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

FORM 10-Q
 
(Mark One)
 
x
 
 
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31,June 30, 2017
 
or
 
 
 o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
                                                                                      
For the transition period fromto

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," "smaller reporting company" and "emerging growth 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[   ]
   Emerging growth company[   ]

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
                                                                                                                                                                              Yes [   ]   No [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                                                                                                                                              Yes [   ]   No [X]
At April 30,July 31, 2017, there were 6,1486,140 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  Three months ended  Six months ended 
 March 31,  June 30,  June 30, 
 2017  2016  2017  2016  2017  2016 
                  
Operating Revenues                  
Service $36,456  $37,101  $36,538  $37,142  $72,994  $74,243 
Equipment  2,909   3,434   3,299   3,378   6,208   6,812 
Total operating revenues  39,365   40,535   39,837   40,520   79,202   81,055 
                        
Operating Expenses                        
Cost of services and sales                        
Equipment  3,848   4,375   4,138   4,260   7,986   8,635 
Broadcast, programming and operations  4,974   4,629   4,898   4,701   9,872 �� 9,330 
Other cost of services (exclusive of depreciation and
amortization shown separately below)
  9,065   9,396   9,218   9,514   18,283   18,910 
Selling, general and administrative  8,487   8,441   8,113   8,909   16,600   17,350 
Depreciation and amortization  6,127   6,563   6,147   6,576   12,274   13,139 
Total operating expenses  32,501   33,404   32,514   33,960   65,015   67,364 
Operating Income  6,864   7,131   7,323   6,560   14,187   13,691 
Other Income (Expense)                        
Interest expense  (1,293)  (1,207)  (1,395)  (1,258)  (2,688)  (2,465)
Equity in net income (loss) of affiliates  (173)  13   14   28   (159)  41 
Other income (expense) – net  (20)  70   128   91   108   161 
Total other income (expense)  (1,486)  (1,124)  (1,253)  (1,139)  (2,739)  (2,263)
Income Before Income Taxes  5,378   6,007   6,070   5,421   11,448   11,428 
Income tax expense  1,804   2,122   2,056   1,906   3,860   4,028 
Net Income  3,574   3,885   4,014   3,515   7,588   7,400 
Less: Net Income Attributable to Noncontrolling Interest  (105)  (82)  (99)  (107)  (204)  (189)
Net Income Attributable to AT&T $3,469  $3,803  $3,915  $3,408  $7,384  $7,211 
Basic Earnings Per Share Attributable to AT&T $0.56  $0.62  $0.63  $0.55  $1.19  $1.17 
Diluted Earnings Per Share Attributable to AT&T $0.56  $0.61  $0.63  $0.55  $1.19  $1.17 
Weighted Average Number of Common Shares Outstanding – Basic (in millions)  6,166   6,172   6,165   6,174   6,166   6,173 
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)
  6,186   6,190   6,184   6,195   6,185   6,193 
Dividends Declared Per Common Share $0.49  $0.48  $0.49  $0.48  $0.98  $0.96 
See Notes to Consolidated Financial Statements.                        

2
AT&T INC.      
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      
Dollars in millions      
(Unaudited)      
  Three months ended 
  March 31, 
  2017  2016 
Net income $3,574  $3,885 
Other comprehensive income (loss), net of tax:        
    Foreign currency:        
        Foreign currency translation adjustment (includes $6 and $0 attributable to
            noncontrolling interest), net of taxes of $391 and $(10)
  372   (44)
    Available-for-sale securities:        
        Net unrealized gains (losses), net of taxes of $15 and $(15)  33   (26)
        Reclassification adjustment included in net income, net of taxes of $3, and $(2)  5   (3)
     Cash flow hedges:        
        Net unrealized gains, net of taxes of $7 and $67  13   124 
        Reclassification adjustment included in net income, net of taxes of $5 and $5  10   10 
     Defined benefit postretirement plans:        
        Amortization of net prior service credit included in net income, net of taxes of $(139)
            and $(131)
  (228)  (215)
Other comprehensive income (loss)  205   (154)
Total comprehensive income  3,779   3,731 
Less: Total comprehensive income attributable to noncontrolling interest  (111)  (82)
Total Comprehensive Income Attributable to AT&T $3,668  $3,649 
See Notes to Consolidated Financial Statements.        
3
AT&T INC. 
CONSOLIDATED BALANCE SHEETS 
Dollars in millions except per share amounts 
  March 31,  December 31, 
  2017  2016 
Assets (Unaudited)    
Current Assets      
Cash and cash equivalents $14,884  $5,788 
Accounts receivable - net of allowances for doubtful accounts of $699 and $661  15,078   16,794 
Prepaid expenses  1,418   1,555 
Other current assets  14,347   14,232 
Total current assets  45,727   38,369 
Property, plant and equipment  319,108   319,648 
   Less: accumulated depreciation and amortization  (193,816)  (194,749)
Property, Plant and Equipment – Net  125,292   124,899 
Goodwill  105,593   105,207 
Licenses  94,617   94,176 
Customer Lists and Relationships – Net  13,366   14,243 
Other Intangible Assets – Net  8,295   8,441 
Investments in Equity Affiliates  1,551   1,674 
Other Assets  17,462   16,812 
Total Assets $411,903  $403,821 
         
Liabilities and Stockholders' Equity        
Current Liabilities        
Debt maturing within one year $12,681  $9,832 
Accounts payable and accrued liabilities  27,120   31,138 
Advanced billing and customer deposits  4,493   4,519 
Accrued taxes  3,384   2,079 
Dividends payable  3,012   3,008 
Total current liabilities  50,690   50,576 
Long-Term Debt  120,568   113,681 
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes  61,100   60,128 
Postemployment benefit obligation  33,404   33,578 
Other noncurrent liabilities  21,160   21,748 
Total deferred credits and other noncurrent liabilities  115,664   115,454 
         
Stockholders' Equity        
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2017 and        
   December 31, 2016: issued 6,495,231,088 at March 31, 2017 and December 31, 2016)  6,495   6,495 
Additional paid-in capital  89,411   89,604 
Retained earnings  35,175   34,734 
Treasury stock (347,741,277 at March 31, 2017 and 356,237,141        
   at December 31, 2016, at cost)  (12,400)  (12,659)
Accumulated other comprehensive income  5,160   4,961 
Noncontrolling interest  1,140   975 
Total stockholders' equity  124,981   124,110 
Total Liabilities and Stockholders' Equity $411,903  $403,821 
See Notes to Consolidated Financial Statements.        
AT&T INC.            
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME          
Dollars in millions            
(Unaudited)            
  Three months ended  Six months ended 
  June 30,  June 30, 
  2017  2016  2017  2016 
Net income $4,014  $3,515  $7,588  $7,400 
Other comprehensive income (loss), net of tax:                
    Foreign currency:                
        Foreign currency translation adjustment (includes $(10),
            $0, $(4) and $0 attributable to noncontrolling interest),
            net of taxes of $115, $136, $506 and $126
  (33)  218   339   174 
    Available-for-sale securities:                
        Net unrealized gains (losses), net of taxes of $29, $2, $44
            and $(13)
  50   5   83   (21)
        Reclassification adjustment included in net income, net of
            taxes of $(7), $2, $(4) and $0
  (12)  3   (7)  - 
     Cash flow hedges:                
        Net unrealized gains (losses), net of taxes of $(279), $(208),
            $(272) and $(141)
  (517)  (387)  (504)  (263)
        Reclassification adjustment included in net income, net of
            taxes of $5, $5, $10 and $10
  9   9   19   19 
     Defined benefit postretirement plans:                
        Net prior service credit arising during period, net of
            taxes of $594, $0, $594 and $0
  969   -   969   - 
        Amortization of net prior service credit included in net
            income, net of taxes of $(151), $(131), $(290) and $(262)
  (247)  (214)  (475)  (429)
Other comprehensive income (loss)  219   (366)  424   (520)
Total comprehensive income  4,233   3,149   8,012   6,880 
Less: Total comprehensive income attributable to
        noncontrolling interest
  (89)  (107)  (200)  (189)
Total Comprehensive Income Attributable to AT&T $4,144  $3,042  $7,812  $6,691 
See Notes to Consolidated Financial Statements.                
 

43
AT&T INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
Dollars in millions 
(Unaudited)      
  Three months ended 
  March 31, 
  2017  2016 
Operating Activities      
Net income $3,574  $3,885 
Adjustments to reconcile net income to net cash provided by operating activities:        
   Depreciation and amortization  6,127   6,563 
   Undistributed loss (earnings) from investments in equity affiliates  182   (13)
   Provision for uncollectible accounts  393   374 
   Deferred income tax expense  480   1,346 
   Net loss (gain) from sale of investments, net of impairments  61   (44)
Changes in operating assets and liabilities:        
   Accounts receivable  445   43 
   Other current assets  228   1,319 
   Accounts payable and other accrued liabilities  (1,778)  (3,990)
   Equipment installment receivables and related sales  579   454 
   Deferred fulfillment costs  (436)  (542)
Retirement benefit funding  (140)  (140)
Other - net
  (497)  (1,355)
Total adjustments  5,644   4,015 
Net Cash Provided by Operating Activities  9,218   7,900 
         
Investing Activities        
Capital expenditures:        
   Purchase of property and equipment  (5,784)  (4,451)
   Interest during construction  (231)  (218)
Acquisitions, net of cash acquired  (162)  (165)
Dispositions  6   81 
Sale of securities, net  -   445 
Net Cash Used in Investing Activities  (6,171)  (4,308)
         
Financing Activities        
Net change in short-term borrowings with original maturities of three months or less  (1)  - 
Issuance of long-term debt  12,440   5,978 
Repayment of long-term debt  (3,053)  (2,296)
Purchase of treasury stock  (177)  - 
Issuance of treasury stock  21   89 
Dividends paid  (3,009)  (2,947)
Other  (172)  471 
Net Cash Provided by Financing Activities  6,049   1,295 
Net increase in cash and cash equivalents  9,096   4,887 
Cash and cash equivalents beginning of year  5,788   5,121 
Cash and Cash Equivalents End of Period $14,884  $10,008 
Cash paid (received) during the three months ended March 31 for:        
   Interest $1,643  $1,459 
   Income taxes, net of refunds $(160) $477 
See Notes to Consolidated Financial Statements. 
AT&T INC. 
CONSOLIDATED BALANCE SHEETS 
Dollars in millions except per share amounts 
  June 30,  December 31, 
  2017  2016 
Assets (Unaudited)    
Current Assets      
Cash and cash equivalents $25,617  $5,788 
Accounts receivable - net of allowances for doubtful accounts of $732 and $661  14,997   16,794 
Prepaid expenses  1,371   1,555 
Other current assets  11,562   14,232 
Total current assets  53,547   38,369 
Property, plant and equipment  323,098   319,648 
   Less: accumulated depreciation and amortization  (196,914)  (194,749)
Property, Plant and Equipment – Net  126,184   124,899 
Goodwill  105,546   105,207 
Licenses  95,864   94,176 
Customer Lists and Relationships – Net  12,414   14,243 
Other Intangible Assets – Net  7,980   8,441 
Investments in Equity Affiliates  1,615   1,674 
Other Assets  17,645   16,812 
Total Assets $420,795  $403,821 
         
Liabilities and Stockholders' Equity        
Current Liabilities        
Debt maturing within one year $10,831  $9,832 
Accounts payable and accrued liabilities  26,471   31,138 
Advanced billing and customer deposits  4,371   4,519 
Accrued taxes  3,331   2,079 
Dividends payable  3,008   3,008 
Total current liabilities  48,012   50,576 
Long-Term Debt  132,824   113,681 
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes  61,926   60,128 
Postemployment benefit obligation  31,422   33,578 
Other noncurrent liabilities  20,753   21,748 
Total deferred credits and other noncurrent liabilities  114,101   115,454 
         
Stockholders' Equity        
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2017 and        
   December 31, 2016: issued 6,495,231,088 at June 30, 2017 and December 31, 2016)  6,495   6,495 
Additional paid-in capital  89,471   89,604��
Retained earnings  36,067   34,734 
Treasury stock (355,448,811 at June 30, 2017 and 356,237,141        
   at December 31, 2016, at cost)  (12,697)  (12,659)
Accumulated other comprehensive income  5,389   4,961 
Noncontrolling interest  1,133   975 
Total stockholders' equity  125,858   124,110 
Total Liabilities and Stockholders' Equity $420,795  $403,821 
See Notes to Consolidated Financial Statements.        

4
AT&T INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
Dollars in millions 
(Unaudited)      
  Six months ended 
  June 30, 
  2017  2016 
Operating Activities      
Net income $7,588  $7,400 
Adjustments to reconcile net income to net cash provided by operating activities:        
   Depreciation and amortization  12,274   13,139 
   Undistributed loss (earnings) from investments in equity affiliates  167   (22)
   Provision for uncollectible accounts  795   705 
   Deferred income tax expense  964   1,767 
   Net loss (gain) from sale of investments, net of impairments  12   (85)
   Actuarial loss (gain) on pension and postretirement benefits  (259)  - 
Changes in operating assets and liabilities:        
   Accounts receivable  119   (364)
   Other current assets  471   2,229 
   Accounts payable and other accrued liabilities  (2,761)  (3,032)
   Equipment installment receivables and related sales  907   464 
   Deferred fulfillment costs  (796)  (1,190)
Retirement benefit funding  (280)  (280)
Other - net
  (1,041)  (2,524)
Total adjustments  10,572   10,807 
Net Cash Provided by Operating Activities  18,160   18,207 
         
Investing Activities        
Capital expenditures:        
   Purchase of property and equipment  (10,750)  (9,702)
   Interest during construction  (473)  (437)
Acquisitions, net of cash acquired  1,224   (485)
Dispositions  51   107 
Sale of securities, net  -   500 
Net Cash Used in Investing Activities  (9,948)  (10,017)
         
Financing Activities        
Net change in short-term borrowings with original maturities of three months or less  (2)  - 
Issuance of long-term debt  24,115   10,140 
Repayment of long-term debt  (6,118)  (9,129)
Purchase of treasury stock  (458)  (197)
Issuance of treasury stock  24   119 
Dividends paid  (6,021)  (5,899)
Other  77   (1,137)
Net Cash Provided by (Used in) Financing Activities  11,617   (6,103)
Net increase in cash and cash equivalents  19,829   2,087 
Cash and cash equivalents beginning of year  5,788   5,121 
Cash and Cash Equivalents End of Period $25,617  $7,208 
Cash paid during the six months ended June 30 for:        
   Interest $3,095  $2,914 
   Income taxes, net of refunds $1,470  $2,468 
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) 
 March 31, 2017  June 30, 2017 
 Shares  Amount  Shares  Amount 
Common Stock            
Balance at beginning of year  6,495  $6,495   6,495  $6,495 
Issuance of stock  -   -   -   - 
Balance at end of period  6,495  $6,495   6,495  $6,495 
                
Additional Paid-In Capital                
Balance at beginning of year     $89,604      $89,604 
Issuance of treasury stock      4       4 
Share-based payments      (197)      (137)
Balance at end of period     $89,411      $89,471 
                
Retained Earnings                
Balance at beginning of year     $34,734      $34,734 
Net income attributable to AT&T ($0.56 per diluted share)      3,469 
Dividends to stockholders ($0.49 per share)      (3,030)
Net income attributable to AT&T ($1.19 per diluted share)      7,384 
Dividends to stockholders ($0.98 per share)      (6,053)
Other      2       2 
Balance at end of period     $35,175      $36,067 
                
Treasury Stock                
Balance at beginning of year  (356) $(12,659)  (356) $(12,659)
Repurchase and acquisition of common stock  (5)  (200)  (13)  (504)
Issuance of treasury stock  13   459   14   466 
Balance at end of period  (348) $(12,400)  (355) $(12,697)
                
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax                
Balance at beginning of year     $4,961      $4,961 
Other comprehensive income attributable to AT&T      199       428 
Balance at end of period     $5,160      $5,389 
                
Noncontrolling Interest                
Balance at beginning of year     $975      $975 
Net income attributable to noncontrolling interest      105       204 
Distributions      (77)      (174)
Acquisition of noncontrolling interest      131       132 
Translation adjustments attributable to noncontrolling interest, net of taxes      6       (4)
Balance at end of period     $1,140      $1,133 
                
Total Stockholders' Equity at beginning of year     $124,110      $124,110 
Total Stockholders' Equity at end of period     $124,981      $125,858 
See Notes to Consolidated Financial Statements.                
 

