276 at June 30, 2013 and 331 at June 30, 2012.

Advertising Solutions                 
Segment Results                 
 Second Quarter Six-Month Period 
 2013 2012  
Percent
Change
 2013 2012  
Percent
Change
 
Total Segment Operating Revenues$-  $305   -  $-  $1,049   - 
Segment operating expenses                       
   Operations and support -   226   -   -   773   - 
   Depreciation and amortization -   29   -   -   106   - 
Total Segment Operating Expenses -   255   -   -   879   - 
Segment Income$-  $50   -  $-  $170   - 

On May 8, 2012, we completed the sale of our Advertising Solutions segment to an affiliate of Cerberus Capital Management, L.P.

27 
AT&T INC.
JUNE 30, 2013

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

 
Other                 
Segment Results                 
 Second Quarter Six-Month Period 
 2013 2012  
Percent
Change
 2013 2012  
Percent
Change
 
 
Total Segment Operating Revenues$11  $10   10.0% $21  $23   (8.7)%
Total Segment Operating Expenses 210   250   (16.0)   588   493   19.3 
Segment Operating Loss (199)   (240)   17.1   (567)   (470)   (20.6) 
Equity in Net Income of Affiliates 237   148   60.1   439   384   14.3 
Segment Income (Loss)$38  $(92)   -  $(128)  $(86)   (48.8)%

The Other segment includes our portion of the results from our international equity method investment, our equity interest in YP Holdings, and costs to support corporate-driven activities and 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 costs and expected return on plan assets for our pension and postretirement benefit plans.

Segment operating revenues increased $1, or 10.0%, in the second quarter and decreased $2, or 8.7%, for the first six months of 2013. Operating revenues are from leased equipment programs.

Segment operating expenses decreased $40, or 16.0%, in the second quarter and increased $95, or 19.3%, for the first six months of 2013. Lower operating expenses in the second quarter were primarily due to lower Pension/OPEB and other employee related charges. These decreases were partially offset by higher new product development expenses and higher corporate support and capital leasing operations costs. Increased costs over the first six months were due to higher new product development costs, as well as higher corporate support and capital leasing operations expenses. These increases were partially offset by lower Pension/OPEB financing costs and decreased employee related costs.

Our Other segment also includes our equity method investments in América Móvil and YP Holdings, the income from which we report as equity in net income of affiliates. Our earnings from foreign affiliates are sensitive to exchange-rate changes in the value of the respective local currencies.

Equity in net income of affiliates increased $89, or 60.1%, in the second quarter and $55, or 14.3%, for the first six months of 2013. Increased equity in net income of affiliates in the second quarter was primarily due to increased earnings from América Móvil and YP Holdings. The increase for the first six months was primarily due to increased earnings from YP Holdings, partially offset by foreign exchange impacts at América Móvil.

Our equity in net income of affiliates by major investment is listed below:

  Second Quarter  Six-Month Period 
  2013  2012  2013  2012 
América Móvil $174  $127  $325  $364 
YP Holdings  63   19   115   19 
Other  -   2   (1)   1 
Other Segment Equity in Net Income of Affiliates $237  $148  $439  $384 
                 
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AT&T INC.
JUNE 30, 2013

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


OTHER BUSINESS MATTERS

U-verse Services  As part of June 30, 2013,Project Velocity IP (VIP), we are marketing U-verse servicesplan to expand our IP-broadband service to approximately 25.357 million customer locations (locations eligible to receive U-verse service).locations. As of June 30, 2013,March 31, 2014, we had 9.411.3 million total U-verse subscribers (high-speed Internet and video), including 9.111.0 million Internet and 5.05.7 million video subscribers (subscribers to both services are only counted once in the total). As part of Project Velocity IP (VIP), we plan to expand our U-verse services to a total of approximately 33 million customer locations and expect to be essentially complete by year-end 2015.

