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 September 30, 20122013 
    
  or 
    
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    
For the transition period from       to     
 
Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
 
208 S. Akard St., Dallas, Texas 75202
Telephone Number:  (210) 821-4105


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]   No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer[X] Accelerated filer[   ]
Non-accelerated filer[   ](Do not check if a smaller reporting company)Smaller reporting company[   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]   No [X]
 
At October 31, 20122013 there were 5,6805,268 million common shares outstanding.


 
 
 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.CONSOLIDATED STATEMENTS OF INCOMEDollars in millions except per share amounts(Unaudited)
 Three months ended Nine months ended Three months ended  Nine months ended
 September 30, September 30, September 30,  September 30,
 2012   2011   2012   2011  2013   2012   2013   2012 
Operating Revenues        $32,158  $31,459  $95,589  $94,856 
Wireless service$14,906  $14,261  $44,237  $42,379 
Data 7,977  7,459  23,695  21,979 
Voice 5,565  6,242  17,155  19,132 
Directory -  803  1,049  2,512 
Other 3,011  2,713  8,720  8,218 
Total operating revenues 31,459  31,478  94,856  94,220 
Operating Expenses                 
Cost of services and sales (exclusive of depreciation                 
and amortization shown separately below) 12,718  12,656  38,000  38,225  13,403  12,602   39,227  37,673 
Selling, general and administrative 8,192  7,969  24,330  23,983  7,952  8,308   24,406  24,657 
Depreciation and amortization 4,512  4,618  13,571  13,804  4,615  4,512   13,715  13,571 
Total operating expenses 25,422  25,243  75,901  76,012  25,970  25,422   77,348  75,901 
Operating Income 6,037  6,235  18,955  18,208  6,188  6,037   18,241  18,955 
Other Income (Expense)                 
Interest expense (824) (889) (2,624) (2,583) (829) (824)  (2,481) (2,624)
Equity in net income of affiliates 182  193  537  649  91  182   494  537 
Other income (expense) – net 47  46  122  132  50  47  370  122 
Total other income (expense) (595) (650) (1,965) (1,802) (688) (595)  (1,617) (1,965)
Income Before Income Taxes 5,442  5,585  16,990  16,406  5,500  5,442   16,624  16,990 
Income tax expense 1,741  1,899  5,672  5,594  1,595  1,741   5,066  5,672 
Net Income 3,701  3,686  11,318  10,812  3,905  3,701   11,558  11,318 
Less: Net Income Attributable to Noncontrolling Interest (66) (63) (197) (190) (91) (66)  (222) (197)
Net Income Attributable to AT&T$3,635  $3,623  $11,121  $10,622 $ 3,814  $ 3,635  $ 11,336  $ 11,121 
Basic Earnings Per Share Attributable to AT&T$0.63  $0.61  $1.90  $1.79 $0.72  $0.63  $2.10  $1.90 
Diluted Earnings Per Share Attributable to AT&T$0.63  $0.61  $1.90  $1.79 $0.72  $0.63  $2.09  $1.90 
Weighted Average Number of Common Shares                 
Outstanding – Basic (in millions) 5,771  5,936  5,848  5,931  5,315   5,771   5,402   5,848 
Weighted Average Number of Common Shares                   
Outstanding – with Dilution (in millions)
 5,792  5,954  5,869  5,950  5,331   5,792   5,419   5,869 
Dividends Declared Per Common Share$0.44  $0.43  $1.32  $1.29 $0.45  $0.44  $1.35  $1.32 
See Notes to Consolidated Financial Statements.                

 
2 
 

AT&T INC.                
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      
Dollars in millions                
(Unaudited)                
Three months ended Nine months endedThree months ended Nine months ended
September 30, September 30,September 30, September 30,
2012  2011  2012  2011 2013  2012  2013  2012 
Net income$3,701  $3,686  $11,318  $10,812 $3,905  $3,701  $11,558  $11,318 
Other comprehensive income, net of tax:                    
Foreign currency translation adjustments, net of
taxes of $33, $(280), $109 and $(157)
 57  (519)  199  (291)
Net unrealized gains (losses) on available-for-sale securities:        
Unrealized gains (losses), net of taxes of $31, $(88), $58
and $(59)
 59  (165) 108  (110)
Reclassification adjustment realized in net income, net of
taxes of $(28), $(2), $(34) and $(23)
 (51) (2) (63) (43)
Net unrealized gains (losses) on cash flow hedges:        
Unrealized gains (losses), net of taxes of $126, $(135),
$68 and $(143)
 232  (249) 125  (263)
Reclassification adjustment included in net income,
net of taxes of $4, $1, $11 and $4
 8  2  21  7 
Foreign Currency:           
Translation adjustment (includes $(1), $0, $(2) and $0 attributable
to noncontrolling interest), net of taxes of $(21), $33, $(86)
and $109
 (37)  57   (155)  199 
Reclassification adjustment included in net income, net of
taxes of $0, $0, $19 and $0
 -   -   34   - 
Available-for-sale securities:           
Net unrealized gains (losses), net of taxes of $38, $31, $84
and $58
 69   59   155   108 
Reclassification adjustment realized in net income, net of
taxes of $(2), $(28), $(7) and $(34)
 (3)  (51)  (13)  (63)
Cash flow hedges:           
Net unrealized gains (losses), net of taxes of $171, $126, $286
and $68
 316   232   526   125 
Reclassification adjustment included in net income, net of
taxes of $4, $4, $12 and $11
 7   8   22   21 
Defined benefit postretirement plans:                   
Net actuarial loss from equity method investees arising
during period, net of taxes of $0, $0, $(29) and $0
  -   -  (53)  - 
Amortization of net prior service credit included in
net income, net of taxes of $(84), $(69), $(255)
and $(206)
 (137) (112) (411) (336)
Net unrealized gains (losses) from equity method investees
arising during period, net of taxes of $0, $0, $0 and $(29)
 -   -   -   (53)
Reclassification adjustment included in net income, net of taxes
of $0, $0, $5 and $0
 -   -   8   - 
Amortization of net prior service credit included in net income,
net of taxes of $(109), $(84), $(327) and ($255)
 (178)  (137)  (533)  (411)
Other (1)  2   -   1  -   (1)  -   - 
Other comprehensive income (loss) 167  (1,043) (74) (1,035) 174   167   44   (74)
Total comprehensive income 3,868  2,643  11,244  9,777  4,079   3,868   11,602   11,244 
Less: Total comprehensive income attributable to
noncontrolling interest
 (66) (63) (197) (190) (90)  (66)  (220)  (197)
Total Comprehensive Income Attributable to AT&T$3,802  $2,580  $11,047  $9,587 $3,989  $3,802  $11,382  $11,047 
See Notes to Consolidated Financial Statements.                

 
3 
 

AT&T INC.CONSOLIDATED BALANCE SHEETSDollars in millions except per share amounts
September 30, December 31,September 30, December 31,
2012  2011 2013  2012 
Assets(Unaudited)   (Unaudited)   
Current Assets          
Cash and cash equivalents$2,217  $3,185 $1,371  $4,868 
Accounts receivable - net of allowances for doubtful accounts of $606 and $878 12,398  13,606 
Accounts receivable - net of allowances for doubtful accounts of $491 and $547 12,444   12,657 
Prepaid expenses 1,337  1,155  1,022   1,035 
Deferred income taxes 1,312  1,470  682   1,036 
Other current assets 1,694  3,611  2,916   3,110 
Total current assets 18,958  23,027  18,435   22,706 
Property, plant and equipment 267,639  260,279  282,445   270,907 
Less: accumulated depreciation and amortization (159,422)  (153,192) (170,021)  (161,140)
Property, Plant and Equipment – Net 108,217  107,087  112,424   109,767 
Goodwill 69,762  70,842  70,014   69,773 
Licenses 52,082  51,374  56,304   52,352 
Customer Lists and Relationships – Net 1,622  2,757  876   1,391 
Other Intangible Assets – Net 5,038  5,212  5,020   5,032 
Investments in and Advances to Equity Affiliates 4,563  3,718  3,949   4,581 
Other Assets 6,607  6,327  7,577   6,713 
Total Assets$266,849  $270,344 $274,599  $272,315 
         
Liabilities and Stockholders’ Equity         
Current Liabilities         
Debt maturing within one year$3,433  $3,453 $7,873  $3,486 
Accounts payable and accrued liabilities 18,936  19,858  20,433   20,494 
Advanced billing and customer deposits 3,709  3,872  4,013   4,225 
Accrued taxes 2,209  1,003  1,488   1,026 
Dividends payable 2,511  2,608  2,376   2,556 
Total current liabilities 30,798  30,794  36,183   31,787 
Long-Term Debt 60,314  61,300  68,350   66,358 
Deferred Credits and Other Noncurrent Liabilities         
Deferred income taxes 29,092  25,748  30,666   28,491 
Postemployment benefit obligation 33,842  34,011  42,036   41,392 
Other noncurrent liabilities 11,529  12,694  11,234   11,592 
Total deferred credits and other noncurrent liabilities 74,463  72,453  83,936   81,475 
          
Stockholders’ Equity         
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2012 and    
December 31, 2011: issued 6,495,231,088 at September 30, 2012 and December 31, 2011) 6,495  6,495 
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2013 and     
December 31, 2012: issued 6,495,231,088 at September 30, 2013 and December 31, 2012) 6,495   6,495 
Additional paid-in capital 90,982  91,156  91,021   91,038 
Retained earnings 28,907  25,453  26,648   22,481 
Treasury stock (788,169,469 at September 30, 2012 and 568,719,202    
at December 31, 2011, at cost) (28,533) (20,750)
Treasury stock (1,214,987,626 at September 30, 2013 and 913,836,325     
at December 31, 2012, at cost) (43,731)  (32,888)
Accumulated other comprehensive income 3,106  3,180  5,282   5,236 
Noncontrolling interest 317  263  415   333 
Total stockholders’ equity 101,274  105,797  86,130   92,695 
Total Liabilities and Stockholders’ Equity$266,849  $270,344 $274,599  $272,315 
See Notes to Consolidated Financial Statements.        