6
AT&T INC.
MARCH 31,JUNE 30, 2017

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 and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. 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, 2016. The results for the interim periods are not necessarily indicative of those for the full year.

In the tables throughout this document, 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.

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

Basis of Presentation  These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates.affiliates over which we exercise control.

All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-ownedunconsolidated subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including cumulative translation adjustments.

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.

Recently Adopted Accounting Standards
Income Taxes  As of January 1, 2017, we adopted Accounting Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU 2016-16), with modified retrospective application, resulting in our recognition of an immaterial adjustment to retained earnings. Under ASU 2016-16, we recognize the income tax effects of the intercompany sales or transfers of assets other than inventory (e.g., intellectual property or property, plant and equipment) during the period of intercompany sale or transfer instead of the period of either the sale or transfer to a third party or recognition of depreciation or impairment.

New Accounting Standards
Pension and Other Postretirement Benefits  In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07), which changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue to present service costs within our operating expenses but present amortization of prior service credits and other components of our net periodic benefit cost in "other income (expense)" – net" in our consolidated statements of income. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017. See Note 5 for our components of net periodic benefit cost.

Revenue Recognition  In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASC 606), and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASC 606, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard using the "modified retrospective method." Under that method, we will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous accounting standards.

7
AT&T INC.
MARCH 31,JUNE 30, 2017

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 and diluted earnings per share for the three months and six months ended March 31,June 30, 2017 and 2016, is shown in the table below:

 Three months ended  Three months ended  Six months ended 
 March 31,  June 30,  June 30, 
 2017  2016  2017  2016  2017  2016 
Numerators                  
Numerator for basic earnings per share:                  
Net Income $3,574  $3,885  $4,014  $3,515  $7,588  $7,400 
Less: Net income attributable to noncontrolling interest  (105)  (82)  (99)  (107)  (204)  (189)
Net Income attributable to AT&T  3,469   3,803   3,915   3,408   7,384   7,211 
Dilutive potential common shares:                        
Share-based payment  4   4   2   2   6   6 
Numerator for diluted earnings per share $3,473  $3,807  $3,917  $3,410  $7,390  $7,217 
Denominators (000,000)                        
Denominator for basic earnings per share:                        
Weighted average number of common shares outstanding  6,166   6,172   6,165   6,174   6,166   6,173 
Dilutive potential common shares:                        
Share-based payment (in shares)  20   18   19   21   19   20 
Denominator for diluted earnings per share  6,186   6,190   6,184   6,195   6,185   6,193 
Basic earnings per share attributable to AT&T $0.56  $0.62  $0.63  $0.55  $1.19  $1.17 
Diluted earnings per share attributable to AT&T $0.56  $0.61  $0.63  $0.55  $1.19  $1.17 
 

8
AT&T INC.
MARCH 31,JUNE 30, 2017

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 included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.

 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, 2016$(1,995) $541 $744 $5,671 $4,961
Other comprehensive income
   (loss) before reclassifications
 343  83  (504)  969  891
Amounts reclassified
   from accumulated OCI
 -
1
 
 (7)
1
 
 19
2
 
 (475)
3
 
 (463)
Net other comprehensive
   income (loss)
 343  76  (485)  494  428
Balance as of June 30, 2017$(1,652) $617 $259 $6,165 $5,389
                
 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, 2015$(1,198) $484 $16 $6,032 $5,334
Other comprehensive income
   (loss) before reclassifications
 174  (21)  (263)  -  (110)
Amounts reclassified
   from accumulated OCI
 -
1
 
 -
1
 
 19
2
 
 (429)
3
 
 (410)
Net other comprehensive
   income (loss)
 174  (21)  (244)  (429)  (520)
Balance as of June 30, 2016$(1,024) $463 $(228) $5,603 $4,814
 1 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
 2 (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
 3 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).

 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, 2016$(1,995) $541 $744 $5,671 $4,961
Other comprehensive income
   (loss) before reclassifications
 366  33  13  -  412
Amounts reclassified
   from accumulated OCI
 -
1
 		 5
1
 		 10
2
 		 (228)
3
 		 (213)
Net other comprehensive
   income (loss)
 366  38  23  (228)  199
Balance as of March 31, 2017$(1,629) $579 $767 $5,443 $5,160
                
 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, 2015$(1,198) $484 $16 $6,032 $5,334
Other comprehensive income
   (loss) before reclassifications
 (44)  (26)  124  -  54
Amounts reclassified
   from accumulated OCI
 -
1
 		 (3)
1
 		 10
2
 		 (215)
3
 		 (208)
Net other comprehensive
   income (loss)
 (44)  (29)  134  (215)  (154)
Balance as of March 31, 2016$(1,242) $455 $150 $5,817 $5,180
 1 
 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
 2 
 (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
 3 
 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).
NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate segment operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

 
9
AT&T INC.
MARCH 31,JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete communications solution to our business customers.

The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network and/orand our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our network to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates.

In reconciling items to consolidated operating income and income before income taxes, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.

Certain operating items are not allocated to our business segments, and those include:
·
Acquisition-related items which consists of (1) items associated with the merger and integration of acquired businesses and (2) the noncash amortization of intangible assets acquired in acquisitions.
·
Certain significant items which consists of (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3) losses resulting from abandonment or impairment of assets and (4) other items for which the segments are not being evaluated.

Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as our satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and, therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.

10
AT&T INC.
MARCH 31,JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended March 31, 2017 
  Revenues  
Operations
and Support
Expenses
  EBITDA  
Depreciation
and
Amortization
  
Operating
Income (Loss)
  
Equity in Net
Income (Loss) of
Affiliates
  
Segment
Contribution
 
Business Solutions $16,848  $10,176  $6,672  $2,312  $4,360  $-  $4,360 
Entertainment Group  12,623   9,601   3,022   1,419   1,603   (6)  1,597 
Consumer Mobility  7,740   4,528   3,212   873   2,339   -   2,339 
International  1,929   1,759   170   290   (120)  20   (100)
Segment Total  39,140   26,064   13,076   4,894   8,182  $14  $8,196 
Corporate and Other  225   221   4   31   (27)        
Acquisition-related items  -   207   (207)  1,202   (1,409)        
Certain significant items  -   (118)  118   -   118         
AT&T Inc. $39,365  $26,374  $12,991  $6,127  $6,864         

For the three months ended March 31, 2016 
  Revenues  
Operations
and Support
Expenses
  EBITDA  
Depreciation
and
Amortization
  
Operating
Income (Loss)
  
Equity in Net
Income (Loss) of
Affiliates
  
Segment
Contribution
 
Business Solutions $17,609  $10,802  $6,807  $2,508  $4,299  $-  $4,299 
Entertainment Group  12,658   9,578   3,080   1,488   1,592   3   1,595 
Consumer Mobility  8,328   4,912   3,416   922   2,494   -   2,494 
International  1,667   1,588   79   277   (198)  14   (184)
Segment Total  40,262   26,880   13,382   5,195   8,187  $17  $8,204 
Corporate and Other  273   377   (104)  17   (121)        
Acquisition-related items  -   295   (295)  1,351   (1,646)        
Certain significant items  -   (711)  711   -   711         
AT&T Inc. $40,535  $26,841  $13,694  $6,563  $7,131         
11
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2017 
  Revenues  
Operations
and Support
Expenses
  EBITDA  
Depreciation
and
Amortization
  
Operating
Income (Loss)
  
Equity in Net
Income (Loss) of
Affiliates
  
Segment
Contribution
 
Business Solutions $17,107  $10,313  $6,794  $2,335  $4,459  $-  $4,459 
Entertainment Group  12,682   9,558   3,124   1,458   1,666   (11)  1,655 
Consumer Mobility  7,791   4,520   3,271   871   2,400   -   2,400 
International  2,026   1,772   254   311   (57)  25   (32)
Segment Total  39,606   26,163   13,443   4,975   8,468  $14  $8,482 
Corporate and Other  231   87   144   2   142         
Acquisition-related items  -   281   (281)  1,170   (1,451)        
Certain significant items  -   (164)  164   -   164         
AT&T Inc. $39,837  $26,367  $13,470  $6,147  $7,323         
                             
For the six months ended June 30, 2017 
  Revenues  
Operations
and Support
Expenses
  EBITDA  
Depreciation
and
Amortization
  
Operating
Income (Loss)
  
Equity in Net
Income (Loss) of
Affiliates
  
Segment
Contribution
 
Business Solutions $33,955  $20,489  $13,466  $4,647  $8,819  $-  $8,819 
Entertainment Group  25,305   19,159   6,146   2,877   3,269   (17)  3,252 
Consumer Mobility  15,531   9,048   6,483   1,744   4,739   -   4,739 
International  3,955   3,531   424   601   (177)  45   (132)
Segment Total  78,746   52,227   26,519   9,869   16,650  $28  $16,678 
Corporate and Other  456   308   148   33   115         
Acquisition-related items  -   488   (488)  2,372   (2,860)        
Certain significant items  -   (282)  282   -   282         
AT&T Inc. $79,202  $52,741  $26,461  $12,274  $14,187         
 
The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income. 
       
  First Quarter 
  2017  2016 
Business Solutions $4,360  $4,299 
Entertainment Group  1,597   1,595 
Consumer Mobility  2,339   2,494 
International  (100)  (184)
Segment Contribution  8,196   8,204 
Reconciling Items:        
  Corporate and Other  (27)  (121)
  Merger and integration charges  (207)  (295)
  Amortization of intangibles acquired  (1,202)  (1,351)
  Employee separation costs  -   (25)
  Gain on wireless spectrum transactions  118   736 
  Segment equity in net (income) loss of affiliates  (14)  (17)
AT&T Operating Income  6,864   7,131 
Interest expense  1,293   1,207 
Equity in net income (loss) of affiliates  (173)  13 
Other income (expense) - net  (20)  70 
Income Before Income Taxes $5,378  $6,007 

11
AT&T INC.
JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2016 
  Revenues  
Operations
and Support
Expenses
  EBITDA  
Depreciation
and
Amortization
  
Operating
Income (Loss)
  
Equity in Net
Income (Loss) of
Affiliates
  
Segment
Contribution
 
Business Solutions $17,579  $10,857  $6,722  $2,521  $4,201  $-  $4,201 
Entertainment Group  12,711   9,569   3,142   1,489   1,653   (2)  1,651 
Consumer Mobility  8,186   4,680   3,506   932   2,574   -   2,574 
International  1,828   1,723   105   298   (193)  9   (184)
Segment Total  40,304   26,829   13,475   5,240   8,235  $7  $8,242 
Corporate and Other  216   293   (77)  20   (97)        
Acquisition-related items  -   233   (233)  1,316   (1,549)        
Certain significant items  -   29   (29)  -   (29)        
AT&T Inc. $40,520  $27,384  $13,136  $6,576  $6,560         
  ��                          
For the six months ended June 30, 2016 
  Revenues  
Operations
and Support
Expenses
  EBITDA  
Depreciation
and
Amortization
  
Operating
Income (Loss)
  
Equity in Net
Income (Loss) of
Affiliates
  
Segment
Contribution
 
Business Solutions $35,188  $21,659  $13,529  $5,029  $8,500  $-  $8,500 
Entertainment Group  25,369   19,147   6,222   2,977   3,245   1   3,246 
Consumer Mobility  16,514   9,592   6,922   1,854   5,068   -   5,068 
International  3,495   3,311   184   575   (391)  23   (368)
Segment Total  80,566   53,709   26,857   10,435   16,422  $24  $16,446 
Corporate and Other  489   670   (181)  37   (218)        
Acquisition-related items  -   528   (528)  2,667   (3,195)        
Certain significant items  -   (682)  682   -   682         
AT&T Inc. $81,055  $54,225  $26,830  $13,139  $13,691         
 

12
AT&T INC.
JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income. 
             
  Second Quarter  Six Month Period 
  2017  2016  2017  2016 
Business Solutions $4,459  $4,201  $8,819  $8,500 
Entertainment Group  1,655   1,651   3,252   3,246 
Consumer Mobility  2,400   2,574   4,739   5,068 
International  (32)  (184)  (132)  (368)
Segment Contribution  8,482   8,242   16,678   16,446 
Reconciling Items:                
  Corporate and Other  142   (97)  115   (218)
  Merger and integration charges  (281)  (233)  (488)  (528)
  Amortization of intangibles acquired  (1,170)  (1,316)  (2,372)  (2,667)
  Actuarial gain (loss)  259   -   259   - 
  Employee separation costs  (60)  (29)  (60)  (54)
  Gain on wireless spectrum transactions  63   -   181   736 
  Venezuela devaluation  (98)  -   (98)  - 
  Segment equity in net (income) loss of affiliates  (14)  (7)  (28)  (24)
AT&T Operating Income  7,323   6,560   14,187   13,691 
Interest expense  1,395   1,258   2,688   2,465 
Equity in net income (loss) of affiliates  14   28   (159)  41 
Other income (expense) - net  128   91   108   161 
Income Before Income Taxes $6,070  $5,421  $11,448  $11,428 

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Many 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. 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 provide benefits described in the plans to employees upon their retirement.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,426$8,294 at March 31,June 30, 2017. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and accounted for as contributions. We distributed $140$280 to the trust during the threesix months ended March 31,June 30, 2017. So long as we make the 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 is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.