We believe that our U-verse TV service is a “video service” under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation. Petitions have been filed at the FCCFederal Communications Commission (FCC) alleging that the manner in which we provision “public, educational and governmental” (PEG) programming over our U-verse TV service conflicts with federal law, and a lawsuit has been filed in a California state superior court raising similar allegations under California law. If courts having jurisdiction where we have significant deployments of our U-verse services were to decide that federal, state and/or local cable regulation were applicable to our U-verse services, or if the FCC, state agencies or the courts were to rule that we must deliver PEG programming in a manner substantially different from the way we do today or in ways that are inconsistent with our current network architecture, it could have a material adverse effect on the cost and extent of our U-verse offerings.

Wage and Hour Litigation Leap AcquisitionTwo wage and hour cases were filed in federal court in December 2009 each asserting claims  On March 13, 2014, we completed our acquisition of Leap Wireless International, Inc. a provider of prepaid wireless service under the Fair Labor Standards Act (Luque et al. v. AT&T Corp. et al., U.S. District CourtCricket brand name, for fifteen dollars per outstanding share of Leap’s common stock, or $1,248 in cash (excluding approximately $840 of Leap’s cash and investments on hand). In connection with the Northern Districtacquisition, we retired Leap’s term and other loans of California) (Lawson et al. v. BellSouth Telecommunications, Inc., U.S. District Court in the Northern District$1,852 and on April 14, 2014 we redeemed other notes with a principal of Georgia). Luque also alleges violations$1,600. In addition, we expect to realize significant value through utilization of a California wage and hour law,Leap’s net operating losses carryforwards, which varies from the federal law. In April 2012, we settled these cases, subject to court approval, on terms that will not have a material effect on our financial statements. On April 23, 2013, the court granted approval of the settlement in Lawson. On April 26, 2013, the court granted final approval following its earlier preliminary approval of the settlement in Luque.were approximately $3,100 at December 31, 2013.

Atlantic Tele-Network, Inc. TransactionConnecticut Wireline Disposition  In JanuaryDecember 2013, we announced an agreementagreed to acquire Atlantic Tele-Network, Inc.’s U.S. retail wirelesssell our incumbent local exchange operations operated under the Alltel brand,in Connecticut to Frontier Communications Corporation for $780$2,000 in cash. Under the termsThese Connecticut operations represent approximately $1,200 in annual revenues as of the agreement, we will acquire wireless properties, including licenses, network assets, retail stores and approximately 585,000 subscribers.2013. The transaction is subject to review by the FCC and the Department of Justice (DOJ)Connecticut Public Utilities Regulatory Authority and to other customary closing conditions and is expectedstate regulatory authorities. We expect the transaction to close in the second halffourth quarter of 2013.2014, subject to customary closing conditions. We anticipate the cash tax impact of the transaction to be minimal due to the availability of capital loss carryforwards that are expected to exceed capital gains generated from the transaction.
Labor Contracts  On March 20, 2014, approximately 11,500 Mobility employees in the Southeast represented by the Communication Workers of America ratified a new four-year contract.

Spectrum AcquisitionsEnvironmental  In January 2013, we announced an agreement to acquire spectrum inDecember 2011, Harris County, Texas brought suit on behalf of itself and the 700 MHz B band from Verizon Wireless for $1,900 in cash and an assignment of Advanced Wireless Service (AWS) spectrum licenses in five markets. The 700 MHz licensesTexas Commission on Environmental Quality (TCEQ) alleging AT&T to be acquired by AT&T cover 42 million peopleliable for statutory civil penalties for past leakage at eleven petroleum storage tank locations. All eleven sites have been remediated (with de minimis actual impact) in 18 states. The transaction is subject to review by the FCC and DOJ. We expect to close the transaction in the second half of 2013.