 
4 
 

AT&T INC.CONSOLIDATED STATEMENTS OF CASH FLOWSDollars in millions(Unaudited)
Nine months endedNine months ended
September 30,September 30,
2012  2011 2013  2012 
Operating Activities         
Net income$ 11,318  $ 10,812 $ 11,558  $ 11,318 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization  13,571    13,804   13,715    13,571 
Undistributed earnings from investments in equity affiliates  (483)   (539)  (232)   (483)
Provision for uncollectible accounts  835    805   653    835 
Deferred income tax expense and noncurrent unrecognized tax benefits  3,441    4,942   2,389    3,441 
Net (gain) loss from sale of investments, net of impairments  (27)   (57)  (272)   (27)
Changes in operating assets and liabilities:          
Accounts receivable  (450)   (573)  (440)   (571)
Other current assets  1,459    1,342   520    1,581 
Accounts payable and accrued liabilities  387    (2,533)  (420)   (156)
Retirement benefit funding  (175)   - 
Other - net
  (1,107)   (853)  (417)   (853)
Total adjustments  17,626    16,338   15,321    17,338 
Net Cash Provided by Operating Activities  28,944    27,150   26,879    28,656 
          
Investing Activities        
Construction and capital expenditures:        
Capital expenditures  (13,619)   (14,625)  (15,565)   (13,619)
Interest during construction  (197)   (119)  (213)   (197)
Acquisitions, net of cash acquired  (551)   (430)  (4,025)   (551)
Dispositions  807    76   846    807 
Sales (purchases) of securities, net  311    45   -    311 
Return of advances to and investments in equity affiliates  301    - 
Other  (2)   28   (4)   (2)
Net Cash Used in Investing Activities  (13,251)   (15,025)  (18,660)   (13,251)
          
Financing Activities          
Net change in short-term borrowings with original maturities of three months or less  -    (1,620)  1,851    - 
Issuance of other short-term borrowings  1,476    - 
Repayment of other short-term borrowings  (1,476)   - 
Issuance of long-term debt  6,935    7,935   6,416    6,935 
Repayment of long-term debt  (8,042)   (1,298)  (2,131)   (8,042)
Purchase of treasury stock  (8,374)   -   (11,134)   (8,374)
Issuance of treasury stock  460    216   108    460 
Dividends paid  (7,738)   (7,627)  (7,325)   (7,738)
Other  98    (406)  499    98 
Net Cash Used in Financing Activities  (16,661)   (2,800)  (11,716)   (16,661)
Net (decrease) increase in cash and cash equivalents  (968)   9,325 
Net decrease in cash and cash equivalents  (3,497)   (1,256)
Cash and cash equivalents beginning of year  3,185    1,437   4,868    3,045 
Cash and Cash Equivalents End of Period$ 2,217  $ 10,762 $ 1,371  $ 1,789 
Cash paid during the nine months ended September 30 for:        
Interest$ 3,335  $ 3,066 $ 2,980  $ 3,214 
Income taxes, net of refunds$ 390  $ (121)$ 1,573  $ 390 
See Notes to Consolidated Financial Statements.

 
5 
 

AT&T INC.CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYDollars and shares in millions except per share amounts(Unaudited)
September 30, 2012September 30, 2013
Shares AmountShares Amount
Common Stock       
Balance at beginning of year6,495  $ 6,495 6,495  $6,495 
Issuance of stock -   -  -   - 
Balance at end of period6,495  $ 6,495 6,495  $6,495 
       
Additional Paid-In Capital       
Balance at beginning of year  $ 91,156   $91,038 
Issuance of treasury stock   119    (8)
Share-based payments   (133)   (9)
Share of equity method investee capital transactions   (160)
Balance at end of period  $ 90,982   $91,021 
      
Retained Earnings      
Balance at beginning of year  $ 25,453   $22,481 
Net income attributable to AT&T ($1.90 per diluted share)   11,121 
Dividends to stockholders ($1.32 per share)   (7,646)
Other   (21)
Net income attributable to AT&T ($2.09 per diluted share)  11,336 
Dividends to stockholders ($1.35 per share)  (7,169)
Balance at end of period  $ 28,907   $26,648 
      
Treasury Stock      
Balance at beginning of year (568) $(20,750) (914) $(32,888)
Purchase of stock (245) (8,374)
Repurchase of common stock (312) (11,134)
Issuance of treasury stock25   591 11  291 
Balance at end of period (788) $ (28,533) (1,215) $(43,731)
        
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax      
Balance at beginning of year  $ 3,180   $5,236 
Other comprehensive loss attributable to AT&T    (74)
Other comprehensive income attributable to AT&T   46 
Balance at end of period  $ 3,106   $5,282 
        
Noncontrolling Interest        
Balance at beginning of year  $ 263   $333 
Net income attributable to noncontrolling interest    197    222 
Distributions    (143)   (161)
Acquisitions of noncontrolling interests   23 
Translation adjustments attributable to noncontrolling interest, net of taxes   (2)
Balance at end of period  $ 317   $415 
        
Total Stockholders’ Equity at beginning of year  $ 105,797   $92,695 
Total Stockholders’ Equity at end of period  $ 101,274   $86,130 
See Notes to Consolidated Financial Statements.  

 
6
 
AT&T INC.
SEPTEMBER 30, 20122013

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

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation  Throughout this document, AT&T Inc. is referred to as “AT&T,” “we” or the “Company.” We believe that these consolidated financial statements include all adjustments, (consistingconsisting only of normal recurring accruals)accruals, that are necessary to present fairly the results for the presented interim periods. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.2012.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates operate in the communications services industry both in the United Statesdomestically and internationally, providing wireless communications services, local exchange services, long-distancetraditional wireline voice services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale services. On May 8, 2012, we completed the sale of our Advertising Solutions segment to an affiliate of Cerberus Capital Management, L.P. for approximately $740 in cash after closing adjustments, a $200 note and a 47% equity interest in the new entity, YP Holdings LLC (YP Holdings). Our operating results include the results of the Advertising Solutions segment through May 8. Beginning on May 9, we included our 47% equity in YP Holdings in equity in net income of affiliates in our Other segment and on our consolidated income statement.

All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships and less than majority-owned subsidiaries where we have significant influence are accounted for under the equity method. Earnings from certain foreign equity investments accounted for using the equity method are included for periods ended within up to one month of our period end. We also record our proportionate share of our equity method investees’ other comprehensive income (OCI) items, including actuarial gains and losses on pension and other postretirement benefit obligations.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. WeCertain amounts have been reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation, including a reclassification of certain operating expenses based on an enhanced activity-based expense tracking system.

Employee Separations  We established obligations for expected termination benefits provided under existing plans to former or inactive employees after employment but before retirement. At September 30, 2012, we had severance accruals of $118 and at December 31, 2011, we had severance accruals of $335. The decline was primarily due to payments during the period.presentation.

Stock Repurchase ProgramIn December 2010, theMay 2013, we completed a repurchase authorization that was approved by our Board of Directors in July 2012. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of AT&Tour common stock. We began buying back stock under this program inDuring the first quarter of 2012. For the nine months endedof 2013, we repurchased 312 million shares for $11,134 under these authorizations. At September 30, 2012,2013, we had repurchased approximately 245216 million shares totaling $8,374. In July 2012,remaining under the Board of Directors authorized the repurchase of an additional 300 million shares. We intend to continue repurchasing shares.March 2013 authorization. The authorization has no expiration date.

To implement these authorizations, we use open market repurchase programs, relying on Rule 10b5-1 of the Securities Exchange Act of 1934 where feasible. We also use accelerated share repurchase programs with large financial institutions to repurchase our stock.