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. During the second quarter of 2017, a substantive plan change involving the frequency of considering potential health reimbursement account credit increases was communicated to our retirees. This plan change resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by $1,563. Such credits will be amortized through earnings over a period approximating the average service period to full eligibility. Upon our adoption of ASU 2017-07, the amortization of these prior service credits will be recorded in other income (expense) - net. The plan change also triggered a remeasurement of our postretirement benefit obligation, resulting in an actuarial gain of $259 recognized in the second quarter of 2017.

13
AT&T INC.
JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included with Corporate and Other (see Note 4).

  Three months ended  Six months ended 
  June 30,  June 30, 
  2017  2016  2017  2016 
Pension cost:            
   Service cost – benefits earned during the period $282  $278  $564  $556 
   Interest cost on projected benefit obligation  484   495   968   990 
   Expected return on assets  (784)  (780)  (1,567)  (1,558)
   Amortization of prior service credit  (31)  (25)  (62)  (51)
   Net pension (credit) cost $(49) $(32) $(97) $(63)
                 
Postretirement cost:                
   Service cost – benefits earned during the period $34  $48  $75  $96 
   Interest cost on accumulated postretirement benefit obligation  202   243   424   486 
   Expected return on assets  (79)  (89)  (159)  (178)
   Amortization of prior service credit  (366)   (319)  (702)  (638)
   Actuarial (gain) loss  (259)  -    (259)   -  
   Net postretirement (credit) cost $(468) $(117) $(621) $(234)
                 
   Combined net pension and postretirement (credit) cost $(517) $(149) $(718) $(297)

The decrease in the combined net pension and postretirement costs in the second quarter and first six months reflects higher amortization of prior service credits as well as decreasing corporate bond rates, which contributed to lower interest costs.

As part of our second-quarter 2017 remeasurement, we decreased the weighted-average discount rate used to measure our postretirement benefit obligation to 4.10%. The discount rate in effect for determining postretirement service and interest costs after remeasurement is 4.50% and 3.30%, respectively. Including the effects of our plan change and remeasurement, the total estimated prior service credits that will be amortized from accumulated OCI into net periodic benefit cost over the last half of 2017 is $764 ($474 net of tax) for postretirement benefits.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the second quarter ended 2017 and 2016, net supplemental pension benefits costs not included in the table above were $23 and $24. For the first six months of 2017 and 2016, net supplemental pension benefit costs were $45 and $47.

1214
AT&T INC.
MARCH 31,JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
  Three months ended 
  March 31, 
  2017  2016 
Pension cost:      
   Service cost – benefits earned during the period $282  $278 
   Interest cost on projected benefit obligation  484   495 
   Expected return on assets  (783)  (778)
   Amortization of prior service credit  (31)  (26)
   Net pension (credit) cost $(48) $(31)
         
Postretirement cost:        
   Service cost – benefits earned during the period $41  $48 
   Interest cost on accumulated postretirement benefit obligation  222   243 
   Expected return on assets  (80)  (89)
   Amortization of prior service credit  (336)  (319)
   Net postretirement (credit) cost $(153) $(117)
         
   Combined net pension and postretirement (credit) cost $(201) $(148)

The decrease in the combined net pension and postretirement costs in the first quarter reflects higher amortization of prior service credits due to plan changes, including changes to future costs for continued retiree healthcare coverage. The reduction also reflects decreasing corporate bond rates, which contributed to lower interest costs.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended 2017 and 2016, net supplemental pension benefits costs not included in the table above were $22 and $23.

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. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
13
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

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, 2016.

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

March 31, 2017 December 31, 2016 June 30, 2017 December 31, 2016 
Carrying Fair Carrying Fair Carrying Fair Carrying Fair 
Amount Value Amount Value Amount Value Amount Value 
Notes and debentures 1
 $132,379  $138,944  $122,381  $128,726  $142,816  $151,338  $122,381  $128,726 
Bank borrowings  3   3   4   4   2   2   4   4 
Investment securities  2,640   2,640   2,587   2,587   2,556   2,556   2,587   2,587 
1 Includes credit agreement borrowings.
                                

The carrying amount 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 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.

Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2017 and December 31, 2016:15

  March 31, 2017 
  Level 1  Level 2  Level 3  Total 
Available-for-Sale Securities            
   Domestic equities $1,253  $-  $-  $1,253 
   International equities  639   -   -   639 
   Fixed income bonds  -   501   -   501 
Asset Derivatives1
                
   Interest rate swaps  -   62   -   62 
   Cross-currency swaps  -   235   -   235 
Liability Derivatives1
                
   Interest rate swaps  -   (20)  -   (20)
   Cross-currency swaps  -   (3,635)  -   (3,635)
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" in our consolidated balance sheets.  
14
AT&T INC.
MARCH 31,JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Following is the fair value leveling for available-for-sale securities and derivatives as of June 30, 2017 and December 31, 2016:

  June 30, 2017 
  Level 1  Level 2  Level 3  Total 
Available-for-Sale Securities            
   Domestic equities $1,276  $-  $-  $1,276 
   International equities  659   -   -   659 
   Fixed income bonds  -   370   -   370 
Asset Derivatives1
                
   Interest rate swaps  -   57   -   57 
   Cross-currency swaps  -   294   -   294 
   Interest rate locks  -   3   -   3 
Liability Derivatives1
                
   Interest rate swaps  -   (42)  -   (42)
   Cross-currency swaps  -   (2,631)  -   (2,631)
   Interest rate locks  -   (82)  -   (82)
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" in our consolidated balance sheets. 

  December 31, 2016 
  Level 1  Level 2  Level 3  Total 
Available-for-Sale Securities            
   Domestic equities $1,215  $-  $-  $1,215 
   International equities  594   -   -   594 
   Fixed income bonds  -   508   -   508 
Asset Derivatives1
                
   Interest rate swaps  -   79   -   79 
   Cross-currency swaps  -   89   -   89 
Liability Derivatives1
                
   Interest rate swaps  -   (14)  -   (14)
   Cross-currency swaps  -   (3,867)  -   (3,867)
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" in our consolidated balance sheets. 

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 was 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 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 $236$220 have maturities of less than one year, $58$33 within one to three years, $47$32 within three to five years and $160$85 for five or more years.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the consolidated balance sheets.

16
AT&T INC.
JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Derivative Financial Instruments
We enter into derivative transactions 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.

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 in 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 values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the threesix months ended March 31,June 30, 2017 and March 31,June 30, 2016, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
15
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

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, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S. dollar 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. 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 (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the threesix months ended March 31,June 30, 2017 and March 31,June 30, 2016, no ineffectiveness was 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 $59 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. 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 "Other income (expense) – net" in the consolidated statements of income. In the threesix months ended March 31,June 30, 2017 and March 31,June 30, 2016, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

17
AT&T INC.
JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31,June 30, 2017, we had posted collateral of $2,846$2,297 (a deposit asset) and held no collateral.collateral of $13 (a receipt liability). Under the agreements, if AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March,June, we would have been required to post additional collateral of $123.$133. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P), we would have been required to post additional collateral of $246.$239. At December 31, 2016, we had posted collateral of $3,242 (a deposit asset) and held no collateral. We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

March 31, December 31,  June 30,  December 31, 
2017 2016  2017  2016 
Interest rate swaps $10,450  $9,650  $10,775  $9,650 
Cross-currency swaps  29,642   29,642   38,694   29,642 
Interest rate locks  5,000   - 
Total $40,092  $39,292  $54,469  $39,292 

Following are the related hedged items affecting our financial position and performance: 
             
Effect of Derivatives on the Consolidated Statements of Income          
Fair Value Hedging RelationshipsThree months ended Six months ended 
June 30, June 30, 
2017 2016 2017 2016 
Interest rate swaps (Interest expense):            
     Gain (Loss) on interest rate swaps $(23) $5  $(48) $71 
     Gain (Loss) on long-term debt  23   (5)  48   (71)

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

Three months ended Six months ended 
June 30, June 30, 
Cash Flow Hedging Relationships2017 2016 2017 2016 
Cross-currency swaps:            
     Gain (Loss) recognized in accumulated OCI $(717) $(595) $(697) $(404)
Interest rate locks:                
     Gain (Loss) recognized in accumulated OCI  (79)  -   (79)  - 
     Interest income (expense) reclassified from
        accumulated OCI into income
  (14)  (14)  (29)  (29)

 

1618
AT&T INC.
MARCH 31,JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Following are the related hedged items affecting our financial position and performance: 
       
Effect of Derivatives on the Consolidated Statements of Income      
Fair Value Hedging RelationshipsThree months ended 
March 31, 
2017 2016 
Interest rate swaps (Interest expense):      
     Gain (Loss) on interest rate swaps $(25) $66 
     Gain (Loss) on long-term debt  25   (66)

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

Three months ended 
March 31, 
Cash Flow Hedging Relationships2017 2016 
Cross-currency swaps:      
     Gain (Loss) recognized in accumulated OCI $20  $191 
Interest rate locks:        
     Interest income (expense) reclassified from accumulated OCI into income  (15)  (15)

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

SubsequentAcquisitions
Auction 1000 On April 13, 2017, the Federal Communications Commission (FCC) announced that we were the successful bidder for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017.

Dispositions
YP Holdings LLC  In June 2017, YP Holdings LLC was acquired by Dex Media. Our second-quarter results include a gain of $36 for our portion of the proceeds.

Pending Acquisitions
Time Warner Inc.  On October 22, 2016, we entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at DecemberMarch 31, 2016,2017, the total transaction value is approximately $108,200.$107,160. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash.

Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world's largest pay-TV subscriber bases and leading scale in TV, mobile and broadband distribution.

The Merger Agreement was approved by Time Warner shareholders on February 15, 2017 and remains subject to review by the U.S. Department of Justice.Justice and certain foreign jurisdictions. The Federal Communications Commission (FCC)FCC has stated that it does not believe it will need to review the deal as no licenses are involved. It is also a condition to closing that necessary consents from foreign governmental entities must be obtained. The transaction is expected to close before year-end 2017. If the Merger is terminated as a result of reaching the termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would be obligated to pay Time Warner $500.
17
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Auction 1000 On April 13, 2017, the FCC announced that we were the successful bidder for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017.

Other Events
FirstNet  On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. As of July 31, 2017, seven states have opted-in to the program. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.
results.
 


19
AT&T INC.
JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of March 31,June 30, 2017 and December 31, 2016, gross equipment installment receivables of $4,119$3,920 and $5,665 were included on our consolidated balance sheets, of which $2,346$2,230 and $3,425 are notes receivable that are included in "Accounts receivable - net."

In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transferredtransfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. In June 2017, we modified the agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, in the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. Since inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $3,740.$3,946.

The following table sets forth a summary of equipment installment receivables sold during the three and six months ended March 31,June 30, 2017 and 2016:

Three months ended Three months ended  Six months ended 
March 31, June 30,  June 30, 
2017 2016 2017  2016  2017  2016 
Gross receivables sold $2,846  $2,482  $1,752  $1,845  $4,598  $4,327 
Net receivables sold 1
  2,621   2,256   1,599   1,671   4,220   3,927 
Cash proceeds received  1,432   1,521   1,415   1,126   2,847   2,647 
Deferred purchase price recorded  1,189   719   293   563   1,482   1,282 
Guarantee obligation recorded  74   -   74   - 
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
1 Receivables net of allowance, imputed interest and trade-in right guarantees.

The deferred purchase price isand guarantee obligation are initially recorded at estimated fair value which is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of device trade-ins. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
18
AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price during the three months and six months ended March 31,June 30, 2017 and 2016:

Three months ended Three months ended Six months ended 
March 31, June 30, June 30, 
2017 2016 2017 2016 2017 2016 
Fair value of repurchased receivables $377  $532  $337  $-  $714  $532 
Carrying value of deferred purchase price  339   539   301   -   640   539 
Gain (loss) on repurchases 1
 $38  $(7) $36  $-  $74  $(7)
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.


20
AT&T INC.
JUNE 30, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
At March 31,June 30, 2017 and December 31, 2016, our deferred purchase price receivable was $3,813$3,648 and $3,090, respectively, of which $2,049$2,232 and $1,606 are included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price at any point in time.and guarantee obligation.

The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.

Derecognized Installment Receivables
The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no longer considered our assets.

 2017  2017 
Outstanding derecognized receivables at January 1, $7,232  $7,232 
Gross receivables sold  2,846   4,598 
Collections on cash purchase price  (1,128)  (2,337)
Collections on deferred purchase price  (185)  (382)
Fees  (23)  (48)
Trade ins and other  (73)  (141)
Fair value of repurchased receivables  (377)  (714)
Outstanding derecognized receivables at March 31, $8,292 
Outstanding derecognized receivables at June 30, $8,208 

NOTE 9. SUBSEQUENT EVENT
On July 27, 2017, we initiated a debt offering for $22,500 that will be completed on August 7, 2017. The proceeds will be used for general corporate purposes, including funding the cash consideration for the Time Warner acquisition. Upon settlement of the debt offering, we expect to terminate our bridge loan credit agreement.

Details for the offering are as follows:
·$750 of floating rate notes due 2023.
·$1,750 of 2.850% global notes due 2023.
·$3,000 of 3.400% global notes due 2024.
·$5,000 of 3.900% global notes due 2027.
·$4,500 of 4.900% global notes due 2037.
·$5,000 of 5.150% global notes due 2050.
·$2,500 of 5.300% global notes due 2058.
The notes detailed above, along with $7,301 of floating rate and global notes issued in June 2017, are subject to a special mandatory redemption feature. If we do not consummate the Time Warner acquisition pursuant to the merger agreement on or prior to April 22, 2018, or, if prior to such date, the merger agreement is terminated, then in either case, we must redeem the notes at a redemption price equal to 101% of the principal amount of the notes, plus accrued but unpaid interest.
 
In conjunction with this offering, we settled our interest rate locks.


1921
AT&T INC.
MARCH 31,JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
 
RESULTS OF OPERATIONS

AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements.