Leap Acquisition  On July 12, 2013, we announced an agreement to acquire Leap Wireless International, Inc. (Leap), a provider of prepaid wireless service, for fifteen dollars per outstanding share of Leap’s common stock, or approximately $1,260, plus one non-transferable contingent value right (CVR) per share. The CVR will entitle each Leap stockholder to a pro rata share of the net proceeds of the future sale of the Chicago 700 MHz A-band FCC license held by Leap. As of June 30, 2013, Leap had approximately $2,700 of debt, net of cash. Under the terms of the agreement, we will acquire all of Leap’s stock and, thereby, acquire all of its wireless properties, including spectrum licenses, network assets, retail stores and approximately 5 million subscribers. Leap’s spectrum licenses include Personal Communications Services (PCS) and AWS bands and are largely complementary to our licenses. Leap’s network covers approximately 96 million people in 35 states and consists of a 3G Code Division Multiple Access (CDMA) network and an LTE network covering approximately 21 million people.
The agreement must be approved by Leap’s stockholders and stockholders holding approximately 29.9 percent of the outstanding common stock have agreed to support the transaction. The transaction also is subject to review by the FCCaccordance with state programs and the DOJTCEQ has issued No Further Action letters closing the sites. Notwithstanding these facts, Harris County declined to dismiss its claims and to other customary closing conditions andis proceeding with litigation. Trial is expected to close in approximately sixbe delayed from July 2014 to nine months fromFebruary 2015. While it is possible that Harris County may recover civil penalties exceeding one hundred thousand dollars, we do not expect the announcement. The agreement also provides both parties with certain termination rightsamount, if the transaction does not close by July 11, 2014, which canany, to be extended until January 11, 2015 if certain conditions have not been met by that date. Under certain circumstances, Leap may be required to pay a termination fee or AT&T may be required to provide Leap with a three-year roaming agreement for LTE data coverage in certain Leap markets lacking LTE coverage, if the transaction does not close. If Leap enters into the roaming agreement, AT&T will then have the option within 30 days after entry into the roaming agreement to purchase certain specified Leap spectrum assets. If AT&T does not exercise its right to purchase all of the specified Leap spectrum assets, Leap can then within 60 days after expiration of AT&T’s option require AT&T to purchase all of the specified spectrum assets.material.
 
 
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JUNE 30, 2013MARCH 31, 2014

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


Labor Contracts  As of June 30, 2013, we employed approximately 245,000 persons. Approximately 54 percent of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. In June 2013, approximately 3,000 Connecticut-based wireline employees represented by the CWA ratified a new four-year contract; the previous contract had expired in April 2012. In May 2013, approximately 6,500 wireline employees represented by the IBEW and located mainly in the Midwest ratified a new four-year contract.

COMPETITIVE AND REGULATORY ENVIRONMENT

Overview  AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided, and regulation is generally limited to operational licensing authority for the provision of services to enterprise customers.

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumers.consumer welfare. However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. We are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not extended to broadband or wireless services, which are subject to vigorous competition.

In addition, states representing a majority of our local service access lines have adopted legislation that enables new video entrants to acquire a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer competitive video services. We also are supporting efforts to update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and depends on many factors.

We provide wireless services in robustly competitive markets, but those services are subject to substantial and increasing governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers’ prices and service offerings are generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015, and also authorized the FCC to conduct an “incentive auction,” to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees. The FCC has initiated a proceedingproceedings to establish rules that would govern this process. these auctions. In April, the FCC Chairman indicated that limits could be imposed on certain bidders, including AT&T, in markets served by AT&T that cover as much as 70-80 percent of the U.S. population. The exact parameters of those limits have yet to be finalized and could change significantly.

It also initiated a separate proceeding to review its policies governing mobile spectrum holdings and consider whether there should be limits on the amount of spectrum a wireless service provider may possess. We seek to ensure that we have the opportunity, through the incentive auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service.service in the future.

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 data and voice services and our ability to launch new, advanced wireless communications providers’ prices and service offeringsbroadband services, unless we are generally not subjectable to state regulation, states sometimesobtain more spectrum. Any long-term spectrum solution will require that the FCC make new or existing spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.address spectrum and capacity constraints on a market-by-market basis.