 
7 
 
AT&T INC.
SEPTEMBER 30, 20122013

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

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for net income attributable to AT&T for the three and nine months ended September 30, 2013 and 2012, and 2011, areis shown in the table below:

Three months ended Nine months endedThree months ended Nine months ended
September 30, September 30,September 30, September 30,
2012  2011  2012  2011 2013  2012  2013  2012 
Numerators                     
Numerator for basic earnings per share:                    
Net Income$3,701  $3,686  $11,318  $10,812 
Net income$3,905  $3,701  $11,558  $11,318 
Net income attributable to noncontrolling interest (66) (63) (197) (190) (91)  (66)  (222)  (197)
Net Income attributable to AT&T 3,635  3,623  11,121  10,622 
Net income attributable to AT&T 3,814   3,635   11,336   11,121 
Dilutive potential common shares:                   
Other share-based payment 3  3  9  8 
Share-based payment 3   3   9   9 
Numerator for diluted earnings per share$3,638  $3,626  $11,130  $10,630 $3,817  $3,638  $11,345  $11,130 
Denominators (000,000)                   
Denominator for basic earnings per share:                   
Weighted average number of common shares outstanding 5,771  5,936  5,848  5,931  5,315   5,771   5,402   5,848 
Dilutive potential common shares:                   
Stock options 4  3  4  4 
Other share-based payment 17  15  17  15 
Share-based payment 16   21   17   21 
Denominator for diluted earnings per share 5,792  5,954  5,869  5,950  5,331   5,792   5,419   5,869 
Basic earnings per share attributable to AT&T$0.63  $0.61  $1.90  $1.79 $0.72  $0.63  $2.10  $1.90 
Diluted earnings per share attributable to AT&T$0.63  $0.61  $1.90  $1.79 $0.72  $0.63  $2.09  $1.90 

At September 30, 20122013 and 2011,2012, we had issued and outstanding options to purchase approximately 1812 million and 8518 million shares of AT&T common stock. For the quarter ended September 30, 20122013 and 2011,2012, the exercise prices of 3 million and 2 million and 58 million optionsshares were above the market price of AT&T stock for the respective periods. Accordingly, we did not include these amounts in determining the dilutive potential common shares. At September 30, 20122013 and 2011,2012, the exercise prices of 169 million and 2416 million vested stock options were below market price.


 
8 
 
AT&T INC.
SEPTEMBER 30, 20122013

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 OCI for the nine months ended September 30, 2013, are presented below. All amounts are net of tax and exclude noncontrolling interest.

At September 30, 2013 and for the period ended:           
  
Foreign
Currency
 Translation
Adjustment
  
Net
Unrealized
Gain (Loss)
on Available-
for-Sale
Securities
  
Net
Unrealized
Gains
(Losses) on
Cash Flow
 Hedges
  
Defined Benefit
Postretirement
Plans
  
Accumulated
Other
Comprehensive
Income
Balance as of January 1, 2013$ (284) $ 272  $ (110) $ 5,358  $ 5,236 
Other comprehensive income
   (loss) before reclassifications
  (153)   155    526    -    528 
Amounts reclassified
   from accumulated OCI
  34 1   (13)2   22 3   (525)4   (482)
Net other comprehensive
   income (loss)
  (119)   142    548    (525)   46 
Balance as of September 30, 2013$ (403) $ 414  $ 438  $ 4,833  $ 5,282 
 1  Pre-tax translation loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
 2  Realized gains are included in Other income (expense) - net in the consolidated statements of income.
 3  Realized (gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
 4  The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5). Actuarial loss
  reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.

NOTE 3.4. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our various operating segments based on segment income before income taxes. We make our capital allocationsallocation decisions based on ourthe strategic directionneeds of the business, needs of the network (wireless or wireline) providingprovided services, and other assets neededdemands to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each reportable segment’s results. The customers and long-lived assets of our reportable segments are predominantly in the United States. For the quarter ended September 30, 2012, weWe have three reportable segments: (1) Wireless, (2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions. On May 8, 2012, we completed the sale of our Advertising Solutions segment, and received a 47 percent equity interest in the new entity YP Holdings (see Note 1).which was subsequently sold.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voicedata and advanced datavoice communications services. The WirelessThis segment includes our portion of the results have been reclassified to includefrom our mobile payment joint venture marketed as the operating results of a subsidiary that provides servicesIsis Mobile WalletTM (ISIS), which is accounted for subscribers to wirelessly monitor their home that was previously reported in the Wireline segment.as an equity method investment.

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

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

The Other segment includes our portion of the results from our international equity investments,investment, our 47 percent equity interest in YP Holdings LLC (YP Holdings), and all corporatecosts to support corporate-driven activities and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costcosts and expected return on plan assets for our pension and postretirement benefit plans. The Other segment results have been reclassified to exclude the operating results of customer information services, which are now reported

9 
AT&T INC.
SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in our Wireline segment’s results.millions except per share amounts
 
In the following tables, we show how our segment results are reconciled to our consolidated results reported.

For the three months ended September 30, 2013     Advertising        
Consolidated
Results 
  Wireless   Wireline   Solutions  Other   Consolidations   
Data$ 5,509  $ 8,457  $ -  $ -  $ -  $ 13,966 
Voice, text and other  9,951    5,023    -     -    -    14,974 
Equipment and other  2,020    1,190    -    8    -    3,218 
Total segment operating revenues  17,480    14,670    -    8    -    32,158 
Operations and support expenses  10,982    10,385    -    (12)   -    21,355 
Depreciation and amortization expenses  1,875    2,736    -    4    -    4,615 
Total segment operating expenses  12,857    13,121    -    (8)   -    25,970 
Segment operating income (loss)  4,623    1,549    -    16    -    6,188 
Interest expense  -    -    -    -    829    829 
Equity in net income (loss) of affiliates  (18)   -    -    109    -    91 
Other income (expense) – net  -    -    -    -    50    50 
Segment income (loss) before
   income taxes
$ 4,605  $  1,549  $  -  $  125  $  (779) $ 5,500 
                  
For the nine months ended September 30, 2013     Advertising        
Consolidated
Results 
  Wireless  Wireline   Solutions  Other   Consolidations   
Data$ 15,990  $ 25,019  $-  $ -  $ -  $ 41,009 
Voice, text and other  29,902    15,470   -    -    -    45,372 
Equipment and other  5,570    3,609     -    29    -    9,208 
Total segment operating revenues  51,462    44,098     -    29    -    95,589 
Operations and support expenses  31,932    31,137     -      564    -    63,633 
Depreciation and amortization expenses  5,553    8,146     -    16    -    13,715 
Total segment operating expenses  37,485    39,283     -    580    -    77,348 
Segment operating income (loss)  13,977    4,815     -    (551)   -    18,241 
Interest expense  -    -     -    -    2,481    2,481 
Equity in net income (loss) of affiliates  (55)   1     -    548    -    494 
Other income (expense) – net  -    -     -    -    370    370 
Segment income (loss) before
   income taxes
$  13,922  $  4,816  $   -  $  (3) $  (2,111) $ 16,624 

 
 
910 
 
AT&T INC.
SEPTEMBER 30, 20122013

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

For the three months ended September 30, 2012For the three months ended September 30, 2012             For the three months ended September 30, 2012     Advertising      
Consolidated
Results 
 Wireless  Wireline  Advertising Solutions  Other  Consolidations  Consolidated Results  Wireless  Wireline   Solutions Other  Consolidations  
Data$ 4,686  $ 7,987  $  -  $ -  $ -  $ 12,673 
Voice, text and other  10,220   5,563     -   -   -   15,783 
Equipment and other  1,726   1,264     -    13   -   3,003 
Total segment operating revenues $16,632  $14,813  $-  $14  $-  $31,459   16,632    14,814      -   13    -    31,459 
Operations and support expenses  10,549   10,134   -   227   -   20,910   10,432    10,246      -   232    -    20,910 
Depreciation and amortization expenses  1,730   2,774   -   8   -   4,512   1,730    2,774      -   8    -    4,512 
Total segment operating expenses  12,279   12,908   -   235   -   25,422   12,162    13,020      -   240    -    25,422 
Segment operating income (loss)  4,353   1,905   -   (221)  -   6,037   4,470    1,794      -   (227)   -    6,037 
Interest expense  -   -   -   -   824   824   -    -      -   -    824    824 
Equity in net income (loss) of affiliates  (17)  -   -   199   -   182   (17)   -      -   199    -    182 
Other income (expense) – net  -   -   -   -   47   47   -    -      -   -    47    47 
Segment income (loss) before income taxes $4,336  $1,905  $-  $(22) $(777) $5,442 $  4,453  $  1,794  $    -  $  (28) $  (777) $ 5,442 
                                        
For the nine months ended September 30, 2012For the nine months ended September 30, 2012                For the nine months ended September 30, 2012      Advertising       
Consolidated
Results 
 Wireless  Wireline  Advertising Solutions  Other  Consolidations  Consolidated Results  Wireless  Wireline   Solutions Other  Consolidations  
Data$ 13,392  $ 23,722  $   -  $ -  $ -  $ 37,114 
Voice, text and other  30,845   17,151     -   -   -   47,996 
Equipment and other  4,884   3,777     1,049   36   -   9,746 
Total segment operating revenues $49,121  $44,645  $1,049  $41  $-  $94,856   49,121   44,650     1,049   36   -   94,856 
Operations and support expenses  30,337   30,516   773   704   -   62,330   30,000   30,849     773   708   -   62,330 
Depreciation and amortization expenses  5,092   8,348   106   25   -   13,571   5,092   8,348     106   25   -   13,571 
Total segment operating expenses  35,429   38,864   879   729   -   75,901   35,092   39,197     879   733   -   75,901 
Segment operating income (loss)  13,692   5,781   170   (688)  -   18,955   14,029   5,453     170   (697)  -   18,955 
Interest expense  -   -   -   -   2,624   2,624   -   -     -   -   2,624   2,624 
Equity in net income (loss) of affiliates  (45)  (1)  -   583   -   537   (45)  (1)    -   583   -   537 
Other income (expense) – net  -   -   -   -   122   122   -   -     -   -   122   122 
Segment income (loss) before income taxes $13,647  $5,780  $170  $(105) $(2,502) $16,990 $  13,984  $  5,452  $    170 $  (114) $  (2,502) $ 16,990 
                        