Consolidated Results  Our financial results in the second quarter and for the first quartersix months of 2017 and 2016 are summarized as follows:

 First Quarter  Second Quarter  Six-Month Period 
 2017  2016  Percent Change  2017  2016  
Percent
Change
  2017  2016  
Percent
Change
 
Operating Revenues                           
Service $36,456  $37,101   (1.7)% $36,538  $37,142   (1.6)% $72,994  $74,243   (1.7)%
Equipment  2,909   3,434   (15.3)  3,299   3,378   (2.3)  6,208   6,812   (8.9)
Total Operating Revenues  39,365   40,535   (2.9)  39,837   40,520   (1.7)  79,202   81,055   (2.3)
                                    
Operating expenses                                    
Cost of services and sales                                    
Equipment  3,848   4,375   (12.0)  4,138   4,260   (2.9)  7,986   8,635   (7.5)
Broadcast, programming and operations  4,974   4,629   7.5   4,898   4,701   4.2   9,872   9,330   5.8 
Other cost of services  9,065   9,396   (3.5)  9,218   9,514   (3.1)  18,283   18,910   (3.3)
Selling, general and administrative  8,487   8,441   0.5   8,113   8,909   (8.9)  16,600   17,350   (4.3)
Depreciation and amortization  6,127   6,563   (6.6)  6,147   6,576   (6.5)  12,274   13,139   (6.6)
Total Operating Expenses  32,501   33,404   (2.7)  32,514   33,960   (4.3)  65,015   67,364   (3.5)
Operating Income  6,864   7,131   (3.7)  7,323   6,560   11.6   14,187   13,691   3.6 
Income Before Income Taxes  5,378   6,007   (10.5)  6,070   5,421   12.0   11,448   11,428   0.2 
Net Income  3,574   3,885   (8.0)  4,014   3,515   14.2   7,588   7,400   2.5 
Net Income Attributable to AT&T $3,469  $3,803   (8.8)% $3,915  $3,408   14.9% $7,384  $7,211   2.4%

Overview

Operating revenues decreased $1,170,$683, or 2.9%1.7%, in the second quarter and $1,853, or 2.3%, for the first quartersix months of 2017.
Service revenues decreased $645,$604, or 1.6%, in the second quarter and $1,249, or 1.7%, infor the first quartersix months of 2017. The decrease wasdecreases were primarily due to continued declines in legacy wireline voice and data products and lower wireless service revenues reflecting increased adoption of unlimited and Mobile Share plans. These were partially offset by increased revenues from video and strategic business services.

Equipment revenues decreased $525,$79, or 15.3%2.3%, in the second quarter and $604, or 8.9%, for the first quartersix months of 2017. The decrease wasdecreases were primarily due to lower wireless handset sales, driven by a continuing low rate of customer device upgrades and strong Bring Your Own Device (BYOD) participation. Equipment revenue is becoming increasingly unpredictable as many customers are choosing to upgrade devices less frequently or bringare bringing their own.

Operating expenses decreased $903,$1,446, or 2.7%4.3%, in the second quarter and $2,349, or 3.5%, for the first quartersix months of 2017.
Equipment expenses decreased $527,$122, or 12.0%2.9%, in the second quarter and $649, or 7.5%, for the first quartersix months of 2017. The decrease wasdecreases were driven by a decline in devices sold reflecting a change in customer buying habits.


Broadcast, programming and operations22 expenses increased $345, or 7.5%, in the first quarter of 2017, reflecting annual content cost increases.
20
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MARCH 31,
JUNE 30, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Broadcast, programming and operations expenses increased $197, or 4.2%, in the second quarter and $542, or 5.8%, for the first six months of 2017, reflecting annual content cost increases.

Other cost of services expenses decreased $331,$296, or 3.5%3.1%, in the second quarter and $627, or 3.3%, for the first quartersix months of 2017. The decrease reflectsdecreases reflect our continued focus on cost structure management and utilizingthe utilization of automation and digitalization where appropriate. Also contributing to the decreases were lower Federal Universal Service Fund (USF) rates and fees were also lower when comparedand an actuarial gain due to the prior year.remeasurement of our postretirement benefit obligation. These expense declines were partially offset by higher handset insurance costs.an increase in amortization of deferred customer fulfillment cost.

Selling, general and administrative expenses increased $46,decreased $796, or 0.5%8.9%, in the second quarter and $750, or 4.3%, for the first quartersix months of 2017. Expenses includeThe decreases were attributable to our disciplined cost management, lower advertising costs and an increaseactuarial gain due to remeasurement of approximately $618 resulting fromour postretirement benefit obligation. The decrease in the first six months was partially offset by lower gains on wireless spectrum transactions in the first quarter ofduring 2017 than in the comparable period of 2016. Offsetting this increase were lower advertising costs, decreased expenses for merger and integration-related activities and reductions from our disciplined cost management.

Depreciation and amortization expense decreased $436,$429, or 6.5%, in the second quarter and $865, or 6.6%, infor the first quartersix months of 2017. Depreciation expense decreased $288,$281, or 5.5%5.3%, in the second quarter and $569, or 5.4%, for the first quarter.six months of 2017. The decrease wasdecreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease. This decrease wasin the second quarter and $654 of the decrease for the first six months. These decreases were partially offset by increases resulting from ongoing capital spending for upgrades and expansion.

Amortization expense decreased $148, or 11.0%11.2%, in the second quarter and $296, or 11.1%, for the first quartersix months of 2017 due to lower amortization of intangibles for the customer lists associated with acquisitions.

OperatingOperating income decreased $267,increased $763, or 3.7%11.6%, in the second quarter and $496, or 3.6%, for the first quartersix months of 2017. Our operating income margin in the firstsecond quarter decreasedincreased from 17.6%16.2% in 2016 to 17.4%18.4% in 2017, and the first six months increased from 16.9% in 2016 to 17.9% in 2017.

Interest expense increased $86,$137, or 7.1%10.9%, in the second quarter and $223, or 9.0%, for the first quartersix months of 2017. The increases were primarily due to higher average rates and debt balances and average interest rates when compared to the prior year. Fees paid to secure financing for pending acquisitions also contributed to higher expenses in 2017.

Equity in net income (loss) of affiliates decreased $186$14 in the second quarter and $200 for the first quartersix months of 2017, predominantly from losses from our legacy publishing business (which we sold in June 2017), partially offset by income from our investments in video-related businesses.

Other income (expense) – net We had other expense of $20increased $37, or 40.7%, in the second quarter and decreased $53, or 32.9%, for the first six months. The increase in the second quarter of 2017was primarily due to growth in interest and otherdividend income of $70 in the first quarter of 2016. Results in the first quarter of 2017 included$54, including interest on tax-related settlements, and net losses ongains from the sale of non-strategic assets and investments of $61$8. These increases were partially offset by foreign exchange pressure.

The decrease for the first six months was primarily due to additional net losses from the sale of non-strategic assets totaling $97 and foreign exchange pressure, partially offset by growth in interest and dividend income of $30.

Other income (expense) in the first quarter of 2016 included net gains on the sale of non-strategic assets and investments of $44 and interest and dividend income of $29.$55.

Income taxes decreased $318,increased $150, or 15.0%7.9%, in the second quarter of 2017 and decreased $168, or 4.2%, for the first quartersix months of 2017. Our effective tax rate was 33.5%33.9% for the second quarter and 33.7% for the first quartersix months of 2017, as compared to 35.3%35.2% for the second quarter and 35.2% for the first quartersix months of 2016. The increase in income tax expense for the second quarter was primarily due to higher income before income taxes in 2017. The decrease in income tax expense and our effective tax rate for the first quartersix months of 2017 was primarily due to lower income before income taxes in 2017 and the recognition of tax benefits related to the restructuring of a portion of our wireless business.business, which also resulted in decreases in our effective tax rate for the second quarter and the first six months of 2017.
 

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Selected Financial and Operating Data      
  March 31, 
Subscribers and connections in (000s) 2017  2016 
Domestic wireless subscribers  134,218   130,445 
Mexican wireless subscribers  12,606   9,213 
North American wireless subscribers  146,824   139,658 
         
North American branded subscribers  103,532   98,158 
North American branded net additions  738   1,195 
         
Domestic satellite video subscribers  21,012   20,112 
AT&T U-verse® (U-verse) video subscribers  4,048   5,260 
Latin America satellite video subscribers 1
  13,678   12,436 
Total video subscribers  38,738   37,808 
         
Total domestic broadband connections  15,695   15,764 
         
Network access lines in service  13,363   15,975 
U-verse VoIP connections  5,858   5,484 
         
Debt ratio 2
  51.6%  51.2%
Net debt ratio 3
  45.8%  47.3%
Ratio of earnings to fixed charges 4
  3.80   4.22 
Number of AT&T employees  264,530   280,870 
Selected Financial and Operating Data      
  June 30, 
Subscribers and connections in (000s) 2017  2016 
Domestic wireless subscribers  136,500   131,805 
Mexican wireless subscribers  13,082   9,955 
North American wireless subscribers  149,582   141,760 
         
North American branded subscribers  104,421   99,557 
North American branded net additions  1,626   2,596 
         
Domestic satellite and over-the-top video subscribers  21,347   20,454 
AT&T U-verse® (U-verse) video subscribers  3,853   4,869 
Latin America satellite video subscribers 1
  13,622   12,523 
Total video subscribers  38,822   37,846 
         
Total domestic broadband connections  15,686   15,641 
         
Network access lines in service  12,791   15,284 
U-verse VoIP connections  5,853   5,593 
         
Debt ratio 2
  53.3%   50.5% 
Net debt ratio 3
  43.8%   47.6% 
Ratio of earnings to fixed charges 4
  3.84   4.01 
Number of AT&T employees  260,480   277,200 
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At DecemberMarch 31, 2016,2017, SKY Mexico had 8.0 million subscribers.
2 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.
3 Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
 

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

The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete integrated communications solution to our business customers.

The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network and/orand our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and therefore asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.

Business Solutions                           
Segment Results                           
 First Quarter  Second Quarter  Six-Month Period 
 2017  2016  Percent Change  2017  2016  
Percent
Change
  2017  2016  
Percent
Change
 
Segment operating revenues                           
Wireless service $7,929  $7,855   0.9% $8,006  $7,963   0.5% $15,935  $15,818   0.7%
Fixed strategic services  2,974   2,751   8.1   3,028   2,805   8.0   6,002   5,556   8.0 
Legacy voice and data services  3,630   4,373   (17.0)  3,508   4,162   (15.7)  7,138   8,535   (16.4)
Other service and equipment  817   859   (4.9)  844   874   (3.4)  1,661   1,733   (4.2)
Wireless equipment  1,498   1,771   (15.4)  1,721   1,775   (3.0)  3,219   3,546   (9.2)
Total Segment Operating Revenues  16,848   17,609   (4.3)  17,107   17,579   (2.7)  33,955   35,188   (3.5)
                                    
Segment operating expenses                                    
Operations and support  10,176   10,802   (5.8)  10,313   10,857   (5.0)  20,489   21,659   (5.4)
Depreciation and amortization  2,312   2,508   (7.8)  2,335   2,521   (7.4)  4,647   5,029   (7.6)
Total Segment Operating Expenses  12,488   13,310   (6.2)  12,648   13,378   (5.5)  25,136   26,688   (5.8)
Segment Operating Income  4,360   4,299   1.4   4,459   4,201   6.1   8,819   8,500   3.8 
Equity in Net Income of Affiliates  -   -   -   -   -   -   -   -   - 
Segment Contribution $4,360  $4,299   1.4% $4,459  $4,201   6.1% $8,819  $8,500   3.8%
 

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MARCH 31,JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
The following tables highlight other key measures of performance for the Business Solutions segment:

 March 31,     June 30,  Percent 
(in 000s) 2017  2016  Percent Change  2017  2016  Change 
Business Wireless Subscribers                  
Postpaid/Branded  50,839   48,844   4.1%  51,111   49,433   3.4%
Reseller  76   64   18.8   72   51   41.2 
Connected devices 1
  31,439   26,863   17.0   33,611   28,061   19.8 
Total Business Wireless Subscribers  82,354   75,771   8.7   84,794   77,545   9.3 
                        
Business IP Broadband Connections  980   928   5.6%  992   948   4.6%
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

 First Quarter   Second Quarter  Six-Month Period 
 2017  2016     2017  2016  Percent  2017  2016  Percent 
(in 000s)Percent Change   Change  Change 
                           
Business Wireless Net Additions 1, 4
                           
Postpaid/Branded  (125)  133   -%   36   185   (80.5)%  (89)  318   -%
Reseller  6   (22)  -    (5)  (13)  61.5   1   (35)  - 
Connected devices 2
  2,553   1,578   61.8    2,170   1,199   81.0   4,723   2,777   70.1 
Business Wireless Net Subscriber Additions  2,434   1,689   44.1 
Business Wireless Net Subscriber   2,201   1,371   60.5   4,635   3,060   51.5 
Additions 
                                     
Business Wireless Postpaid Churn 1, 3, 4
  1.07%  1.02%5 BP    0.97%  0.91% 6 BP   1.02%  0.97% 5 BP 
                                     
Business IP Broadband Net Additions  4   17   (76.5)%   12   20   (40.0)%  16   37   (56.8)%
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
3 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.
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number
3 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 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. each month of that period.
4 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.
4 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.
 
4 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.

Operating Revenues decreased $761,$472, or 4.3%2.7%, in the second quarter and $1,233, or 3.5%, for the first quartersix months of 2017. Revenue declines reflect technological shifts away from legacy products, as well as decreasing wireless equipment revenues resulting from changes in customer buying habits. Our second-quarter 2016 sale of certain hosting operations also negatively impacted revenue comparability. These decreases were partially offset by continued growth in wireless services and fixed strategic services, which represent 40%41% of non-wireless revenues. Our revenues continue to be pressured by slower fixed business investment.

Wireless service revenues increased $74,$43, or 0.9%0.5%, in the second quarter and $117, or 0.7%, for the first quartersix months of 2017. The revenue increase isincreases are primarily due to the migration of customers from our Consumer Mobility segment.

At March 31,June 30, 2017, we served 82.484.8 million subscribers, an increase of 8.7%9.3% from the prior year. Postpaid subscribers increased 4.1%3.4% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 17.0%19.8% from the prior year reflecting growth in our connected car business and other data centric devices that utilize the network to connect and control physical devices using embedded computing systems and/or software, commonly called the Internet of Things (IoT).

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MARCH 31,JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the firstsecond quarter, business wireless postpaid churn increased to 1.07%0.97% in 2017 from 0.91% in 2016, and for the first six months increased to 1.02% in 2017 from 0.97% in 2016.

Fixed strategic services revenues increased $223, or 8.1%8.0%, in the second quarter and $446, or 8.0%, for the first quartersix months of 2017. Our revenues increased in the second quarter and first quartersix months of 2017 primarily due to: Ethernet of $73;$93 and $166; Dedicated Internet services of $59; IP Broadband, Voice,$45 and Video of $44;$104; and VoIP of $43.$61 and $118, respectively.

Legacy wired voice and data service revenues decreased $743,$654, or 17.0%15.7%, in the second quarter and $1,397, or 16.4%, for the first quartersix months of 2017. LegacyIn the second quarter and first six months of 2017, legacy voice billings in the first quarter of 2017 decreased $402$342 and $744 and traditional data billings decreased $341. The$312 and $653, respectively. These decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or to competitors, and the sale of certain hosting operations in 2016.competitors.