 
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JUNE 30, 2013MARCH 31, 2014

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


Net Neutrality  In January 2014, the D.C. Circuit released its decision on Verizon’s appeal of the FCC’s Net Neutrality rules. Those rules prohibited providers of fixed, mass market Internet access service from blocking access to lawful content, applications, services or non-harmful devices. The rules prohibited providers of mobile broadband Internet access service from blocking consumers from accessing lawful websites or applications that compete with the provider’s own voice or video telephony services. The rules also imposed transparency requirements on providers of both fixed and mobile broadband Internet access services, requiring public disclosure of information regarding network management practices, performance and commercial terms of their service offerings. In addition, the rules prohibited providers of fixed (but not mobile) broadband Internet access service from unreasonably discriminating in their transmission of lawful network traffic. In its decision, the court found the FCC had authority under section 706 of the Act (which directs the FCC and state commissions to promote broadband deployment) to adopt rules designed to preserve the open Internet, but vacated and remanded the antidiscrimination and no-blocking rules on the ground that they impermissibly imposed common carrier regulation on broadband Internet access service. The court held that, having declared broadband Internet access services to be information services, the FCC could not regulate them as telecommunications services. The court did not vacate the transparency rules. 

The invalidation of the no-blocking and antidiscrimination rules means that broadband Internet access providers have greater flexibility in their provision of mass market services. However, the court’s finding that section 706 provides the FCC independent authority to adopt rules to promote broadband deployment appears to give the FCC broad authority to regulate the Internet and, more generally, IP-based services, provided the FCC finds such regulation promotes deployment of broadband infrastructure. In addition, because section 706(a) grants authority to both the FCC and the states to adopt rules to promote broadband deployment, states could attempt to rely on that provision to regulate broadband services, although the states’ authority to do so appears to be narrower than the FCC’s. If the FCC were to reclassify broadband as a telecommunications service, or the FCC and/or the states were to impose additional regulation of the Internet or broadband services, it could have a material adverse impact on our broadband services and operating results.

Intercarrier Compensation/Universal Service  In October 2011, the FCC adopted an order fundamentally overhauling its high-cost universal service program, through which it disburses approximately $4,500 per year to carriers providing telephone service in high-cost areas, and its existing intercarrier compensation (ICC) rules, which govern payments between carriers for the exchange of traffic. The order adoptedadopts rules to address immediately address certain practices that artificially increase ICC payments, as well as other practices to avoid such payments. The order also establishedestablishes a new ICC regime that will result in the elimination of virtually all terminating switched access charges and reciprocal compensation payments over a six-year transition. In the order, the FCC also repurposed its high-cost universal service program to encourage providers to deploy broadband facilities in unserved areas. To accomplish this goal, the FCC will transitionis transitioning support amounts disbursed through its existing high-cost program to its new Connect America Fund which eventually will award targeted high-cost support amounts(CAF). In 2013, the FCC awarded us approximately $100 in new CAF funding to providers through a competitive process.deploy broadband in unserved areas. We support many aspects of the order and new rules. AT&T and other parties have filed appeals of the FCC’s rules, which are pending in the Tenth Circuit Court of Appeals. Our appeal challenges only certain, narrow aspects of the order; AT&T intervened in support of the broad framework adopted by the order. Oral argument on the appeal took place in November 2013. A decision is possible in 2014. We do not expect the FCC’s rules to have a material impact on our operating results.

Transition to IP-Based Network  In November 2012, we announced plans to significantly expand and enhance our wireless and wireline broadband networks to support future IP data growth and new services (referred to as Project VIP). In conjunction with Project VIP, we filed a petition with the FCC asking it to open a proceeding to facilitate the “telephone” industry’sour transition from traditional transmission platforms and services to all IP-based networks and services. Our petition asks the FCC to conduct trial runs of the transition to next-generation services including the upgrading of traditional telephone facilities and offerings and their replacement with IP-based alternatives. The objective of the trials is to inform policymakers and other stakeholders regarding the technological and policy dimensions of the IP transition and, in the process, identify the regulatory reforms needed to promote consumer interests and preserveincent private incentives to upgrade America’sinvestment in broadband infrastructure. In May 2013, the FCC’s Technology Transition Task Force sought comment on potential trials to obtain data to assistJanuary 2014, the FCC adopted an order authorizing a broad set of voluntary experiments to measure the impact on consumers of the IP transition. Among other things, the order invites providers to submit proposals for all-IP trials in managing the transition to next-generation networks.discrete geographic areas. In February 2014, AT&T filed a detailed plan for two such trials. We expect the FCC will deciderule on whether we can go forward with the plan by the end of this year whether to conduct such trials.second quarter of 2014. We expect this transition to transition wireline customers to an all IP-based network by 2020.take several years.