For the three months ended September 30, 2011                
 Wireless  Wireline  Advertising Solutions  Other  Consolidations  Consolidated Results 
Total segment operating revenues $15,606  $15,055  $803  $14  $-  $31,478 
Operations and support expenses  9,376   10,295   554   400   -   20,625 
Depreciation and amortization expenses  1,620   2,892   94   12   -   4,618 
Total segment operating expenses  10,996   13,187   648   412   -   25,243 
Segment operating income (loss)  4,610   1,868   155   (398)  -   6,235 
Interest expense  -   -   -   -   889   889 
Equity in net income (loss) of affiliates  (8)  -   -   201   -   193 
Other income (expense) – net  -   -   -   -   46   46 
Segment income (loss) before income taxes $4,602  $1,868  $155  $(197) $(843) $5,585 
                        
For the nine months ended September 30, 2011                
 Wireless  Wireline  Advertising Solutions  Other  Consolidations  Consolidated Results 
Total segment operating revenues $46,519  $45,136  $2,512  $53  $-  $94,220 
Operations and support expenses  29,023   30,752   1,707   726   -   62,208 
Depreciation and amortization expenses  4,741   8,726   301   36   -   13,804 
Total segment operating expenses  33,764   39,478   2,008   762   -   76,012 
Segment operating income (loss)  12,755   5,658   504   (709)  -   18,208 
Interest expense  -   -   -   -   2,583   2,583 
Equity in net income (loss) of affiliates  (19)  -   -   668   -   649 
Other income (expense) – net  -   -   -   -   132   132 
Segment income (loss) before income taxes $12,736  $5,658  $504  $(41) $(2,451) $16,406 

10
AT&T INC.
SEPTEMBER 30, 2012

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

NOTE 4.5. PENSION AND POSTRETIREMENT BENEFITS

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

On September 9, 2013, we filed an application with the U.S. Departmentmade a voluntary contribution of Labor for approval to contribute a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our Mobilitywireless business, to the trust used to pay pension benefits under plans sponsored by AT&T.our qualified pension plans. The preferred equity interest is estimated to be valued at $9,500 upon contribution. We anticipate approval in 2013, and expect to makehad a value of $9,104 on the contribution date. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as contributions. This preferred equity 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 included in plan assets in our consolidated financial statements. At the time of the contribution of the preferred equity interest, we made an additional cash contribution of $175 and have agreed to annual cash contributions of $175 no later than the due date for our federal income tax return for each of 2014, 2015 and 2016. These contributions combined with our existing pension assets, are essentially equivalent to the expected pension obligation at that time.year-end.

11 
AT&T INC.
SEPTEMBER 30, 2013

The following table details pension and postretirement benefit costs includedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in operating expenses (in cost of services and sales, and selling, general and administrative expenses) in the accompanying consolidated statements of income. millions except per share amounts
We recognize actuarial gains and losses from remeasuring ouron pension and postretirement plan obligations and assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required.

In The following table details pension and postretirement benefit costs included in operating expenses in the following table,accompanying consolidated statements of income, expense credits are denoted with parentheses. A portion of these benefit costs is capitalized as part of the benefit load on internal construction projects, providing a small reduction in the net expense recorded.

Three months ended Nine months endedThree months ended Nine months ended
September 30, September 30,September 30, September 30,
2012  2011  2012  2011 2013  2012  2013  2012 
Pension cost:                    
Service cost – benefits earned during the period$301  $297  $915  $890 $331  $301  $991  $915 
Interest cost on projected benefit obligation 700  740  2,100  2,219  608   700   1,822   2,100 
Expected return on assets (880) (923) (2,640) (2,767) (828)  (880)  (2,484)  (2,640)
Amortization of prior service (credit) (3) (4) (11) (12) (25)  (3)  (71)  (11)
Net pension cost$118  $110  $364  $330 $86  $118  $258  $364 
                   
Postretirement cost:                   
Service cost – benefits earned during the period$81  $90  $247  $271 $95  $81  $286  $247 
Interest cost on accumulated postretirement benefit obligation 446  513  1,340  1,538  389   446   1,168   1,340 
Expected return on assets (200) (260) (601) (780) (177)  (200)  (533)  (601)
Amortization of prior service (credit) (215) (173) (647) (520) (263)  (215)  (788)  (647)
Net postretirement cost$112  $170  $339  $509 $44  $112  $133  $339 
                   
Combined net pension and postretirement cost$230  $280  $703  $839 $130  $230  $391  $703 

Our combined net pension and postretirement cost decreased $50$100 in the third quarter and $136$312 for the first nine months of 2012.2013. The decreases were related todecrease is driven by lower interest costs, which reflect the declining bond rates used when valued at the beginning of the year and higher amortization of prior service credits due to our plan change that provides prescription drug benefits on a group basis under Medicare Part D, as allowed under federalchanges, including changes to retiree costs for continued healthcare law. The combined net pension and postretirement cost also reflects the prior year’s performance of the U.S. securities markets and declining bond rates, which contribute to lower interest costs on the projected benefit obligation largelycoverage. This decrease is partially offset by lower expected long-term return on plan assets.assets reflecting each plan’s asset mix and continued uncertainty in the securities markets and the U.S. economy.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental retirement pension benefits cost, which is not included in the table above, was $31$27 in the third quarter of 2013, of which $25 was interest cost, and $82 for the first nine months, of which $76 was interest cost. In 2012, net supplemental retirement pension benefits cost was $31 in the third quarter, of which $29 was interest cost, and $94 for the first nine months, of which $87 was interest cost. In 2011, net supplemental retirement pension benefits cost was $35 in the third quarter, of which $31 was interest cost, and $106 for the first nine months, of which $94 was interest cost.

 
1112 
 
AT&T INC.
SEPTEMBER 30, 20122013

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

NOTE 5.6. 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 measurementmeasurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2011.2012.

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:

September 30, 2012 December 31, 2011September 30, 2013 December 31, 2012
Carrying Fair Carrying FairCarrying Fair Carrying Fair
Amount Value Amount ValueAmount Value Amount Value
Notes and debentures$ 63,510  $ 76,432  $ 64,514  $ 73,738 $ 74,103  $ 79,156  $ 69,578  $ 81,310 
Commercial paper  1,851    1,851    -    - 
Bank borrowings  1    1    1    1 
Investment securities  1,950   1,950   2,092   2,092   2,525    2,525    2,218    2,218 

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

 
1213 
 
AT&T INC.
SEPTEMBER 30, 20122013

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


Investment Securities
Our investment securities consist of primarily available-for-sale instruments, which include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities werewas estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in “Other income (expense) – net” in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated other comprehensive income (accumulated OCI).OCI. Unrealized losses that are considered other than temporary are recorded in “Other income (expense) – net” with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $11$109 have maturities of less than one year, $103$279 within one to three years, $233$175 within three to five years, and $252 for five or more years.

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

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

Following is the fair value leveling for available-for-sale securities and derivatives as of September 30, 20122013 and December 31, 2011:2012:

  September 30, 2012
  Level 1 Level 2 Level 3 Total
Available-for-Sale Securities           
   Domestic equities$ 865  $ -  $ -  $ 865 
   International equities  445    -    -    445 
   Fixed income bonds  -    599    -    599 
Asset Derivatives1 
           
   Interest rate swaps  -    306    -    306 
   Cross-currency swaps  -    472    -    472 
   Foreign exchange contracts  -    1    -    1 
Liability Derivatives1 
           
   Cross-currency swaps  -    (791)   -    (791)
   Foreign exchange contracts  -    (2)   -    (2)
             
  December 31, 2011
  Level 1 Level 2 Level 3 Total
Available-for-Sale Securities           
   Domestic equities$ 947  $ -  $ -  $ 947 
   International equities  495    -    -    495 
   Fixed income bonds  -    562    -    562 
Asset Derivatives1 
           
   Interest rate swaps  -    521    -    521 
   Cross-currency swaps  -    144    -    144 
   Foreign exchange contracts  -    2    -    2 
Liability Derivatives1 
           
   Cross-currency swaps  -    (820)   -    (820)
   Interest rate locks  -    (173)   -    (173)
   Foreign exchange contracts  -    (9)   -    (9)
1
 Derivatives designated as hedging instruments are reflected as other assets, other liabilities and, for a portion of interest rate swaps, accounts receivable.
  September 30, 2013
  Level 1 Level 2 Level 3 Total
Available-for-Sale Securities           
   Domestic equities$ 1,065  $ -  $ -  $ 1,065 
   International equities  583    -    -    583 
   Fixed income bonds  -    815    -    815 
Asset Derivatives1 
           
   Interest rate swaps  -    216    -    216 
   Cross-currency swaps  -    1,657    -    1,657 
Liability Derivatives1 
           
   Interest rate swaps  -    (4)   -    (4)
   Cross-currency swaps  -    (557)   -    (557)
             
  December 31, 2012
  Level 1 Level 2 Level 3 Total
Available-for-Sale Securities           
   Domestic equities$ 873  $ -  $ -  $ 873 
   International equities  469    -    -    469 
   Fixed income bonds  -    837    -    837 
Asset Derivatives1 
           
   Interest rate swaps  -    287    -    287 
   Cross-currency swaps  -    752    -    752 
   Foreign exchange contracts  -    1    -    1 
Liability Derivatives1 
           
   Cross-currency swaps  -    (672)   -    (672)
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.
 