Wireless equipment revenues decreased $273,$54, or 15.4%3.0%, in the second quarter and $327, or 9.2%, for the first six months of 2017. While equipment revenue is becoming increasingly unpredictable as many customers are choosing to upgrade devices less frequently or bring their own, equipment revenues improved sequentially in the second quarter as compared to the first quarter of 2017. The decrease2017 due to customers choosing to purchase higher priced devices and lower promotional activity in the first quarter was primarily due to decreases in handset upgrades.quarter.

Operations and support expenses decreased $626,$544, or 5.8%5.0%, in the second quarter and $1,170, or 5.4%, for the first quartersix months of 2017. 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.

Decreased operations and support expenses in the second quarter and first quartersix months were primarily due to lower wireless equipment sales and upgrade transactions, which decreased equipment costs $248, and efforts to automate and digitize our support activities, which improvedimproving results approximately $170.$230 and $397, and lower equipment sales and wireless upgrade transactions, decreasing equipment costs by $148 and $396, respectively. Expense reductions also reflect lower USF rates,administrative costs, contributing to a $77 reduction in USF fees,expenses of $149 and $164, and fewer traffic compensation and wireless interconnect costs, resulting in a $51 declinedeclines of $60 and $111, respectively, in access and interconnect costs. USF rates and fees also contributed to lower expenses for the first six months.

Depreciation expense decreased $196,$186, or 7.8%7.4%, in the second quarter and $382, or 7.6%, for the first quartersix months of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income increased $61,$258, or 1.4%6.1%, in the second quarter and $319, or 3.8%, for the first quartersix months of 2017. Our Business Solutions segment operating income margin in the firstsecond quarter increased from 24.4%23.9% in 2016 to 25.9%26.1% in 2017, and for the first six months increased from 24.2% in 2016 to 26.0% in 2017. Our Business Solutions EBITDA margin in the firstsecond quarter increased from 38.7%38.2% in 2016 to 39.6%39.7% in 2017, and for the first six months increased from 38.4% in 2016 to 39.7% in 2017.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Entertainment GroupEntertainment Group Entertainment Group 
Segment Results                           
 First Quarter  Second Quarter  Six-Month Period 
 2017  2016  Percent Change  2017  2016  
Percent
Change
  2017  2016  
Percent
Change
 
Segment operating revenues                           
Video entertainment $9,020  $8,904   1.3% $9,153  $8,963   2.1% $18,173  $17,867   1.7%
High-speed internet  1,941   1,803   7.7   1,927   1,867   3.2   3,868   3,670   5.4 
Legacy voice and data services  1,056   1,313   (19.6)  1,005   1,244   (19.2)  2,061   2,557   (19.4)
Other service and equipment  606   638   (5.0)  597   637   (6.3)  1,203   1,275   (5.6)
Total Segment Operating Revenues  12,623   12,658   (0.3)  12,682   12,711   (0.2)  25,305   25,369   (0.3)
                                    
Segment operating expenses                                    
Operations and support  9,601   9,578   0.2   9,558   9,569   (0.1)  19,159   19,147   0.1 
Depreciation and amortization  1,419   1,488   (4.6)  1,458   1,489   (2.1)  2,877   2,977   (3.4)
Total Segment Operating Expenses  11,020   11,066   (0.4)  11,016   11,058   (0.4)  22,036   22,124   (0.4)
Segment Operating Income  1,603   1,592   0.7   1,666   1,653   0.8   3,269   3,245   0.7 
Equity in Net Income (Loss) of Affiliates  (6)  3   -   (11)  (2)  -   (17)  1   - 
Segment Contribution $1,597  $1,595   0.1% $1,655  $1,651   0.2% $3,252  $3,246   0.2%

The following tables highlight other key measures of performance for the Entertainment Group segment:

 March 31,    June 30,   
(in 000s) 2017  2016  Percent Change  2017  2016  
Percent
Change
 
Linear Video Connections         
Video Connections         
Satellite  21,012   20,112   4.5%  20,856   20,454   2.0%
U-verse  4,020   5,232   (23.2)  3,825   4,841   (21.0)
Total Linear Video Connections  25,032   25,344   (1.2)
DIRECTV NOW 1
  491   -   - 
Total Video Connections  25,172   25,295   (0.5)
                        
Broadband Connections                        
IP  13,130   12,542   4.7   13,242   12,596   5.1 
DSL  1,164   1,749   (33.4)  1,060   1,585   (33.1)
Total Broadband Connections  14,294   14,291   -   14,302   14,181   0.9 
                        
Retail Consumer Switched Access Lines  5,533   6,888   (19.7)  5,257   6,515   (19.3)
U-verse Consumer VoIP Connections  5,470   5,225   4.7   5,439   5,300   2.6 
Total Retail Consumer Voice Connections  11,003   12,113   (9.2)%  10,696   11,815   (9.5)%
1 Consistent with industry practice, DIRECTV NOW includes trial-period subscribers.
1 Consistent with industry practice, DIRECTV NOW includes trial-period subscribers.
 

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
 First Quarter  Second Quarter  Six-Month Period 
 2017  2016  Percent Change  2017  2016  
Percent
Change
  2017  2016  
Percent
Change
 
(in 000s)
Linear Video Net Additions 1
         
Satellite  -   328   -%
U-verse  (233)  (382)  39.0 
Linear Net Video Additions  (233)  (54)  - 
Video Net Additions                  
Satellite 1
  (156)  342   -%  (156)  670   -%
U-verse 1
  (195)  (391)  50.1   (428)  (773)  44.6 
DIRECTV NOW 2
  152   -   -   224   -   - 
Net Video Additions  (199)  (49)  -   (360)  (103)  - 
                                    
Broadband Net Additions                                    
IP  242   186   30.1   112   54   -   354   240   47.5 
DSL  (127)  (181)  29.8   (104)  (164)  36.6   (231)  (345)  33.0 
Net Broadband Additions  115   5   -%  8   (110)  -%  123   (105)  -%
1 Includes disconnections for customers that migrated to DIRECTV NOW.
1 Includes disconnections for customers that migrated to DIRECTV NOW.
1 Includes disconnections for customers that migrated to DIRECTV NOW.
2 Consistent with industry practice, DIRECTV NOW includes trial-period subscribers.
2 Consistent with industry practice, DIRECTV NOW includes trial-period subscribers.

Operating revenues decreased $35,$29, or 0.2%, in the second quarter and $64, or 0.3%, infor the first quartersix months of 2017, largely due to lower revenues from legacy voice and data products, substantially offset by growth in revenues from consumer IP broadband and satellite video services.

As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite and U-verse subscribers. In November 2016, we launched DIRECTV NOW, our newest video streaming option that does not require either satellite or U-verse service (commonly called over-the-top video service).

Video entertainment revenues increased $116,$190, or 1.3%2.1%, in the second quarter and $306, or 1.7%, for the first quartersix months of 2017, primarily due toreflecting a 1.8%3.5% and 2.3% increase in average revenue per linear (combined satellite and U-verse) video connection. Our continued focus on satellite serviceconnection and the lower marginal content costs associated with those subscribers contributed to increased video revenue. However, this strategy contributed to lower U-verse video revenueincreases of $51 and connections. More than 80% of our$72 in advertising revenues, respectively. While linear video subscriberslosses have continued their recent trend, we are onbeginning to see the impact of customers wanting mobile and over-the-top offerings, which is contributing to growth in our DIRECTV platform. Our decline inNOW connections and offsetting linear video subscriber losses. DIRECTV NOW connections for the first quarter of 2017 reflects,continue to grow as we add eligible devices and increase content choices. While our ability to bundle services has also positively impacted subscriber trends and churn, we did experience an increase in part, the migration of satellite customers to DIRECTV NOW. Churn rosechurn for subscribers with linear video onlybut no wireless service through AT&T, partially reflectingdue to pricing increases associated with annual content cost increases.increases and involuntary churn.

High-speed internet revenues increased $138,$60, or 7.7%3.2%, in the second quarter and $198, or 5.4%, for the first quartersix months of 2017. When compared to 2016,2017, reflecting a 5.1% increase in IP broadband subscribers increased 4.7%,when compared to 13.1 million subscribers at March 31, 2017, reflecting higher IP broadband net additions.the prior year. Also contributing to higher revenues was a 3.3% increase in averagethe increasing trend of subscribers to select higher-speed and higher-rated plans. Average revenue per IP broadband connection.

connection (ARPU) increased 0.7% in the first six months of 2017. To compete more effectively against other broadband providers in the midst of ongoing declines in DSL broadband subscribers, we continued to deploy our all-fiber, high-speed wireline network, which has improved customer retention rates in those areas.rates.

Legacy voice and data service revenues decreased $257,$239, or 19.6%19.2%, in the second quarter and $496, or 19.4%, for the first quartersix months of 2017. For the quartersix months ended March 31,June 30, 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 10% at March 31,for the June 30, 2016 period, and reflect second quarter and year to date decreases of $174$161 and $335 in local voice and long-distance, and $83$79 and $162 in traditional data billings.billings, respectively. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At March 31,June 30, 2017, approximately 8%7% of our broadband connections were DSL compared to 12%11% at March 31,June 30, 2016.

Operations and support expenses increased $23,decreased $11, or 0.2%0.1%, in the second quarter and increased $12, or 0.1%, for the first quartersix months of 2017. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, which include costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.

Increased operations and support expenses were primarily due to annual content cost increases and the impact of storms and flooding on the West Coast in 2017. Partially offsetting these increases was the impact of our ongoing focus on cost efficiencies and merger synergies, lower employee-related expenses resulting from workforce reductions and lower advertising costs.29
27
AT&T INC.
MARCH 31,JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Decreased operations and support expenses in the second quarter were due to merger synergies and efforts to automate and digitize our support activities. These reductions were mostly offset by annual content cost increases and an increase in amortization of deferred customer fulfillment cost.

Increased operations and support expenses for the first six months of 2017 were primarily due to annual content cost increases, deferred customer fulfillment cost amortization, and impacts of storms and flooding on the West Coast that occurred earlier in 2017. Offsetting these increases were the impact of our ongoing focus on cost efficiencies and merger synergies, as well as workforce reductions and lower advertising costs.

Depreciation expense decreased $69,$31, or 4.6%2.1%, in the second quarter, and $100, or 3.4%, for the first quartersix months of 2017. The decrease wasdecreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated assets.depreciated. These decreases were offset by ongoing capital spending for network upgrades and expansion.

Operating income increased $11,$13, or 0.8%, in the second quarter and $24, or 0.7%, infor the first quartersix months of 2017. Our Entertainment Group segment operating income margin in the firstsecond quarter increased from 12.6%13.0% in 2016 to 12.7%13.1% in 2017, and for the first six months increased from 12.8% in 2016 to 12.9% in 2017. Our Entertainment Group segment EBITDA margin in the firstsecond quarter decreased from 24.3%24.7% in 2016 to 23.9%24.6% in 2017, and for the first six months decreased from 24.5% in 2016 to 24.3% in 2017.

Consumer Mobility                           
Segment Results                           
 First Quarter  Second Quarter  Six-Month Period 
 2017  2016  Percent Change  2017  2016  
Percent
Change
  2017  2016  
Percent
Change
 
Segment operating revenues                           
Service $6,609  $6,943   (4.8)% $6,528  $6,948   (6.0)% $13,137  $13,891   (5.4)%
Equipment  1,131   1,385   (18.3)  1,263   1,238   2.0   2,394   2,623   (8.7)
Total Segment Operating Revenues  7,740   8,328   (7.1)  7,791   8,186   (4.8)  15,531   16,514   (6.0)
                                    
Segment operating expenses                                    
Operations and support  4,528   4,912   (7.8)  4,520   4,680   (3.4)  9,048   9,592   (5.7)
Depreciation and amortization  873   922   (5.3)  871   932   (6.5)  1,744   1,854   (5.9)
Total Segment Operating Expenses  5,401   5,834   (7.4)  5,391   5,612   (3.9)  10,792   11,446   (5.7)
Segment Operating Income  2,339   2,494   (6.2)  2,400   2,574   (6.8)  4,739   5,068   (6.5)
Equity in Net Income of Affiliates  -   -   -   -   -   -   -   -   - 
Segment Contribution $2,339  $2,494   (6.2)% $2,400  $2,574   (6.8)% $4,739  $5,068   (6.5)%

The following tables highlight other key measures of performance for the Consumer Mobility segment: 
          
  March 31,    
(in 000s) 2017  2016  Percent Change 
Consumer Mobility Subscribers         
   Postpaid  26,510   28,294   (6.3)%
   Prepaid  13,844   12,171   13.7 
Branded  40,354   40,465   (0.3)
Reseller  10,549   13,313   (20.8)
Connected devices 1
  961   896   7.3 
Total Consumer Mobility Subscribers  51,864   54,674   (5.1)%
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 
 
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AT&T INC.
MARCH 31,JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
  First Quarter 
  2017  2016 Percent Change 
(in 000s)
Consumer Mobility Net Additions 1, 4
        
   Postpaid  (66)  (4)  -%
   Prepaid  282   500   (43.6)
Branded Net Additions  216   496   (56.5)
Reseller  (588)  (378)  (55.6)
Connected devices 2
  19   (26)  - 
Consumer Mobility Net Subscriber Additions  (353)  92   -%
             
Total Churn 1, 3, 4
  2.42%  2.11%31 BP 
Postpaid Churn 1, 3, 4
  1.22%  1.24%(2) BP 
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period.
 
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.
 
The following tables highlight other key measures of performance for the Consumer Mobility segment: 
          
  June 30,  Percent 
(in 000s) 2017  2016  Change 
Consumer Mobility Subscribers         
   Postpaid  26,290   27,862   (5.6)%
   Prepaid  14,187   12,633   12.3 
Branded  40,477   40,495   - 
Reseller  10,182   12,869   (20.9)
Connected devices 1
  1,047   896   16.9 
Total Consumer Mobility Subscribers  51,706   54,260   (4.7)%
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 

  Second Quarter  Six-Month Period 
  2017  2016 
Percent
Change
  2017  2016 
Percent
Change
 
(in 000s)
Consumer Mobility Net Additions 1, 4
                
   Postpaid  91   72   26.4%  25   68   (63.2)%
   Prepaid  267   365   (26.8)  549   865   (36.5)
Branded Net Additions  358   437   (18.1)  574   933   (38.5)
Reseller  (363)  (446)  18.6   (951)  (824)  (15.4)
Connected devices 2
  86   (1)  -   105   (27)  - 
Consumer Mobility Net Subscriber Additions    81   (10)  -%  (272)  82   -%
                         
Total Churn 1, 3, 4
  2.15%  1.96%19 BP   2.29%  2.04%25 BP 
Postpaid Churn 1, 3, 4
  1.09%  1.09%- BP   1.16%  1.16%- BP 
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number
 
  of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period. 
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.
 

Operating Revenues decreased $588,$395, or 7.1%4.8%, in the second quarter and $983, or 6.0%, for the first quartersix months of 2017. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited and Mobile Share plans, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.