 
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AT&T INC.
JUNE 30, 2013MARCH 31, 2014

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


LIQUIDITY AND CAPITAL RESOURCES

We had $4,548$3,611 in cash and cash equivalents available at June 30, 2013.March 31, 2014. Cash and cash equivalents included cash of $328$355 and money market funds and other cash equivalents of $4,220.$3,256. In the first sixthree months of 2013,2014, cash outflowsinflows were primarily provided by cash receipts from operations and long-term debt issuances, with additional cash from the monetization of nonstrategic assets. These inflows were largely offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, dividends to stockholders, stock repurchases and the acquisition of operations and wireless spectrum. Cash flows were also used to return value to stockholders through dividends and stock repurchases. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities
During the first sixthree months of 2013,2014, cash provided by operating activities was $17,711,$8,799, compared to $17,325$8,199 for the first sixthree months of 2012.2013. Higher operating cash flows in 2014 were primarily due to the timing of working capital payments, with partial offsets by net tax refunds that were $1,074 lower when compared to 2013 and wireless device financing related to our AT&T Next program, which results in cash collection over the installment period instead of at the time of sale. We expect lower cash from operations in 2014 as our AT&T Next program continues to gain popularity with customers, we incur Leap integration costs, and for increased tax payments resulting from prior-year deductions for our contribution to the pension plan and for changes in tax rules that allowed for us to more rapidly deduct the cost of equipment.

Cash Used in or Provided by Investing Activities
For the first sixthree months of 2013,2014, cash used in investing activities totaled $9,865, which$6,082 and consisted primarily of $9,665$5,716 for capital expenditures, (excludingexcluding interest during construction),construction, and wireless spectrum$662 for the acquisitions of $1,169.Leap, other operations and spectrum. These expenditures were partially offset by cash receipts of approximately $771$320 from the sale of a portion of our shares in América Móvil, $200 from the repayment of advances to YP Holdings and $101 from the return of investment in YP Holdings.vil.

Virtually all of our capital expenditures are spent on our wireless and wireline networks, our U-verse services and support systems for our communications services. Capital spendingexpenditures, excluding interest during construction, increased $1,464 in ourthe first three months. Our Wireless segment of $5,227 represented 54%53% of our total spending and increased 14%35% in the first sixthree months. Wireless expenditures were primarily used for network capacity expansion, integration and the deployment of LTE equipment upgrades and our High-Speed Downlink Packet Access network. The Wireline segment, which includes U-verse services, represented 46%47% of the total capital expenditures and increased 7%34% in the first six months.three months, primarily reflecting our ongoing implementation of Project VIP.

We continue to expect our capital expenditures during 20132014 to be in the $21,000 rangerange. We expect 2014 to be our peak investment year for Project VIP and anticipate our Wireless and Wireline segments’ spend to be proportionally consistent to 2013. Upon our completion of Project VIP, we expect capital expendituresinvestments to trend back to historic levels. The amount of capital investment is influenced by demand for 2014services and 2015 to each be in the $20,000 range.products, continued growth and regulatory considerations.

Cash Used in or Provided by Financing Activities
For the first sixthree months of 2013, our2014, cash used in financing activities totaled $2,445 and included net proceeds of $6,416$2,987 from the following long-term debt issuances:
·  February 2013March 2014 issuance of $1,000$1,100 of 0.900%2.300% global notes due 20162019, $1,000 of 3.900% global notes due 2024 and $1,250$400 of floating rate global notes due 2016.2019. The floating rate for the notenotes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 38.567 basis points.
·  March 20132014 issuance of $500 of 1.400%floating rate global notes due 2017.
·  March 2013 issuance of €1,250 of 2.500% global The floating rate for the notes due 2023 (equivalent to $1,626 when issued) and €400 of 3.550% global notes due 2032 (equivalent to $520 when issued).
·  May 2013 issuance of £1,000 of 4.250% global notes due 2043 (equivalent to approximately $1,560 when issued).is based upon the three-month LIBOR, reset quarterly, plus 42 basis points.