 
1314 
 
AT&T INC.
SEPTEMBER 30, 20122013

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

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

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

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense on the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed-rate notes payable they hedge due to changes in the designated benchmark interest rate and are recognized in interest expense. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. ForIn the nine months ended September 30, 20122013 and September 30, 2011,2012, no ineffectiveness was measured.

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

We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro and British pound sterling denominated debt. These agreements include initial and final exchanges of principal from fixed foreign denominations to fixed U.S. denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed foreign-denominated rate to a fixed U.S. denominated interest rate. We evaluate the effectiveness of our cross-currency swaps each quarter. ForIn the nine months ended September 30, 20122013 and September 30, 2011,2012, no ineffectiveness was measured.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $45 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks. In February 2012, we utilized $800 notional value of interest rate locks related to our February 2012 debt issuance.

We may hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Some of these instruments are designated as cash flow hedges while others remain nondesignated, largely based on size and duration. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. ForIn the nine months ended September 30, 20122013 and September 30, 2011,2012, no ineffectiveness was measured.
 
 
1415 
 
AT&T INC.
SEPTEMBER 30, 20122013

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 September 30, 2012,2013, we had posted collateral of $25$17 (a deposit asset) and held collateral of $469$1,190 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Moody’s Investors Service and Standards & Poor’s and two rating levels by Fitch, Inc., before the final collateral exchange in September, we would have been required to post additional collateral of $174.$55. At December 31, 2011,2012, we had posted collateral of $98$22 (a deposit asset) and had no held collateral of $543 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), against the fair value of the derivative instruments.

Following is the notional amount of our outstanding derivative positions:

 September 30,  December 31,  September 30,  December 31, 
 2012  2011  2013  2012 
Interest rate swaps $3,000  $8,800  $4,750  $3,000 
Cross-currency swaps  9,481   7,502   14,136   12,071 
Interest rate locks  -   800 
Foreign exchange contracts  122   207   4   51 
Total $12,603  $17,309  $18,890  $15,122 

Following is 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 Nine months ended 
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
 
Interest rate swaps (Interest expense):            
Gain (Loss) on interest rate swaps $9  $(21) $(78) $(158)
Gain (Loss) on long-term debt  (9)  21   78   158 
Following is the related hedged items affecting our financial position and performance:       
             
Effect of Derivatives on the Consolidated Statements of Income          
 Three months ended Nine months ended 
 September 30, September 30, 
Fair Value Hedging Relationships 2012  2011  2012  2011 
Interest rate swaps (Interest expense):            
Gain (Loss) on interest rate swaps $(21) $92  $(158) $81 
Gain (Loss) on long-term debt  21   (92)  158   (81)


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

 Three months ended  Nine months ended 
 September 30,  September 30, 
Cash Flow Hedging Relationships 2012  2011  2012  2011 
Cross-currency swaps:            
Gain (Loss) recognized in accumulated OCI $355  $(266) $190  $(415)
                 
Interest rate locks:                
Gain (Loss) recognized in accumulated OCI  -   (105)  -   17 
Interest income (expense) reclassified from
   accumulated OCI into income
   (12)   (3)   (32)  (11)
                 
Foreign exchange contracts:                
Gain (Loss) recognized in accumulated OCI  3   (13)  3   (8)

The balance of the unrealized derivative gain (loss) in accumulated OCI was $(275) at September 30, 2012 and $(421) at December 31, 2011.
  Three months ended  Nine months ended 
Cash Flow Hedging Relationships 
September 30,
2013
  
September 30,
2012
  
September 30,
2013
  
September 30,
2012
 
Cross-currency swaps:            
Gain (Loss) recognized in accumulated OCI $482  $355  $807  $190 
                 
Interest rate locks:                
Interest income (expense) reclassified from
   accumulated OCI into income
  (11)  (12)  (34)  (32)
                 
Foreign exchange contracts:                
Gain (Loss) recognized in accumulated OCI  5   3   5   3 
 
 
1516 
 
AT&T INC.
SEPTEMBER 30, 20122013

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

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions
Atlantic Tele-Network, Inc.  In September 2013, we acquired Atlantic Tele-Network, Inc.’s U.S. retail wireless operations, operated under the Alltel brand, for $806 in cash, which includes closing adjustments. Under the terms of the agreement, we acquired wireless properties, with a preliminary value of $322 in licenses and $239 of goodwill.

700 MHz Spectrum  In September 2013, we acquired spectrum in the 700 MHz B band from Verizon Wireless for $1,900 in cash and an assignment of Advanced Wireless Service (AWS) spectrum licenses in five markets. The 700 MHz licenses acquired by AT&T cover 42 million people in 18 states. We recognized a gain of approximately $293 on this and other spectrum transactions.

Pending Acquisitions
Leap  In July 2013, we announced an agreement to acquire Leap Wireless International, Inc. (Leap), a provider of prepaid wireless service, for fifteen dollars per outstanding share of Leap’s common stock, or approximately $1,260, plus one non-transferable contingent value right (CVR) per share. The CVR will entitle each Leap stockholder to a pro rata share of the net proceeds of the future sale of the Chicago 700 MHz A-band Federal Communications Commission (FCC) license held by Leap. As of June 30, 2013, Leap had approximately $2,700 of debt, net of cash. Under the terms of the agreement, we will acquire all of Leap’s stock and, thereby, acquire all of its wireless properties, including spectrum licenses, network assets, retail stores and approximately 5 million subscribers. Leap’s spectrum licenses include Personal Communications Services (PCS) and AWS bands and are largely complementary to our licenses. Leap’s network covers approximately 96 million people in 35 states and consists of a 3G CDMA network and an LTE network covering approximately 21 million people.

The agreement was approved by Leap’s stockholders on October 30, 2013. The transaction is subject to review by the FCC and Department of Justice (DOJ). The review process is underway at both agencies. The transaction is expected to close in the first quarter of 2014. The agreement provides both parties with certain termination rights if the transaction does not close by July 11, 2014, which can be extended until January 11, 2015, if certain conditions have not been met by that date. Under certain circumstances, Leap may be required to pay a termination fee or AT&T may be required to provide Leap with a three-year roaming agreement for LTE data coverage in certain Leap markets lacking LTE coverage, if the transaction does not close. If Leap enters into the roaming agreement, AT&T will then have the option within 30 days after entry into the roaming agreement to purchase certain specified Leap spectrum assets. If AT&T does not exercise its right to purchase all of the specified Leap spectrum assets, Leap can then within 60 days after expiration of AT&T’s option require AT&T to purchase all of the specified spectrum assets.

NOTE 8. SUBSEQUENT EVENTS

On October 20, 2013, we announced an agreement with Crown Castle International Corp. (Crown Castle) in which Crown Castle will have the exclusive rights to lease and operate approximately 9,100 and purchase approximately 600 of our wireless towers for $4,850. Under the terms of the leases, Crown Castle will have exclusive rights to lease and operate the towers over an average term of approximately 28 years. As the leases expire, Crown Castle will have fixed price purchase options for these towers totaling approximately $4,200, based on their estimated fair market values at the end of the lease terms. We will sublease capacity on the towers from Crown Castle for a minimum of 10 years at current market rates, with options to renew. We plan to account for the proceeds as a financing obligation and expect this transaction to close by year-end 2013, subject to standard closing conditions.

17 
AT&T INC.
SEPTEMBER 30, 2013

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

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry both in both the United States and internationally, providing wireless communicationsand wireline telecommunication services local exchange services, long-distance services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale services.equipment. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.2012. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period’s presentation.

Consolidated Results  Our financial results in the third quarter and for the first nine months of 20122013 and 20112012 are summarized as follows:

  Third Quarter  Nine-Month Period 
  2013  2012  
Percent
Change
  2013  2012  
Percent
Change
 
 
Operating Revenues $32,158  $31,459   2.2% $95,589  $94,856   0.8%
Operating expenses                        
   Cost of services and sales  13,403   12,602   6.4   39,227   37,673   4.1 
   Selling, general and administrative  7,952   8,308   (4.3)  24,406   24,657   (1.0)
   Depreciation and amortization  4,615   4,512   2.3   13,715   13,571   1.1 
Total Operating Expenses  25,970   25,422   2.2   77,348   75,901   1.9 
Operating Income  6,188   6,037   2.5   18,241   18,955   (3.8)
Income Before Income Taxes  5,500   5,442   1.1   16,624   16,990   (2.2)
Net Income  3,905   3,701   5.5   11,558   11,318   2.1 
Net Income Attributable to AT&T $3,814  $3,635   4.9% $11,336  $11,121   1.9%
  Third Quarter Nine-Month Period
  2012  2011  Percent Change 2012  2011  Percent Change
Operating Revenues $31,459  $31,478   (0.1)% $94,856  $94,220   0.7%
Operating expenses                        
Cost of services and sales  12,718   12,656   0.5   38,000   38,225   (0.6)
Selling, general and administrative  8,192   7,969   2.8   24,330   23,983   1.4 
Depreciation and amortization  4,512   4,618   (2.3)   13,571   13,804   (1.7)
Total Operating Expenses  25,422   25,243   0.7   75,901   76,012   (0.1)
Operating Income  6,037   6,235   (3.2)   18,955   18,208   4.1 
  Income Before Income Taxes  5,442   5,585   (2.6)   16,990   16,406   3.6 
Net Income  3,701   3,686   0.4   11,318   10,812   4.7 
Net Income Attributable to AT&T $3,635  $3,623   0.3% $11,121  $10,622   4.7%


Overview
Operating income decreased $198,increased $151, or 3.2%2.5%, in the third quarter and increased $747,decreased $714, or 4.1%3.8%, for the first nine months of 2012.2013. Both operating revenues and expenses in the first nine months of 2012 include results for the quarter were affected by the May 2012 sale of our sold Advertising Solutions segment, as discussed below. Operatingwhich had a negative impact on comparisons to operating income in the third quarter and for the first nine months reflectsof 2013. Operating income increased in the third quarter reflecting continued growth in wireless servicedata and equipment revenue, driven mostly by data revenue growth, along withrevenues, increased revenues from AT&T U-verse® (U-verse) and strategic services, and strategic business services. Growth in wireless and wireline revenues in the third quarter was more thangains realized on spectrum transactions. These increases were partially offset by continued declines in our traditional voice and data services, higher expenses driven primarily by increased wireless equipment commissionscosts, increased expenses for new product development as well as increased expenses supporting U-verse subscriber growth. Operating income for the first nine months was driven by the same factors as for the quarter; however it was also impacted by higher wireless commission expenses and administrative costs.the sale of our Advertising Solutions segment. Our operating income margin in the third quarter decreased from 19.8% in 2011 towas 19.2% in both 2012 and 2013 and for the first nine months increaseddecreased from 19.3% in 2011 to 20.0% in 2012.2012 to 19.1% in 2013.