Service revenue decreased $334,$420, or 4.8%6.0%, in the second quarter and $754, or 5.4%, for the first quartersix months of 2017. The decrease wasdecreases were largely due to the migration of subscribers to Business Solutions and postpaid customers continuing to shift to discounted monthly service charges under our unlimited and Mobile Share plans. Revenues from postpaid customers declined $507,$496, or 9.9%, in the second quarter and $1,003, or 9.9%, for the first quartersix months of 2017. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 5.4%. for both the second quarter and the first six months of 2017. The decreases were partially offset by higher prepaid service revenues of $239,$201, or 18.4%14.7%, in the second quarter and $440, or 16.5%, for the first six months primarily from growth in Cricket and AT&T PREPAIDSMsubscribers.
31
AT&T INC.
JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Equipment revenue decreased $254,increased $25, or 18.3%2.0%, in the second quarter and decreased $229, or 8.7%, for the first quartersix months of 2017. The decreaseincrease in the second quarter equipment revenues resulted from lowerhigher handset sales and upgrades.upgrades, a substantial improvement over the first quarter. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.

Operations and support expenses decreased $384,$160, or 7.8%3.4%, in the second quarter and $544, or 5.7%, for the first quartersix months of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

Decreased operations and support expenses for the second quarter were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment costs $257. Also contributing to the declines were increased operational efficiencies and lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising. These decreases were partially offset by increased equipment costs due to higher volumes of wireless equipment sales and upgrades.

Decreased operations and support expenses for the first six months were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment and selling and commission costs, and lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising.

Depreciation expense decreased $49,$61, or 5.3%6.5%, in the second quarter and $110, or 5.9%, for the first quartersix months of 2017. The decrease wasdecreases were primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income decreased $155,$174, or 6.2%6.8%, in the second quarter and $329, or 6.5%, for the first quartersix months of 2017. Our Consumer Mobility segment operating income margin in the firstsecond quarter increaseddecreased from 29.9%31.4% in 2016 to 30.2%30.8% in 2017, and for the first six months decreased from 30.7% in 2016 to 30.5% in 2017. Our Consumer Mobility EBITDA margin in the firstsecond quarter increaseddecreased from 41.0%42.8% in 2016 to 41.5%42.0% in 2017, and for the first six months decreased from 41.9% in 2016 to 41.7% in 2017.

International                  
Segment Results                  
  Second Quarter  Six-Month Period 
  2017  2016  
Percent
Change
  2017  2016  
Percent
Change
 
Segment operating revenues                  
     Video entertainment $1,361  $1,222   11.4% $2,702  $2,352   14.9%
     Wireless service  535   489   9.4   1,010   944   7.0 
     Wireless equipment  130   117   11.1   243   199   22.1 
Total Segment Operating Revenues  2,026   1,828   10.8   3,955   3,495   13.2 
                         
Segment operating expenses                        
     Operations and support  1,772   1,723   2.8   3,531   3,311   6.6 
     Depreciation and amortization  311   298   4.4   601   575   4.5 
Total Segment Operating Expenses  2,083   2,021   3.1   4,132   3,886   6.3 
Segment Operating Income (Loss)  (57)  (193)  70.5   (177)  (391)  54.7 
Equity in Net Income (Loss) of Affiliates     25   9   -   45   23   95.7 
Segment Contribution $(32) $(184)  82.6% $(132) $(368)  64.1%

 

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AT&T INC.
MARCH 31,JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
International         
Segment Results         
  First Quarter 
  2017  2016  Percent Change 
Segment operating revenues         
     Video entertainment $1,341  $1,130   18.7%
     Wireless service  475   455   4.4 
     Wireless equipment  113   82   37.8 
Total Segment Operating Revenues  1,929   1,667   15.7 
             
Segment operating expenses            
     Operations and support  1,759   1,588   10.8 
     Depreciation and amortization  290   277   4.7 
Total Segment Operating Expenses  2,049   1,865   9.9 
Segment Operating Income (Loss)  (120)  (198)  39.4 
Equity in Net Income (Loss) of Affiliates  20   14   42.9 
Segment Contribution $(100) $(184)  45.7%

The following tables highlight other key measures of performance for the International segment:

 June 30,  Percent 
(in 000s) First Quarter  2017  2016  Change 
 2017  2016  Percent Change 
Mexican Wireless Subscribers                  
Postpaid  5,095   4,404   15.7%  5,187   4,570   13.5%
Prepaid  7,244   4,445   63.0   7,646   5,059   51.1 
Branded  12,339   8,849   39.4   12,833   9,629   33.3 
Reseller  267   364   (26.6)  249   326   (23.6)
Total Mexican Wireless Subscribers  12,606   9,213   36.8   13,082   9,955   31.4 
                        
Latin America Satellite Subscribers                        
PanAmericana  8,090   7,094   14.0   8,103   7,175   12.9 
SKY Brazil 1
  5,588   5,342   4.6   5,519   5,348   3.2 
Total Latin America Satellite Subscribers  13,678   12,436   10.0%  13,622   12,523   8.8%
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 8.0 million subscribers at December 31, 2016 and 7.7 million subscribers at March 31, 2016.
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico
had 8.0 million subscribers at March 31, 2017 and 7.8 million subscribers at June 30, 2016. had 8.0 million subscribers at March 31, 2017 and 7.8 million subscribers at June 30, 2016.

30
AT&T INC.
MARCH 31, 2017
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 First Quarter  Second Quarter  Six-Month Period 
(in 000s) 2017  2016  Percent Change  2017  2016  
Percent
Change
  2017  2016  
Percent
Change
 
Mexican Wireless Net Additions                           
Postpaid  130   116   12.1%  92   165   (44.2)%  222   281   (21.0)%
Prepaid  517   450   14.9   402   614   (34.5)  919   1,064   (13.6)
Branded Net Additions  647   566   14.3   494   779   (36.6)  1,141   1,345   (15.2)
Reseller  (14)  (37)  62.2   (18)  (37)  51.4   (32)  (74)  56.8 
Mexican Wireless Net Subscriber Additions  633   529   19.7   476   742   (35.8)  1,109   1,271   (12.7)
                                    
Latin America Satellite Net Additions 1
                                    
PanAmericana  52   28   85.7   13   81   (84.0)  65   109   (40.4)
SKY Brazil  39   (101)  -   (69)  6   -   (30)  (95)  68.4 
Latin America Satellite Net Subscriber Additions 2
  91   (73)  -%  (56)  87   -%  35   14   -%
1 In 2017, we updated the methodology used to account for prepaid video connections. The impact of this change is excluded.
2 SKY Mexico had net subscriber additions of 100,000 for the quarter ended December 31, 2016, and 398,000 for the quarter ended March 31, 2016.
1 In 2017, we updated the methodology used to account for prepaid video connections, which were reflected in beginning of period subscribers.
1 In 2017, we updated the methodology used to account for prepaid video connections, which were reflected in beginning of period subscribers.
 
2 Excludes SKY Mexico net subscriber losses of 18,000 for the quarter ended March 31, 2017 and additions of 398,000 for the quarter ended
2 Excludes SKY Mexico net subscriber losses of 18,000 for the quarter ended March 31, 2017 and additions of 398,000 for the quarter ended
 
March 31, 2016. March 31, 2016.

Operating Results
Our International segment consists of the Latin American operations acquired with DIRECTV as well as our Mexican wireless operations. Video entertainment services are provided to primarily residential customers using satellite technology. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.

Operating revenues increased $262,$198, or 15.7%10.8%, in the second quarter and $460, or 13.2%, for the first quartersix months of 2017. The increase in the first quarter includes $211, or 18.7%,increases include $139 and $350 from video services in Latin America driven bydue to price increases and favorable foreign currency exchange rates.driven primarily by macroeconomic conditions with mixed local currencies. Mexico wireless revenues increased $51,$59, or 9.5%9.7%, in the second quarter and $110, or 9.6%, for the first quartersix months of 2017, primarily due to an increase in our subscriber base and higher equipment sales offset by competition and lower ARPU (average revenue per average wireless subscriber) and foreign currency pressure.pressures.

33
AT&T INC.
JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Operations and support expenses increased $171,$49, or 10.8%2.8%, in the second quarter and $220, or 6.6%, for the first quartersix months of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits.

The increaseincreases in expenses isLatin America in the second quarter and for the first six months were primarily due to higher programming and other operating costs. The second quarter was partially offset by favorable foreign currency exchange rates and our reassessment of operating tax contingencies in Brazil. The increases in Mexico in the second quarter and for the first six months were primarily driven by higher operational costs, in Latin America, andincluding expenses associated with our network expansion, partially offset by favorable foreign currency exchange rates.

Depreciation expense increased $13, or 4.7%4.4%, in the second quarter and $26, or 4.5%, for the first quartersix months of 2017. The increase wasincreases were primarily due to updating the estimated asset lives for video equipment in Latin America.America and higher capital spending in Mexico.

Operating income increased $78,$136, or 39.4%70.5%, in the second quarter and $214, or 54.7%, for the first quartersix months of 2017. Our International segment operating income margin in the firstsecond quarter increased from (11.9)(10.6)% in 2016 to (6.2)(2.8)% in 2017, and for the first six months increased from (11.2)% in 2016 to (4.5)% in 2017. Our International EBITDA margin in the firstsecond quarter increased from 4.7%5.7% in 2016 to 8.8%12.5% in 2017, and for the first six months increased from 5.3% in 2016 to 10.7% in 2017.

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AT&T INC.
MARCH 31,JUNE 30, 2017

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility). See "Discussion and Reconciliation of Non-GAAP Measure" for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.

AT&T Mobility Results                           
 First Quarter  Second Quarter  Six-Month Period 
 2017  2016  Percent Change  2017  2016  
Percent
Change
  2017  2016  
Percent
Change
 
Operating revenues                           
Service $14,538  $14,798   (1.8)% $14,534  $14,911   (2.5)% $29,072  $29,709   (2.1)%
Equipment  2,629   3,156   (16.7)  2,984   3,013   (1.0)  5,613   6,169   (9.0)
Total Operating Revenues  17,167   17,954   (4.4)  17,518   17,924   (2.3)  34,685   35,878   (3.3)
                                    
Operating expenses                                    
Operations and support  9,998   10,624   (5.9)  10,197   10,501   (2.9)  20,195   21,125   (4.4)
EBITDA  7,169   7,330   (2.2)  7,321   7,423   (1.4)  14,490   14,753   (1.8)
Depreciation and amortization  1,997   2,056   (2.9)  1,992   2,081   (4.3)  3,989   4,137   (3.6)
Total Operating Expenses  11,995   12,680   (5.4)  12,189   12,582   (3.1)  24,184   25,262   (4.3)
Operating Income $5,172  $5,274   (1.9)% $5,329  $5,342   (0.2)% $10,501  $10,616   (1.1)%

The following tables highlight other key measures of performance for AT&T Mobility: 
    
  First Quarter  Percent Change 
(in 000s) 2017  2016 
Wireless Subscribers 1
         
   Postpaid smartphones  59,025   58,258   1.3%
   Postpaid feature phones and data-centric devices  18,324   18,880   (2.9)
Postpaid  77,349   77,138   0.3 
Prepaid  13,844   12,171   13.7 
Branded  91,193   89,309   2.1 
Reseller  10,625   13,378   (20.6)
Connected devices 2
  32,400   27,758   16.7 
Total Wireless Subscribers  134,218   130,445   2.9 
             
Branded Smartphones  71,274   68,271   4.4 
Smartphones under our installment programs at end of period  31,583   28,548   10.6%
1 Represents 100% of AT&T Mobility wireless subscribers. 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 
The following tables highlight other key measures of performance for AT&T Mobility: 
    
  June 30,  
Percent
Change
 
(in 000s) 2017  2016 
Wireless Subscribers 1
         
   Postpaid smartphones  59,178   58,508   1.1%
   Postpaid feature phones and data-centric devices  18,223   18,787   (3.0)
Postpaid  77,401   77,295   0.1 
Prepaid  14,187   12,633   12.3 
Branded  91,588   89,928   1.8 
Reseller  10,254   12,920   (20.6)
Connected devices 2
  34,658   28,957   19.7 
Total Wireless Subscribers  136,500   131,805   3.6 
             
Branded Smartphones  71,818   69,058   4.0 
Smartphones under our installment programs at end of period  31,649   29,026   9.0%
1 Represents 100% of AT&T Mobility wireless subscribers. 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 
 

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Dollars in millions except per share and per subscriber amounts

               
 First Quarter  Second Quarter  Six-Month Period 
 2017  2016 Percent Change  2017  2016 
Percent
Change
  2017  2016 
Percent
Change
 
(in 000s)
Wireless Net Additions 1, 4
                        
Postpaid  (191)  129   -%  127   257   (50.6)%  (64)  386   -%
Prepaid  282   500   (43.6)  267   365   (26.8)  549   865   (36.5)
Branded Net Additions  91   629   (85.5)  394   622   (36.7)  485   1,251   (61.2)
Reseller  (582)  (400)  (45.5)  (368)  (459)  19.8   (950)  (859)  (10.6)
Connected devices 2
  2,572   1,552   65.7   2,256   1,198   88.3   4,828   2,750   75.6 
Wireless Net Subscriber Additions  2,081   1,781   16.8   2,282   1,361   67.7   4,363   3,142   38.9 
                                    
Smartphones sold under our installment programs during period  3,501   4,135   (15.3)%  3,583   3,960   (9.5)%  7,084   8,095   (12.5)%
                                    
Total Churn 3, 4
  1.46%  1.42%4 BP   1.28%  1.35%(7) BP   1.37%  1.38%(1) BP 
Branded Churn 3, 4
  1.71%  1.63%8 BP   1.57%  1.47%10 BP   1.64%  1.55%9 BP 
Postpaid Churn 3, 4
  1.12%  1.10%2 BP   1.01%  0.97%4 BP   1.07%  1.04%3 BP 
Postpaid Phone Only Churn 3, 4
  0.90%  0.96%(6) BP   0.79%  0.84%(5) BP   0.84%  0.90%(6) BP 
1 Excludes acquisition-related additions during the period.
1 Excludes acquisition-related additions during the period.
 
1 Excludes acquisition-related additions during the period.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number
 
of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period. of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period. 
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.
 
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.
 

Operating income decreased $102,$13, or 1.9%0.2%, in the second quarter and $115, or 1.1%, for the first quartersix months of 2017. The first-quartersecond-quarter operating income margin of AT&T Mobility increased from 29.4%29.8% in 2016 to 30.1%30.4% in 2017 and for the first six months increased from 29.6% in 2016 to 30.3% in 2017. AT&T Mobility's first-quartersecond-quarter EBITDA margin increased from 40.8%41.4% in 2016 to 41.8% in 2017 and for the first six months increased from 41.1% in 2016 to 41.8% in 2017. AT&T Mobility's first-quartersecond-quarter EBITDA service margin decreasedincreased from 49.5%49.8% in 2016 to 49.3%50.4% in 2017 and for the first six months increased from 49.7% in 2016 to 49.8% in 2017 (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)revenues).