In March 2013,2014, we repaid €1,250redeemed $1,867 of 4.375%debt, primarily consisting of $1,814 of Cricket Communications, Inc. term loans and $38 of 4.500% Leap convertible senior notes (equivalent to $1,641 when repaid) and $147in connection with the Leap acquisition. In April 2014, we redeemed 7.750% Cricket Communications, Inc. senior notes with a face value of 6.5% notes. Additionally,$1,600 in May 2013, we announcedconnection with the redemption of $300 of 7.375% notes, which was completed in July 2013.Leap acquisition.

In May 2013, we completed a repurchase authorization that was approved by our Board of Directors in July 2012. In March 2013, our Board of Directors authorized the repurchase of an additional 300 million sharesOur weighted average interest rate of our common stock. During the first six monthslong-term debt portfolio was approximately 4.5% as of 2013, we repurchased 257 million shares for $9,217 under these authorizations. At the endMarch 31, 2014, and December 31, 2013. We had $79,552 of the second quarter, we had 272 million shares remaining on thetotal notes and debentures outstanding at March 2013 authorization. We expect to make future repurchases opportunistically,31, 2014, which will slow the paceincluded Euro, British pound sterling and Canadian dollar denominated debt of buybacks compared to recent activity.approximately $18,178.
 
 
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JUNE 30, 2013MARCH 31, 2014

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


Since the first quarter of 2012, we have been buying back shares of AT&T common stock under three previous 300 million share repurchase authorizations approved by our Board of Directors. During the first quarter of 2014, we repurchased approximately 37 million shares for $1,237. In March 2014, our Board of Directors approved a fourth authorization to repurchase 300 million shares of our common stock, which has no expiration date. As of March 31, 2014, we had approximately 425 million shares remaining from the authorizations. We expect to make future repurchases opportunistically.

We paid dividends of $4,930$2,398 during the first sixthree months of 2013,2014, compared with $5,187$2,502 for the first sixthree months of 2012,2013, primarily reflecting the decline in shares outstanding due to our repurchases during the year, whichactivity, partially offset by the increase in the quarterly dividend approved by our Board of Directors in November 2012.December 2013. Dividends declared by our Board of Directors totaled $0.45$0.46 per share in the secondfirst quarter of 20132014 and $0.90$0.45 per share for the first sixthree months of 2013 and $0.44 per share in the second quarter and $0.88 per share for the first six months of 2012.2013. Our dividend policy considers the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

At June 30, 2013,March 31, 2014, we had $3,256$8,301 of debt maturing within one year, $1,991$8,277 of which were long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
·  $1,000 of annual put reset securities issued by BellSouth Corporation (BellSouth) that may be put back to us each April until maturity in 2021. No such put was exercised during April 2014.
·  An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.

We have two revolving credit agreements with a syndicate of banks: a $5,000 agreement expiring in December 20162018 and a $3,000 agreement expiring in December 2017. Advances under either agreement may be used for general corporate purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under each agreement. Under each agreement, we can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. Under each agreement, we must maintain a debt-to-EBITDA, including modifications described in the agreement, ratio of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. Both agreements also contain a negative pledge covenant, which generally provides that if we pledge assets or permit liens on our property, then any advances must also be secured. At June 30, 2013,March 31, 2014, we had no advances outstanding under either agreement and were in compliance with all covenants under each agreement.

Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by América Móvil or YP Holdings. At June 30, 2013,March 31, 2014, our debt ratio was 46.6%, compared to 38.4%45.6% at June 30, 2012,March 31, 2013, and 43.0%45.0% at December 31, 2012.2013. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances.issuances, debt in connection with acquisitions and stock repurchases.