Operating revenues decreased $19,increased $699, or 0.1%2.2%, in the third quarter and increased $636,$733, or 0.7%0.8%, for the first nine months of 2012.2013. Wireless data and equipment revenues increased, reflecting the increasing percentage of wireless subscribers choosing smartphones. Continued growth in U-verse services from residential customers and strategic services also contributed to higher operating revenues. The revenue increases were partially offset by continued declines in wireline voice and wireless voice and text revenues. The sale of our Advertising Solutions segment reduced revenues $803 in the third quarter and $1,463 in the first nine months. The third-quarter decrease from Advertising Solutions was offset by higher wireless service and equipment revenues and higher wireline data revenues from U-verse and strategic business services. The increase in operatingalso contributed to lower revenues for the first nine months was primarily duemonths.

As the telecommunications industry continues to theevolve from voice-oriented services into an industry driven by data-based services, technology, and efficiencies, our products, services and plans have also changed as we transition from traditional voice and basic data services to sophisticated, high-speed, IP-based alternatives. This transition of our offerings will result in continued growth in our wireless service and equipmentwireline IP-based data revenues as we bundle and higher wirelineprice plans with greater focus on the data revenues. These increases were partially offset by the Advertising Solutions segment saleservices that our customers desire, provide new products and services, and transition customers from their current traditional services. We expect continued declines in voice revenues and our basic wireline voice.

data services as customers choose these next-generation services.
 
 
1618 
 
AT&T INC.
SEPTEMBER 30, 20122013

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

Revenue growth continues to be tempered by declines in our wireline voice revenues. Total switched access lines decreased 12.8% since September 30, 2011. Customers disconnecting access lines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data or terminated service permanently as businesses closed or consumers left residences. While we lose wireline voice revenues, we have the opportunity to increase wireless service or wireline data revenues should the customer choose us as their wireless or VoIP provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.

Cost of services and sales expenses increased $62,$801, or 0.5%6.4%, in the third quarter and decreased $225,$1,554, or 0.6%4.1%, for the first nine months of 2012.2013. The sale of our Advertising Solutions segment reduced expenses $277 in the third quarter and $499 for the first nine months. The increase in the third quarter wasincreases were primarily due to higherincreased wireless handsetequipment costs related to smartphonedevice sales, including the launch of the latest iPhone model andincreased wireline costs attributable to U-verse subscriber growth in U-verse subscribers, whichand wireless network costs. The increases were mostlypartially offset by decreased wireless interconnect and long-distance costs, and lower non-employee related charges and the sale of our Advertising Solutions segment. The decrease forcosts associated with Universal Service Fund (USF) fees. For the first nine months is primarily due tooffsets also included the sale of ourthe Advertising Solutions segment and lower non-employee related expenses, partially offset by higher U-verse, wireless handset and wireless network costs.segment.

Selling, general and administrative expenses increased $223,decreased $356, or 2.8%4.3%, in the third quarter and $347,$251, or 1.4%1.0%, for the first nine months of 2012.2013. The increasesdecreases were primarily due to higher wireless commissionsgains on spectrum transactions, decreased wireline employee related expenses and administrative costs. The increaseslower financing-related costs associated with our pension and postretirement benefits (referred to as Pension/OPEB expenses) and, for the first nine months, the sale of the Advertising Solutions segment. These lower expenses were partially offset by decreased salesincreased commissions related to smartphone upgrades, wireless selling and advertising costs, employee relatedadministrative expenses and higher wireline contract service expenses.

Depreciation and amortization expenses increased $103, or 2.3%, in the third quarter and $144, or 1.1%, for the first nine months of 2013. Expenses increased due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets and lower amortization of intangibles for customer lists related to acquisitions. The sale of our Advertising Solutions segment which reducedalso contributed to lower depreciation and amortization expenses $277 in the third quarter and $435 for the first nine months.

Depreciation and amortizationInterest expense expense decreased $106,increased $5, or 2.3%0.6%, in the third quarter and $233,decreased $143, or 1.7%5.4%, for the first nine months of 2012.2013. The sale of our Advertising Solutions segment reduced expenses $94 in the third quarter and $195 for the first nine months. Expenses also decreased due to lower amortization of intangibles for customer lists related to acquisitions, partially offset by increased depreciation associated with ongoing capital spending for network upgrades and expansion.

Interest expense decreased $65, or 7.3%, in the third quarter and increased $41, or 1.6%, for the first nine months of 2012. The decreaseincrease in the third quarter was due to our lowerhigher average debt balances andoffset by lower average interest rates. The decrease for the first nine months reflects our prior-year debt refinancing activity, which contributed to lower average interest rates partially offset by call premiums paid onin 2013 and one-time charges associated with the early redemption of debt in September 2012. The increase for the first nine months was primarily due to a net charge of approximately $151 related to call premiums paid for the early redemption of debt, whichThese decreases were partially offset by net gains on the settlement of associated interest-rate swaps. The increase from the early debt redemptions was partially offset by lower expense resulting from lowerhigher average debt balances and interest rates and an increase in the amount of interest capitalized on wireless spectrum that will be used in the future.balances.

Equity in net income of affiliates decreased $11,$91, or 5.7%50.0%, in the third quarter and $112,$43, or 17.3%,8.0% for the first nine months of 2012.2013. Decreased equity in net income of affiliates in the third quarter was primarily due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil), resulting from foreign exchange losses and increased taxes. Partially offsetting the decreases were earnings from YP Holdings LLC (YP Holdings). Decreased equity in net income of affiliates for the first nine months was primarily due to foreign exchange impacts at América Móvil, partially offset by earnings from YP Holdings.

Other income (expense) – net We had other income of $50 in the third quarter and $370 for the first nine months of 2013, compared to other income of $47 in the third quarter and $122 for the first nine months of 2012, compared to other income of $462012. Results in the third quarter and $132 for the first nine months of 2011.2013 included interest and dividend income of $14 and $54 and leveraged lease income of $6 and $21, respectively. Income for the first nine months of 2013 also included a net gain on the sale of América Móvil shares and other investments of $272.

Other income in the third quarter and for the first nine months of 2012 included interest and dividend income of $17 and $51 and leveraged lease income of $5 and $46 and a net gainsgain on the sale of investments of $83 and $82.$82, respectively. This income was partially offset by a third-quarter investment impairment of $55.

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

Income taxes decreased $158,$146, or 8.3%8.4%, in the third quarter and increased $78,$606, or 1.4%10.7%, for the first nine months of 2012.2013. Our effective tax rate was 29.0% for the third quarter and 30.5% for the first nine months of 2013, as compared to 32.0% for the third quarter and 33.4% for the first nine months of 2012, as compared to 34.0% for the third quarter and 34.1% for the first nine months of 2011.2012. The decrease in effective tax rate in thisfor both the third quarter isand the first nine months was primarily due primarily to recognition of benefits related to resolution oftax audit issues.settlements and prior-year asset sales.

 
1719 
 
AT&T INC.
SEPTEMBER 30, 20122013

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
DollarsDollars in millions except per share amounts
��
Selected Financial and Operating Data         
 September 30, September 30,
 2012  2011 2013  2012 
Wireless subscribers (000)  105,871   100,738 109,460  105,871 
Network access lines in service (000)  33,088   37,956 25,680  30,443 
Total wireline broadband connections (000)  16,392   16,476 16,427  16,392 
Debt ratio1
  38.6%  38.5%46.9% 38.6%
Ratio of earnings to fixed charges2
  5.36   5.41 5.43  5.36 
Number of AT&T employees3
  241,130   256,210 
Number of AT&T employees246,740  241,130 
1
Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and do not consider cash available to pay down debt. See our “Liquidity and Capital Resources” section for discussion.
2See exhibit 12.
See Exhibit 12.
3
Includes the reduction of approximately 8,200 employees as a result of the sale of our Advertising Solutions segment.