Subscriber Relationships
As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including unlimited, and Mobile Share, as well as equipment installment programs. Beginning in the first quarter of 2017, we expanded our unlimited wireless data plans to make them available to customers that do not subscribe to our video services.

ARPU
Postpaid phone-only ARPU was $58.09$58.30 for the second quarter and postpaid$58.20 for the first six months of 2017, compared to $59.80 and $59.66 in 2016. Postpaid phone-only ARPU plus equipment installment billings was $68.81$69.04 for the second quarter and $68.93 for the first quartersix months of 2017, compared to $59.53$69.97 and $69.54$69.75 in 2016. ARPU has been affected by customers shifting to unlimited plans, which decreases overage revenues; however, customers are adding additional devices helping to offset that decline.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was lower for the second quarter and postpaidfirst six months of 2017. Postpaid churn werewas higher for the second quarter and first quartersix months of 2017, reflecting higher tabletstablet churn. Postpaid phone onlyphone-only churn was lower in the second quarter and first quartersix months of 2017, despite competitive pressure in the industry.
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts

Branded Subscribers
Branded subscribers decreased 0.1%increased 0.4% in the firstsecond quarter of 2017 when compared to DecemberMarch 31, 20162017 and increased 2.1%1.8% when compared to March 31,June 30, 2016. The sequential decreaseincrease reflects a 0.6% declinegrowth of 0.1% and 2.5% in postpaid and prepaid subscribers partially offset by a 2.3% increase in prepaid subscribers. Theand the year-over-year increaserise includes increases of 0.3%0.1% and 13.7%12.3% in postpaid and prepaid subscribers, respectively.

At March 31,June 30, 2017, 91%92% of our postpaid phone subscriber base used smartphones, compared to 88%89% at March 31, 2016.June 30, 2016, with more than 95% of phone sales during both years attributable to smartphones. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Device connections on our Mobile Share and unlimited wireless data plans now represent 85%86% of our postpaid customer base, compared to 81%82% at March 31,June 30, 2016. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.

Our equipment installment purchase programs, including AT&T Next, allow for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, AT&T Next subscribers also have the right to trade in the original device for a new device with a new installment plan and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. At March 31,June 30, 2017, about 54%53% of the postpaid smartphone base is on an equipment installment program compared to 49%50% at March 31,June 30, 2016. Of theOver 90% of postpaid smartphone gross adds and upgrades during the first quarter of 2017, 92%for all periods presented were either equipment installment plans or BYOD, compared to 91% in 2016.BYOD. While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.

Connected Devices
Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Connected device subscribers increased 2.6%7.0% during the firstsecond quarter when compared to December 31, 2016 and 16.7% when compared to March 31, 2017 and 19.7% when compared to June 30, 2016. During the second quarter and first quartersix months of 2017, we added approximately 1.61.5 million and 3.2 million "connected" cars, respectively, through agreements with various carmakers, and experienced strong growth in other IoT connections as well. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

OTHER BUSINESS MATTERS

Time Warner Inc. Acquisition  In October 2016, we announced an agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. The cash portion of the purchase price will be financed with new debt and cash. The transaction remains subject to review by the U.S. Department of Justice and certain foreign jurisdictions, but is expected to close before year-end 2017. See Note 7 for additional details of the transaction and "Liquidity" for a discussion of our financing arrangements.

Straight Path Communications Acquisition  As announced on April 10, 2017, we offered to acquire Straight Path Communications, Inc. (Straight Path), which holds a nationwide portfolio of millimeter wave spectrum, including 39 GHz and 28 GHz licenses. Subsequent to our agreement, Straight Path received a proposal from an unsolicited bidder. The process is ongoing at the time of this filing.

FirstNet  On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000 over the life of the 25-year contract to build, deploy, operate and maintain the network.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. Individual states are currently reviewing participation plans, and as of July 31, 2017, seven states have opted-in to the program. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.results.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Litigation Challenging DIRECTV's NFL SUNDAY TICKET  More than two dozen putative class actions were filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have "pooled" their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge "supra-competitive" prices for the NFL SUNDAY TICKET package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management of pre-trial proceedings. In June 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the allegations the complaints have asserted. In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. The court held a hearing on both motions on February 13, 2017. TheOn June 30, 2017, the court hasgranted the NFL defendants' motion to dismiss the complaint without leave to amend, finding that: (1) the plaintiffs did not yet ruled.

SportsNet LA Litigation  On November 2, 2016,plead a viable market; (2) the U.S. Department of Justice filed a civil antitrust complaint in federal court (Central District of California) againstplaintiffs did not plead facts supporting the contention that the exclusive agreement between the NFL and DIRECTV Group Holdings, LLCharms competition; (3) the claims failed to overcome the fact that the NFL and AT&T Inc., as successor in interestits teams must cooperate to DIRECTV, alleging that DIRECTV, in 2014, unlawfully exchanged strategic information with certain competitors in connection with negotiations with SportsNet LA about carryingsell broadcasts; and (4) the Los Angeles Dodgers games. The complaint alleges that DIRECTV's conduct violated Section 1plaintiffs do not have standing to challenge the horizontal agreement among the NFL and the teams. In light of the Sherman Act. The complaint seeks a declaration that DIRECTV's conduct unlawfully restrained trade and seeks an injunction (1) barring DIRECTV and AT&T from engaging in unlawful information sharing in connection with future negotiations for video programming distribution, (2) requiring DIRECTV and AT&Torder granting the motion to monitor relevant communications between their executives and competitors and to periodically report to the Department of Justice, and (3) requiring DIRECTV and AT&T to implement training and compliance programs. The complaint asks that the government be awarded its litigation costs. We vigorously dispute these allegations. On March 23, 2017, the parties adviseddismiss, the court that they have finalized a settlementdenied DIRECTV's motion to resolve the case.compel arbitration as moot.

Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We vigorously dispute these allegations. On April 4, 2017, we reported to the court that we had reached a written settlement with the FTC Bureau of Consumer Protection. Commission approval is still required. The court scheduled trial to begin on August 14, 2017, if Commission approval has not been secured by that date.

Unlimited Data Plan Claims  In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and, on August 29, 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC has asked the Court of Appeals to reconsider the decision butdecision. On May 9, 2017, the Ninth Circuit Court has not ruled on that request.of Appeals granted the FTC's petition for en banc review, which will be conducted by an eleven-judge panel. The court set oral argument for the week of September 18, 2017, in San Francisco. In addition to the FTC case, several class actions have been filed also challenging our MBR program. We vigorously dispute the allegations the complaints have asserted.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
In June 2015, the FCC issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers described above. The NAL alleges that we violated the FCC's Open Internet Transparency Rule by using the term "unlimited" in connection with the offerings subject to the MBR policy and by failing adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. In July 2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter is currently pending before the FCC.

Labor Contracts As of March 31,June 30, 2017, we employed approximately 265,000260,000 persons. Approximately 48%46% of our employees are represented by the Communications Workers of America, the International Brotherhood of Electrical Workers or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.

A summary of labor contract negotiations, by region or employee group, is as follows:
·Approximately 20,000 traditional wireline employees in the Southwest ratified a new contract in April 2017. The new contract will expire in April 2021.
·Approximately 5,000 traditional wireline employees primarily in the Midwest are covered byratified a new contract that expiresin May 2017. The new contract will expire in June 2017. In April, we reached a tentative agreement on a new five-year contract that is subject to ratification.2022.
·Approximately 20,000 mobility employees across the country are covered by contractsa contract that expired in early 2017. We continue to negotiate with labor representatives.
·Approximately 15,000 traditional wireline employees in our West region are covered by contractsa contract that expired in April 2016. We continue to negotiate with labor representatives.In July, we reached a tentative agreement on a new four-year contract that will expire in April 2020, if ratified.
·Approximately 11,000 former DIRECTV employees were eligible for and chose union representation. Bargaining has resulted in approximately 80% of these employees now being covered under ratified contracts that expire between 2017 and 2021.

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

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 consumer welfare. Since the Telecom Act was passed, the Federal Communications Commission (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. However, based on their public statements and written opinions, we expect the new leadership at the FCC to chart a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. In addition, 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 further extended to broadband or wireless services, which are subject to vigorous competition.

In March 2017, the FCC circulated a draft order proposing to significantly reduce regulation of the bulk data connections that telecom companies provide to businesses, otherwise known as special access services or business data services. That order, which was adopted on April 20, 2017, maintains light touch pricing regulation of packet-based services, largely eliminatesextends such light touch pricing regulation ofto high-speed TDM transport services and establishesto most of our TDM channel termination services, based on a competitive market test for granting pricing flexibility for other TDMsuch services. For those services that do not meet the competitive test,qualify for light touch regulation, the order allows companies to offer volume and term discounts, as well as contract tariffs. The order establishes a period of permissive detariffing with a date certain for mandatory detariffing in all areas that meet the competitive market test.

In January 2017, the FCC removed from its list of active proceedings proposed rules on cable set-top boxes.

In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge" providers such as Google and Facebook. On April 3, 2017, the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuance of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress. In June 2017, the FCC released an order clarifying that providers of broadband internet access service continue to be subject to privacy

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
requirements under section 222 of The Communications Act of 1934 (Communications Act), but not the more restrictive rules that were adopted in October 2016.

In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to comprehensive regulation underTitle II of the TelecomCommunications Act. The FCC's decision significantly expandedexpands its existing authority to regulate the provision of fixed and mobile broadband internet access services. On April 26, 2017, the FCC announced that, in May 2017, it will initiate a proceeding to reverse its 2015 decision to classify broadband internet access services as telecommunications services. On a separate track, AT&T and other providers of broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. In June 2016, a panel of the Court of Appeals upheld the FCC's classification of broadband internet access and the attendant rules by a 2-1 vote. In July 2016, AT&T and several of the other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by the panel or by the full Court of Appeals. On May 1, 2017, thosethe Court of Appeals denied the rehearing requests, and on July 20, 2017, the United States Supreme Court extended to September 28, 2017 the deadline for filing petitions were rejected byfor certiorari to review the D.C. Circuit. Parties now have 90 days from issuanceCourt of thatAppeals decision. In May 2017, the FCC initiated a proceeding to reverse its 2015 decision to determine whetherclassify broadband internet access services as telecommunications services. AT&T fully supports an open internet and believes that Congress must pass bipartisan legislation that codifies core principles of net neutrality while maintaining a stable regulatory environment conducive to seek review by the U.S. Supreme Court. The outcome of the April 26, 2017 FCC proceedings could influence the court rulings.investment, future innovation and economic growth.

We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide IP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for our services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts

We provide wireless services in robustly competitive markets, but are subject to substantial 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 offerings are generally not subject to state or local regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the areaareas of consumer protection.protection and the deployment of cell sites and equipment. The anticipated industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of "small cell" equipment and therefore increase the need for a quick permitting process.

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. government to make more spectrum available. The FCC finished its most recent auction in April 2017 of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").
On March 30, 2017, FirstNet announced that it awarded AT&T the contract for constructing and operating the nationwide public safety broadband network. The actual reach of the network will depend on participation by the individual states.

In May 2014, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, we have:
·Submitted winning bids for 251 AWSAdvanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality AWS spectrum in the AWS-3 Auction.
·Redeployed spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks.
·Secured the FirstNet contract, which provides us with access to a nationwide low band 20 MHz of spectrum, assuming all states opt in.opt-in.
·Invested in 5G and millimeter-wave technologies with our in-process acquisition of Fiber Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (28 GHz and 39 GHz) that the FCC recently reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services.
 
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Dollars in millions except per share and per subscriber amounts
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE

We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.

Supplemental Operational Measure
We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.

Supplemental Operational Measure 
  Three Months Ended 
  March 31, 2017  March 31, 2016 
  Consumer Mobility  Business Solutions  
Adjustments1
  AT&T Mobility  Consumer Mobility  Business Solutions  
Adjustments1
  AT&T Mobility
Operating Revenues                        
   Wireless service $6,609  $7,929  $-  $14,538  $6,943  $7,855  $-  $14,798 
   Fixed strategic services  -   2,974   (2,974)  -   -   2,751   (2,751)  - 
   Legacy voice and data services  -   3,630   (3,630)  -   -   4,373   (4,373)  - 
   Other service and equipment  -   817   (817)  -   -   859   (859)  - 
   Wireless equipment  1,131   1,498   -   2,629   1,385   1,771   -   3,156 
Total Operating Revenues  7,740   16,848   (7,421)  17,167   8,328   17,609   (7,983)  17,954 
                                 
Operating Expenses                                
   Operations and support  4,528   10,176   (4,706)  9,998   4,912   10,802   (5,090)  10,624 
EBITDA  3,212   6,672   (2,715)  7,169   3,416   6,807   (2,893)  7,330 
   Depreciation and amortization  873   2,312   (1,188)  1,997   922   2,508   (1,374)  2,056 
Total Operating Expenses  5,401   12,488   (5,894)  11,995   5,834   13,310   (6,464)  12,680 
Operating Income $2,339  $4,360  $(1,527) $5,172  $2,494  $4,299  $(1,519) $5,274 
1 Non-wireless (fixed) operations reported in Business Solutions segment.
 
39
AT&T INC.
MARCH 31, 2017
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
LIQUIDITY AND CAPITAL RESOURCES

We
In anticipation of the Time Warner transaction, we had $14,884$25,617 in cash and cash equivalents available at March 31,June 30, 2017. Cash and cash equivalents included cash of $3,307$2,801 and money market funds and other cash equivalents of $11,577.$22,816. Approximately $1,303$866 of our cash and cash equivalents resided in foreign jurisdictions someand were in foreign currencies; these funds are primarily used to meet working capital requirements of which are subject to restrictions on repatriation.foreign operations.

Cash and cash equivalents increased $9,096$19,829 since December 31, 2016. In the first threesix months of 2017, cash inflows were primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third parties. We also received a $1,438 deposit refund from the FCC. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, debt repayments, dividends to stockholders, and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities
During the first threesix months of 2017, cash provided by operating activities was $9,218,$18,160, compared to $7,900$18,207 for the first threesix months of 2016. HigherLower operating cash flows in 2017 were primarily due to lower taxhigher cash payments for legal and other settlements, and the timing of working capital improvements.payments.

Cash Used in or Provided by Investing Activities
For the first threesix months of 2017, cash used in investing activities totaled $6,171$9,948 and consisted primarily of $5,784$10,750 for capital expenditures, excluding interest during construction, and $162construction.

Investing activities also include a refund from the FCC in the amount of $1,438 in April 2017, resulting from the FCC's 600 MHz Auction that concluded in April 2017. We submitted winning bids to purchase spectrum licenses in 18 markets for the acquisition of business operations and wireless spectrum.which we paid $910.