During 2014, we also received approximately $420 from the monetization of various nonstrategic assets. A majority of that cash was attributable to sales of investments and real estate holdings. We plan to continue to explore similar opportunities in 2014.

In October 2012,September 2013, we filed an application with the U.S. Departmentmade a voluntary contribution of Labor (DOL) for approval to contribute a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our Mobilitywireless business, to the trust used to pay pension benefits under plans sponsored by AT&T.our qualified pension plans. The preferred equity interest had a value of $9,104 on the contribution date, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts. We distributed $140 to the trust during the three months ended March 31, 2014. So long as we make the distributions, we will have no limitations on our ability to declare a dividend, or repurchase shares. At the time we filed the application, the interest had a fair market value of $9,500. Prior to the contribution of the preferred equity interest, we made an additional cash contribution of $175 and have agreed to annual cash contributions of $175 no later than the estimated pension funding contributiondue date for 2013 (required under ERISA) is approximately $175. We continue to work with the DOL to be able to make the contribution before the end of 2013. Our current financial statements reflect the impact of making this tax deductible contribution as a component of deferred tax expense and deferred tax liabilities. If we make the contribution after our 2012federal income tax return due datefor each of September 16, 2013, we will take a tax deduction for2014, 2015 and 2016. These contributions, combined with our 2013 tax return and estimated payments.existing pension assets, were essentially equivalent to the pension obligation at December 31, 2013.
 
 
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JUNE 30, 2013MARCH 31, 2014

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

The preferred equity interest is not transferable by the trust except through its put and call features. After a period of five years from the contribution or, if earlier, the date upon which the pension plan trust is fully funded as determined under U.S. generally accepted accounting principles (GAAP), AT&T has a right to purchase from the pension plan trust some or all the preferred equity interest at the greater of their fair market value or minimum liquidation value plus any unpaid cumulative dividends. In addition, AT&T will have the right to purchase the preferred equity interest in the event AT&T’s ownership of Mobility is less than 50% or there is a transaction that results in the transfer of 50% or more of the pension plan trust’s assets to an entity not under common control with AT&T (collectively, a change of control). The pension plan trust has the right to require AT&T to purchase the preferred equity interest at the greater of their fair market value or minimum liquidation value plus any unpaid cumulative dividends, and in installments, as specified in the contribution agreement upon the occurrence of any of the following: (1) at any time if the ratio of debt to total capitalization of Mobility exceeds that of AT&T, (2) the date on which AT&T is rated below investment grade for two consecutive calendar quarters, (3) upon a change of control if AT&T does not exercise its purchase option, or (4) at any time after a seven-year period from the contribution date. In the event AT&T elects or is required to purchase the preferred equity interest, AT&T may elect to settle the purchase price in cash or shares of AT&T common stock or a combination thereof.

On September 9, 2013, the Department of Labor (DOL) published a proposed exemption that authorizes retroactive approval of this voluntary contribution. The proposal was open for public comment and we are currently awaiting a final decision by the DOL. Our retirement benefit plans, including required contributions, are subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA).
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MARCH 31, 2014

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts


At June 30, 2013,March 31, 2014, we had interest rate swaps with a notional value of $4,250$6,100 and a fair value of $201.$168.

We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $14,136$17,787 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(82)$1,486 at June 30, 2013. We have foreign exchange contracts with a notional value of $4 and a net fair value of less than $1 at June 30, 2013.March 31, 2014.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of June 30, 2013.March 31, 2014. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of June 30, 2013.March 31, 2014.
 