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 34 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes. We make our capital allocationsallocation decisions based on ourthe strategic directionneeds of the business, needs of the network (wireless or wireline) providingprovided services, and other assets neededdemands to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirementpostemployment benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have three reportable segments: (1) Wireless, (2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions. On May 8, 2012, we completed the sale of our Advertising Solutions, segment and receivedwhich was previously a 47 percent equity interest in the new entity YP Holdings (see Note 1).reportable segment.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voicedata and advanced datavoice communications services. The WirelessThis segment includes our portion of the results have been reclassified to includefrom our mobile payment joint venture marketed as the operating results of a subsidiary that provides servicesISIS Mobile WalletTM (ISIS), which is accounted for subscribers to wirelessly monitor their homes that was previously reported in the Wireline segment’s results.as an equity method investment.

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

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

The Other segment includes our portion of the results from our international equity investments,investment, our 47 percent equity interest in YP Holdings, and all corporatecosts to support corporate-driven activities and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costcosts and expected return on plan assets for our pension and postretirement benefit plans.

The Other segment results have been reclassified to exclude thefollowing sections discuss our operating results of customer information services, which are now reported in our Wireline segment’s results.
18
AT&T INC.
SEPTEMBER 30, 2012

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

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

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

Wireless                  
Segment Results                  
  Third Quarter Nine-Month Period
  2012 2011 Percent Change 2012 2011 Percent Change
                   
Segment operating revenues                  
Service $14,906  $14,261   4.5% $44,237  $42,379   4.4%
Equipment  1,726   1,345   28.3   4,884   4,140   18.0 
Total Segment Operating Revenues  16,632   15,606   6.6   49,121   46,519   5.6 
Segment operating expenses                        
Operations and support  10,549   9,376   12.5   30,337   29,023   4.5 
Depreciation and amortization  1,730   1,620   6.8   5,092   4,741   7.4 
Total Segment Operating Expenses  12,279   10,996   11.7   35,429   33,764   4.9 
Segment Operating Income  4,353   4,610   (5.6)   13,692   12,755   7.3 
Equity in Net Income (Loss) of Affiliates  (17)   (8)   -   (45)   (19)   - 
Segment Income $4,336  $4,602   (5.8)% $13,647  $12,736   7.2%

 
1920 
 
AT&T INC.
SEPTEMBER 30, 20122013

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

Wireless                  
Segment Results                  
  Third Quarter  Nine-Month Period 
  2013  2012  
Percent
Change
  2013  2012  
Percent
Change
 
 
Segment operating revenues                  
   Data $5,509  $4,686   17.6% $15,990  $13,392   19.4%
   Voice, text and other service  9,951   10,220   (2.6)   29,902   30,845   (3.1) 
   Equipment  2,020   1,726   17.0   5,570   4,884   14.0 
Total Segment Operating Revenues  17,480   16,632   5.1   51,462   49,121   4.8 
Segment operating expenses                        
   Operations and support  10,982   10,432   5.3   31,932   30,000   6.4 
   Depreciation and amortization  1,875   1,730   8.4   5,553   5,092   9.1 
Total Segment Operating Expenses  12,857   12,162   5.7   37,485   35,092   6.8 
Segment Operating Income  4,623   4,470   3.4   13,977   14,029   (0.4) 
Equity in Net Income (Loss) of
   Affiliates
  (18)   (17)   (5.9)   (55)   (45)   (22.2) 
Segment Income $4,605  $4,453   3.4% $13,922  $13,984   (0.4)%
21 
AT&T INC.
SEPTEMBER 30, 2013

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

The following table highlights other key measures of performance for the Wireless segment:       
                   
  Third Quarter Nine-Month Period
  2012 2011 Percent Change 2012 2011 Percent Change
Wireless Subscribers (000)1
           105,871   100,738   5.1%
     Gross Subscriber Additions (000)2
  4,914   5,946   (17.4)%  15,162   17,154   (11.6)
     Net Subscriber Additions (000)2
  678   2,123   (68.1)  2,670   5,202   (48.7)
     Total Churn4
  1.34%  1.28% 6 BP   1.33%  1.36% (3) BP 
                         
Postpaid Subscribers (000)              69,747   68,614   1.7%
     Net Postpaid Subscriber Additions (000)2
  151   319   (52.7)%  658   712   (7.6)
     Postpaid Churn4
  1.08%  1.15% (7) BP   1.05%  1.16% (11) BP 
                         
Prepaid Subscribers (000)              7,545   7,059   6.9%
     Net Prepaid Subscriber Additions (000)2
  77   293   (73.7)%  294   515   (42.9)
                         
Reseller Subscribers (000)              14,573   13,028   11.9%
     Net Reseller Subscriber Additions (000)2
  137   473   (71.0)%  793   1,282   (38.1)
                         
Connected Device Subscribers (000)3
              14,006   12,037   16.4%
     Net Connected Device Subscriber Additions (000)  313   1,038   (69.8)%  925   2,693   (65.7)
1
Represents 100% of AT&T Mobility customers.
2
Excludes merger and acquisition-related additions during the period.
3
Includes data-centric devices such as eReaders, home security and automobile monitoring systems, and fleet management. Tablets are primarily reflected in our prepaid subscriber category, with the remainder in postpaid.
4
Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
The following table highlights other key measures of performance for the Wireless segment:
 
 
   Third Quarter  Nine-Month Period 
         
Percent
        
Percent
 
(Subscribers in 000s)  2013   2012   Change   2013   2012   Change 
Wireless Subscribers1 
           109,460   105,871   3.4 %
 
 Gross Subscriber Additions2 
  5,251   4,914   6.9%  14,978   15,162   (1.2) 
 
 Net Subscriber Additions2 
  989   678   45.9   1,912   2,670   (28.4) 
 
 Total Churn3 
  1.31%  1.34% (3) BP   1.35%  1.33% 2 BP 
                          
Postpaid Smartphone Subscribers              50,637   44,528   13.7 %
Postpaid Data-Centric Device and Other
   Phone Subscribers
              21,395   25,219   (15.2) 
Total Postpaid Subscribers              72,032   69,747   3.3 
 
 Net Postpaid Subscriber Additions2 
  363   151   -   1,210   658   83.9 
 
 Postpaid Churn3 
  1.07%  1.08% (1) BP   1.04%  1.05% (1) BP 
                          
Prepaid Subscribers              7,425   7,545   (1.6) %
 
 Net Prepaid Subscriber Additions2 
  192   77   -   19   294   (93.5) 
                          
Reseller Subscribers              14,089   14,573   (3.3) %
 
 Net Reseller Subscriber Additions2 
  (285)  137   -   (951)  793   - 
                          
Connected Device Subscribers4 
              15,914   14,006   13.6 %
 
 Net Connected Device Subscriber
   Additions
  719   313   -   1,634   925   76.6 
1 Represents 100% of AT&T Mobility wireless subscribers. 
2 Excludes merger and acquisition-related additions during the period. 
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. 
4 Includes data-centric devices such as eReaders, automobile monitoring systems, and fleet management - excludes tablet subscribers, which are primarily reflected in our postpaid subscriber category, with the remainder in prepaid. 

Wireless Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices and a wireless network that has sufficient spectrum and capacity to support these innovations and make them available to more subscribers. To attract and retain subscribers, we offer a broad handset line and a wide variety of service plans.
20
AT&T INC.
SEPTEMBER 30, 2012

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Our handset offerings include at least 16 smartphones (handsets with voice and data capabilities using an advanced operating system to better manage data and Internet access) from nine manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models (e.g., various Android, Apple, Windows and other smartphones) or significant revisions of existing models. We believe a broad offering of a wide variety of smartphones reduces dependence on any single operating system or manufacturer as these products continue to evolve in terms of technology and subscriber appeal. In the first nine months of 2012,2013, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid phone subscriber base, 63.8%74.7% (or 44.550.6 million subscribers) use smartphones, up from 52.6%66.1% (or 36.144.5 million subscribers) a year earlier. As is common in the industry, most of our subscribers’ phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. From time to time, we offer and have offered attractive handsets on an exclusive basis. As these exclusivity arrangements expire, we expect to continue to offer such handsets (based on historical industry practice), and we believe our service plan offerings will help to retain our subscribers by providing incentives not to migrate to a different carrier. We do not expect exclusivity terminations to have a material impact on our Wireless segment income, consolidated operating margin or our cash flows from operations.

22 
AT&T INC.
SEPTEMBER 30, 2013

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

Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. About 89%90% of our postpaid smartphone subscribers are on FamilyTalk® Plans (family plans), Mobile Share plans or business discount plans, (discount plans), which provide for service on multiple devices at discountedreduced rates, and such subscribers tend to have higher retention and lower churn rates. During the first quarter of 2011, we introducedWe offer our Mobile to Any Mobile feature, which enables our newsubscribers on these and existing subscribers withother qualifying messaging plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions. We also offer data plans at different price levels (usage-based data plans) to attract a wide variety of subscribers and to differentiate us from our competitors. Our postpaid subscribers on data plans increased 10.8%12.0% year over year. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with 63.9%72.0% (or 28.5 million subscribers)36.4 million) on these plans as of September 30, 2012,2013, up from 49.8%63.9% (or 18.0 million subscribers)28.5 million) as of September 30, 2011.2012. About 80% of subscribers on usage-based data plans have chosen the higher-priced plans. We recently expanded our Mobile Share data plans to include additional, larger usage levels, and we have introduced a program allowing subscribers to more frequently upgrade handsets using an installment payment plan. Participation in these plans continues to increase. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn. In late August 2012, we launched new Mobile Share data plans (which allow postpaid subscribers to share data at discounted prices among devices covered by their plan), and early sales results have been positive.