The majority of our capital expenditures are spent on our networks, our video services and related support systems. Capital expenditures, excluding interest during construction, increased $1,333$1,048 in the first threesix months. The increase was primarily due to our continued fiber buildout and timing of build schedules in 2017 compared with 2016. Additionally, in connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing). For the first threesix months of 2017, vendor financing related to capital investments was $107.$799. We do not report capital expenditures at the segment level.

We continue to expect our 2017 capital expenditures to be in the $22,000 range, and we expect our capital expenditures to be in the 15% range of service revenues or lower for each of the years 2017 through 2019. The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital spending also takes into account existing tax law and does not reflect anticipated tax reform. We are also focused on ensuring DIRECTV merger commitments are met.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Cash Provided by or Used in Financing Activities
For the first threesix months of 2017, cash provided by financing activities totaled $6,049$11,617 and included net proceeds of $12,440$24,115 primarily from the following long-term debt issuances:
·February issuance of $1,250 of 3.200% global notes due 2022.
·February issuance of $750 of 3.800% global notes due 2024.
·February issuance of $2,000 of 4.250% global notes due 2027.
·February issuance of $3,000 of 5.250% global notes due 2037.
·February issuance of $2,000 of 5.450% global notes due 2047.
·February issuance of $1,000 of 5.700% global notes due 2057.
·March issuance of $1,430 of 5.500% global notes due 2047.
·March issuance of $800 floating rate global notes due 2020. The floating rate for the notes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 65 basis points.
·March draw of $300 on a private financing agreement with Banco Nacional de Mexico, S.A. due March 2019. The agreement contains terms similar to that provided under our syndicated credit arrangements; the interest rate is a market rate.
·May issuance of $1,500 floating rate global notes due 2021. The floating rate for the notes is based upon the three-month LIBOR, reset quarterly, plus 95 basis points.
40
·May issuance of CAD$600 of 2.850% global notes due 2024 and CAD$750 of 4.850% global notes due 2047 (together, equivalent to $994, when issued).
·June issuance of £1,000 of 3.550% global notes due 2037, subject to mandatory redemption (equivalent to $1,282 when issued).
AT&T INC.
·June issuance of €750 of 1.050% global notes due 2023, €1,750 of 1.800% global notes due 2026, €1,500 of 2.350% global notes due 2029, €1,750 of 3.150% global notes due 2036 and €1,250 of floating rate global notes due 2023, all except the 2036 global notes are subject to mandatory redemption (together, equivalent to $7,883, when issued).
MARCH 31, 2017
·June issuance of €750 of 1.050% global notes due 2023, €1,750 of 1.800% global notes due 2026, €1,500 of 2.350% global notes due 2029, €1,750 of 3.150% global notes due 2036 and €1,250 of floating rate global notes due 2023, all except the 2036 global notes are subject to mandatory redemption (together, equivalent to $7,883, when issued).
 
On July 27, 2017, we initiated a debt offering for $22,500 that will be completed on August 7, 2017. The proceeds will be used for general corporate purposes, including funding the cash consideration for the Time Warner acquisition and are subject to a special mandatory redemption feature described below. Details for the offering are as follows:
Item 2.  Management's Discussion and Analysis
·$750 of floating rate notes due 2023.
·$1,750 of 2.850% global notes due 2023.
·$3,000 of 3.400% global notes due 2024.
·$5,000 of 3.900% global notes due 2027.
·$4,500 of 4.900% global notes due 2037.
·$5,000 of 5.150% global notes due 2050.
·$2,500 of 5.300% global notes due 2058.
For notes subject to mandatory redemption if we do not consummate the Time Warner acquisition pursuant to the merger agreement on or prior to April 22, 2018, or, if prior to such date, the merger agreement is terminated, then in either case, we must redeem certain of Financial Condition and Resultsthe notes at a redemption price equal to 101% of Operations - Continued
Dollars in millions except per share and per subscriber amounts
the principal amount of the notes, plus accrued but unpaid interest.
 
During the first threesix months of 2017, we redeemed $3,053$6,118 of debt, primarily consisting of the following:
·$1,142 of 2.400% global notes due 2017.
·$1,000 of 1.600% global notes due 2017.
·$500 of floating rate notes due 2017.

·£750 of 5.875% global notes due 2017.
The FCC's 600 MHz Auction concluded in April 2017. We submitted winning bids to purchase spectrum licenses in 18 markets for which we paid $910. With our previous deposit made in July 2016, we received a refund from the FCC in the amount of $1,438 on April 19,
·$750 repayment of a private financing agreement with Export Development Canada due 2017.
·$1,150 of 1.700% global notes due 2017.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.3% as of March 31,June 30, 2017, compared to 4.2% as of December 31, 2016. We had $132,379 $142,816
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
of total notes and debentures outstanding at March 31,June 30, 2017, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso and Canadian dollar denominated debt that totaled approximately $24,941.$35,808.

As of March 31,June 30, 2017, we had approximately 396388 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. During the first threesix months of 2017, we did not repurchase anyrepurchased approximately 7 million shares totaling $279 under these authorizations. In 2017, we intend to use free cash flow (operating cash flows less construction and capital expenditures) after dividends primarily to pay down debt.

We paid dividends of $3,009$6,021 during the first threesix months of 2017, compared with $2,947$5,899 for the first threesix months of 2016, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in October 2016, partially offset by the impact of the decline in shares outstanding due to repurchases in 2016. Dividends declared by our Board of Directors totaled $0.49 per share in the second quarter and $0.98 per share in the first threesix months of 2017 and $0.48 per share in the second quarter and $0.96 for the first threesix months of 2016. Our dividend policy considers the expectations and requirements of stockholders, capital funding 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 March 31,June 30, 2017, we had $12,681$10,831 of debt maturing within one year, $12,507$10,662 of which was related to 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 that may be put back to us each April until maturity in 2021. No such put was exercised during April 2017.
·An accreting zero-coupon note that may be redeemed each May until maturity in 2022. In May 2017, $1 was redeemed by the holder for $1. If the remainder of the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.$1,029.

Credit Facilities
The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.

We use credit facilities as a tool in managing our liquidity status. In December 2015, we entered into a five-year $12,000 revolving credit agreement of which no amounts are outstanding as of March 31,June 30, 2017. We also have a $9,155 syndicated credit agreement, of which $4,155 remains outstanding as of March 31,June 30, 2017 ($2,286 of which is payable March 2018).

We also enter into various credit arrangements supported by government agencies to support network equipment purchases.

In connection with our pending Merger with Time Warner, we have also entered into a $30,000 bridge loan credit agreement ("Bridge Loan") and a $10,000 term loan agreement ("Term Loan"). Following the June issuances of €7,000 global notes and £1,000 global notes, we reduced the commitments under the Bridge Loan to $21,000. Upon settlement of our July 27, 2017, debt offering, we expect to terminate our bridge loan credit agreement. No amounts will be borrowed under either the Bridge Loan or the Term Loan prior to the closing of the Merger. Borrowings under either agreementthe Term Loan will be used solely to finance a portion of the cash to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related expenses.

Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of March 31,June 30, 2017, we were in compliance with the covenants for our credit facilities.

Collateral Arrangements
During the first six months of 2017, we received $957 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Subsequent to the end of the quarter, approximately $1,336 of additional collateral has been returned to AT&T. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 6)
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Collateral Arrangements
During the first three months of 2017, we received $396 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 6)

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 our equity method investments. At March 31,June 30, 2017, our debt ratio was 51.6%53.3%, compared to 51.2%50.5% at March 31,June 30, 2016, and 49.9% at December 31, 2016. Our net debt ratio was 45.8%43.8% at March 31,June 30, 2017, compared to 47.3%47.6% at March 31,June 30, 2016 and 47.5% at December 31, 2016. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.

During the first threesix months of 2017, we received $1,446$2,906 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,426$8,294 as of March 31,June 30, 2017, and $8,477 as of December 31, 2016, 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 are distributed quarterly in equal amounts. We distributed $140$280 to the trust during the first threesix months of 2017. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE

We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.

Supplemental Operational Measure
We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.
  Three Months Ended 
  June 30, 2017  June 30, 2016 
  Consumer Mobility  Business Solutions  
Adjustments1
  AT&T Mobility  Consumer Mobility  Business Solutions  
Adjustments1
  AT&T Mobility 
Operating Revenues                        
   Wireless service $6,528  $8,006  $-  $14,534  $6,948  $7,963  $-  $14,911 
   Fixed strategic services  -   3,028   (3,028)  -   -   2,805   (2,805)  - 
   Legacy voice and data services  -   3,508   (3,508)  -   -   4,162   (4,162)  - 
   Other service and equipment  -   844   (844)  -   -   874   (874)  - 
   Wireless equipment  1,263   1,721   -   2,984   1,238   1,775   -   3,013 
Total Operating Revenues  7,791   17,107   (7,380)  17,518   8,186   17,579   (7,841)  17,924 
                                 
Operating Expenses                                
   Operations and support  4,520   10,313   (4,636)  10,197   4,680   10,857   (5,036)  10,501 
EBITDA  3,271   6,794   (2,744)  7,321   3,506   6,722   (2,805)  7,423 
   Depreciation and amortization  871   2,335   (1,214)  1,992   932   2,521   (1,372)  2,081 
Total Operating Expense  5,391   12,648   (5,850)  12,189   5,612   13,378   (6,408)  12,582 
Operating Income $2,400  $4,459  $(1,530) $5,329  $2,574  $4,201  $(1,433) $5,342 
1 Non-wireless (fixed) operations reported in Business Solutions segment.
 

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
  Six Months Ended 
  June 30, 2017  June 30, 2016 
  Consumer Mobility  Business Solutions  
Adjustments1
  AT&T Mobility  Consumer Mobility  Business Solutions  
Adjustments1
  AT&T Mobility 
Operating Revenues                        
   Wireless service $13,137  $15,935  $-  $29,072  $13,891  $15,818  $-  $29,709 
   Fixed strategic services  -   6,002   (6,002)  -   -   5,556   (5,556)  - 
   Legacy voice and data services  -   7,138   (7,138)  -   -   8,535   (8,535)  - 
   Other service and equipment  -   1,661   (1,661)  -   -   1,733   (1,733)  - 
   Wireless equipment  2,394   3,219   -   5,613   2,623   3,546   -   6,169 
Total Operating Revenues  15,531   33,955   (14,801)  34,685   16,514   35,188   (15,824)  35,878 
                                 
Operating Expenses                                
   Operations and support  9,048   20,489   (9,342)  20,195   9,592   21,659   (10,126)  21,125 
EBITDA  6,483   13,466   (5,459)  14,490   6,922   13,529   (5,698)  14,753 
   Depreciation and amortization  1,744   4,647   (2,402)  3,989   1,854   5,029   (2,746)  4,137 
Total Operating Expense  10,792   25,136   (11,744)  24,184   11,446   26,688   (12,872)  25,262 
Operating Income $4,739  $8,819  $(3,057) $10,501  $5,068  $8,500  $(2,952) $10,616 
1 Non-wireless (fixed) operations reported in Business Solutions segment.
 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
 
At March 31,June 30, 2017, we had interest rate swaps with a notional value of $10,450$10,775 and a fair value of $42.$15.

We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $29,642$38,694 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 $(3,400)$(2,337) at March 31,June 30, 2017.

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 March 31,June 30, 2017. 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 March 31,June 30, 2017.

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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; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation or repeal of healthcare legislation, regulations or related court decisions.
·The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limitation, special access and business data services; intercarrier compensation; interconnection obligations; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure, including the withdrawal of legacy TDM-based services; universal service; broadband deployment; wireless equipment siting regulations; E911 services; competition policy; privacy; net neutrality, including the FCC's order classifying broadband as Title II services subject to much more comprehensive regulation; unbundled network elements and other wholesale obligations; multi-channel video programming distributor services and equipment; availability of new spectrum, on fair and balanced terms; and wireless and satellite 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, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, 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 or delivery methods (e.g., cable, wireless, VoIP and over-the-top video service), subscriber reluctance to purchase new wireless handsets, and our ability to maintain capital expenditures.
·The extent of competition including from governmental networks and other providers and the resulting pressure on customer and access line totals and segment operating margins.
·Our ability to develop attractive and profitable product/service offerings to offset increasing competition.
·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 non-regulation of comparable alternative technologies (e.g., VoIP).
·The continued development and delivery of attractive and profitable video offerings through satellite and IP-based networks; the extent to which regulatory and build-out requirements apply to our offerings; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
·Our continued ability to maintain margins, attract and offer a diverse portfolio of wireless service and devices and device financing plans.
·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 video and data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
·The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.
·The impact from major equipment failures on our networks, including satellites operated by DIRECTV; the effect of 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; and in the case of satellites launched, timely provisioning of services from vendors; 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.
·Our ability to integrate our acquisition of DIRECTV.
·Our ability to close our pending acquisition of Time Warner Inc. and successfully integrate its operations.
·Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.
·Our increased exposure to video competition and foreign economies, due to our recent acquisitions of DIRECTV and Mexican wireless properties, including foreign exchange fluctuations as well as regulatory and political uncertainty.
·Changes in our corporate strategies, such as changing network-related 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 decrease in government spending and reluctance of businesses and consumers to spend in general.
·The uncertainty and impact of anticipated regulatory and corporate tax reform, which may impact the overall economy and incentives for business investments.

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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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 firstsecond quarter 2017, there were no such material developments.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
  
          
(c) A summary of our repurchases of common stock during the firstsecond quarter of 2017 is as follows:
          
Period
(a)
 
Period 
(a)(b)(c)(d)
Total Number of
Shares (or Units)
 Purchased 1, 2, 3
 
(b)
 
Average Price Paid
Per Share (or Unit)
 
(c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs1
 
(d)
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs
          
JanuaryApril 1, 2017 -
January 31,April 30, 2017
      658,24212,802 $ 40.9541.46  -  395,550,000
FebruaryMay 1, 2017 -
February 28,May 31, 2017
 1,782,2687,272,174   41.8638.43 7,254,000 388,296,000
June 1, 2017 -
June 30, 2017
    642,772 38.84  -  395,550,000
March 1, 2017 -
March 31, 2017
 2,346,758 41.91 - 395,550,000388,296,000
Total 4,787,2687,927,748 $ 41.7438.43  -7,254,000  
1
In March 2014, our Board of Directors approved an additional 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.
2
Of the shares repurchased, 4,244,76446,300 shares were acquired through the withholding of taxes on the vesting of restricted stock
  and performance shares or on the exercise price of options.
3
Of the shares repurchased, 542,504627,448 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit
  Association (VEBA) trusts.

 
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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.
  
10-aStock Purchase and Deferral Plan
10-bCash Deferral Plan
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



4650
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.
 
 
 
 
 
 
May 4,August 3, 2017  
  
AT&T Inc.
 
 
 
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
    and Chief Financial Officer

                                                                 
 
 
 
 
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