 
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AT&T INC.
JUNE 30, 2013MARCH 31, 2014

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS


Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
·  Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers’ ability to access financial markets at favorable rates and terms.
·  Changes in available technology and the effects of such changes, including product substitutions and deployment costs.
·  Increases in our benefit plans’ costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates,rates; adverse medical cost trends, unfavorable or delayed implementation of healthcare legislation, regulations or related court decisions.decisions; and our inability to receive retroactive approval from the DOL of our voluntary contribution of a preferred interest in our wireless business.
·  The final outcome of FCC and other federal or state agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limit, intercarrier compensation, interconnection obligations, the transition from legacy technologies to IP-based infrastructure, universal service, broadband deployment, E911 services, competition policy, net neutrality, unbundled network elements and other wholesale obligations, availability of new spectrum from the FCC on fair and balanced terms, and wireless license awards and renewals.
·  The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations, and elimination of state commission review of the withdrawal of services.
·  Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
·  Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures.
·  The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless operating margins.
·  Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets.
·  The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).
·  The continued development of attractive and profitable U-verse service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
·  Our continued ability to attract and offer a diverse portfolio of wireless devices, some on an exclusive basis.
·  The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.
·  Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
·  The outcome of pending, threatened or potential litigation, including patent and product safety claims by or against third parties.
·  The impact on our networks and business from major equipment failures; security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks.
·  The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
·  The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions.
·  Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.
·  Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.
·  The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant reduction in government spending and reluctance of businesses and consumers to spend in general and on our products and services specifically, due to this fiscal uncertainty.

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.

 
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AT&T INC.
JUNE 30, 2013MARCH 31, 2014

PART II – OTHER INFORMATION
Dollars in millions except per share amounts


Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the secondfirst quarter 2013,2014, there were no such material developments.

Item 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 2. Unregistered Sales of Equity Securities and Use of Proceeds  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  
                  
(c) A summary of our repurchases of common stock during the second quarter of 2013 is as follows:  
(c) A summary of our repurchases of common stock during the first quarter of 2014 is as follows:(c) A summary of our repurchases of common stock during the first quarter of 2014 is as follows:  
                  
PeriodPeriod 
 (a)
 
 
 
 
 
Total Number of
Shares (or Units)
 Purchased 1,2
 
 (b)
 
 
 
 
 
 
Average Price Paid
Per Share (or Unit)
 
 (c)
 
 
 
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs 1
 
 (d)
 
 
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs
Period 
(a)
 
 
 
 
Total Number of
Shares (or Units)
 Purchased 1,2
 
(b)
 
 
 
 
 
Average Price Paid
 Per Share (or Unit) 
 
(c)
 
 
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs 1 
 
(d)
 
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs 
                   
April 1, 2013 -
April 30, 2013
  44,085,719  $ 37.46  44,080,000  317,097,255
May 1, 2013 -
May 31, 2013
  22,902,175  37.18  22,900,000  294,197,255
June 1, 2013 -
June 30, 2013
  22,650,002  35.50  22,649,704  271,547,551
January 1, 2014 -
January 31, 2014
January 1, 2014 -
January 31, 2014
  14,730,026  $  34.31   14,398,951   148,000,000 
February 1, 2014 -
February 28, 2014
February 1, 2014 -
February 28, 2014
  11,504,974   32.54   11,500,000   136,500,000 
March 1, 2014 -
March 31, 2014
March 1, 2014 -
March 31, 2014
  11,250,143   32.73   11,250,000   425,250,000 
TotalTotal  89,637,896  $ 36.89  89,629,704  Total  37,485,143  $  33.29   37,148,951   
1 In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. In July 2012, our Board of Directors authorized the repurchase of up to In March 2014, our Board of Directors approved a fourth authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. The authorizations have no expiration date.
 an additional 300 million shares of our common stock, which we completed in May 2013, and we completed the December 2010 authorization last year. The March 2013 authorization has no expiration date.
2 Of the shares repurchased, 8,192 shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options. Of the shares repurchased, 336,192 shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options.
 
 
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AT&T INC.
JUNE 30, 2013MARCH 31, 2014

Item 6. Exhibits


Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.

10AT&T Inc. Health Plan, amended and restated effective January 1, 2014
12Computation of Ratios of Earnings to Fixed Charges
31
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32Section 1350 Certifications
101XBRL Instance Document


 
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SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                    AT&T Inc.




AugustMay 2, 20132014                                                                                                               /s/ John J. Stephens
                    John J. Stephens
                    Senior Executive Vice President
                        and Chief Financial Officer




 
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