As of September 30, 2012, more than 40%2013, about 70% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or Long Term Evolution (LTE)LTE network)., and about 42% of our postpaid smartphone subscribers use an LTE device. Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the Federal Communications Commission (FCC) make new or existing spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.

Also as part of our efforts to improve our network performance and help address the need for additional spectrum capacity, we intend to redeploy spectrum currently used for basic 2G services to support more advanced mobile Internet services on our 3G and 4G networks. We will manage this process consistent with previous network upgrades and will transition customers on a market-by-market basis from our Global System for Mobile Communications (GSM) and Enhanced Data rates for GSM Evolution (EDGE) networks (referred to as 2G networks) to our more advanced 3G and 4G networks. We expect to fully discontinue service on our 2G networks by approximately January 1, 2017. Wireless Metrics
Subscriber Additions As of September 30, 2013, we served 109.5 million wireless subscribers, an increase of 3.4% when compared to the prior year. Gross subscriber additions (gross additions) in the third quarter were 6.9% higher than in the third quarter of 2012, about 10%primarily due to increased smartphone sales and growth in the connected device subscriber base. Gross additions for the first nine months of AT&T’s postpaid subscribers2013 were using 2G-capable handsets. We do not1.2% lower than the comparable period of the prior year, reflecting competition in the wireless industry and market saturation, which we expect this transition to have a material impact on our operating results, but will continue to evaluatelimit the financial impactrate of transitioning customers from 2Ggrowth in the industry’s subscriber base. Higher net subscriber additions (net additions) in the third quarter were primarily due to growth in smartphone sales and the connected device subscriber base. Lower net subscriber additions (net additions) for the first nine months of 2013 were primarily attributable to losses in reseller low-revenue accounts.

The increases in net postpaid additions reflect the migration of prepaid tablet subscribers to our postpaid plans, contributing to an increase in postpaid tablet subscribers of 388,000 in the third quarter and 1,151,000 for the first nine months of 2013. The introduction of LTE-capable GoPhones and new pricing plans contributed to the increase in net prepaid additions when compared to the third quarter of 2012.

Average service revenue per user (ARPU) – Postpaid increased 1.5% in the third quarter and 1.4% for the first nine months of 2013. Postpaid data services ARPU increased 16.6% in the third quarter and 17.4% for the first nine months of 2013, reflecting greater use of smartphones and data-centric devices by our subscribers.

The growth in postpaid data services ARPU was partially offset by a 5.1% decrease in postpaid voice, text and other service ARPU in the third quarter and 5.3% decrease for the first nine months of 2013. Voice, text and other service ARPU declined due to 3G or 4G devices.lower access and airtime charges, triggered in part by postpaid subscribers on our discount plans and lower roaming revenues.

ARPU – Total increased 0.9% in the third quarter and 0.7% for the first nine months of 2013, reflecting growth in data services as more subscribers are using smartphones and tablets and choosing higher-priced usage-based data plans. Data services ARPU increased 14.3% in the third quarter and 15.9% for the first nine months of 2013. Voice, text and other service ARPU declined 5.3% in the third quarter and 5.9% for the first nine months of 2013 primarily due to voice access and usage trends and a shift toward a greater percentage of data-centric devices, as well as lower regulatory fees. We expect continued growth in data services ARPU as more subscribers use smartphones and data-centric devices and continue to choose higher-priced usage-based data plans. As technology and devices evolve, we also expect continued pressure on voice, text and other service ARPU.
 
 
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AT&T INC.
SEPTEMBER 30, 20122013

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Wireless Metrics
Subscriber Additions As of September 30, 2012, we served 105.9 million wireless subscribers, an increase of 5.1%. We continue to see a declining rate of growth in the industry’s subscriber base compared to prior years, as reflected in a 17.4% decrease in gross subscriber additions (gross additions) in the third quarter and an 11.6% decrease for the first nine months of 2012. Lower net subscriber additions (net additions) in the third quarter and in the first nine months were primarily attributable to lower connected device and reseller additions when compared to the prior year, which reflected higher churn rates for customers not using such devices (zero-revenue customers). Lower net prepaid additions in the third quarter reflected a decrease in net prepaid tablet additions, as the introduction of our Mobile Share plans has accelerated a shift from prepaid to postpaid tablet subscribers. Postpaid subscriber additions in the third quarter of 2012 reflected, in part, inventory shortages of the latest iPhone model following its September launch.

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

ARPU – Total declined 1.3% in the third quarter and 2.1% for the first nine months, reflecting growth in connected device, tablet and reseller subscribers. Connected devices and other data-centric devices, such as tablets, have lower-priced data-only plans compared with our postpaid smartphone plans, which have voice and data features. Accordingly, ARPU for these subscribers is typically lower compared to that generated from our smartphone subscribers on postpaid and other plans. Data services ARPU increased 11.7% in the third quarter and 11.6% for the first nine months, reflecting greater smartphone and data-centric device use. We expect continued revenue growth from data services as more subscribers use smartphones and data-centric devices, and as we continue to expand our network. Voice and other service ARPU declined 9.7% in the third quarter and 10.5% for the first nine months due to voice access and usage trends and a shift toward a greater percentage of data-centric devices. We expect continued pressure on voice and other service ARPU.

Churn  The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. PostpaidThe total churn rates wererate was lower in the third quarter with higher net postpaid additions and improvements in net connected device additions. A higher total churn rate for the first nine months of 2013 was primarily associated with the disconnection of reseller low-revenue accounts. The postpaid churn rate was slightly lower in the third quarter and for the first nine months reflecting popularity of our discount plans, and last year’s postpaid churn rates reflected integration efforts connected to a prior merger. The total churn rate was also lower for the first nine months due to these integration efforts. The total churn rate was higher in the third quarter of 2012 due primarily to connected devices and a higher number of zero-revenue customers.2013.

Operating Results
Our Wireless segment operating income margin in the third quarter decreased $257,from 26.9% in 2012 to 26.4% in 2013 and for the first nine months decreased from 28.6% in 2012 to 27.2% in 2013. Wireless segment operating income increased $153, or 5.6%3.4%, in the third quarter and increased $937,decreased $52, or 7.3%0.4%, for the first nine months of 2012. Segment2013. The decreases in operating margin and year-to-date operating income margin in the third quarter decreased from 29.5% in 2011 to 26.2% in 2012 and for the first nine months increased from 27.4% in 2011 to 27.9% in 2012. The third-quarter margin decrease reflected higher smartphone upgradescosts associated with upgrade activity and total devicesubsidies associated with growing smartphone sales, partially offset by continued data revenue growth. The increase in third-quarter operating income reflected continued data growth and higher data revenues generated by our postpaid subscribers. The year-to-date margin increase reflected higher data revenues generated by our postpaid subscribers, fewer smartphone upgrades and total device sales and operating efficiencies.upgrades, partially offset by the costs of higher smartphone sales and upgrade activity.

Service revenues are comprised of local voice and data services, roaming, long-distanceVoice, text and other revenue. Service service revenues increased $645,decreased $269, or 4.5%2.6%, in the third quarter and $1,858,$943, or 4.4%3.1%, for the first nine months of 2012. The increases consisted2013. While we had a 3.4% year-over-year increase in the number of the following:wireless subscribers, these revenues continue to decline due to lower access and airtime charges.
·  Data service revenues increased $1,028, or 18.3%, in the third quarter and $3,060, or 19.0%, for the first nine months. The increases were primarily due to the increased number of subscribers and increased Internet usage by subscribers using smartphones and data-centric devices, such as eReaders, tablets, and mobile navigation devices. Data service revenues accounted for 43.4% of our wireless service revenues for the first nine months, compared to 38.0% last year.
·  Voice and other service revenues decreased $383, or 4.4%, in the third quarter and $1,202, or 4.6%, for the first nine months. While we had a 5.1% year-over-year increase in the number of wireless subscribers, ARPU continues to decline for voice and other non-data wireless services due to voice access and usage trends.
22
AT&T INC.
SEPTEMBER 30, 2012Data

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Equipmentservice revenues increased $381,$823, or 28.3%17.6%, in the third quarter and $744,$2,598, or 18.0%19.4%, for the first nine months of 20122013. The increases were primarily due to athe increased number of subscribers using smartphones and data-centric devices, such as tablets, eReaders, and mobile navigation devices. Data service revenues accounted for 34.8% of our wireless service revenues for the first nine months of 2013, compared to 30.3% last year.

Equipment revenues increased $294, or 17.0%, in the third quarter and $686, or 14.0%, for the first nine months of 2013 due to year-over-year increaseincreases in smartphone sales as a percentage of total device sales to postpaid subscribers. During the first quarter of 2012, we introduced an increase in the handset upgrade fee, which also contributed to the year-over-year increases in equipment revenues this year.subscribers and higher device upgrades.

Operations and support expenses increased $1,173,$550, or 12.5%5.3%, in the third quarter and $1,314,$1,932, or 4.5%6.4%, for the first nine months of 2012.2013. The third-quarter increase wasincreases in the third quarter and for the first nine months were primarily due to the following:
·  Equipment costs increased $496$521 and $1,526 reflecting the overallan increase in handset upgrade activity and total device sales, as well as the sales of the more expensive smartphones, including the September launch of the latest iPhone model.
·  Selling expenses (other than commissions) and administrative expenses increased $326 due primarily to a $73 increase in information technology costs in conjunction with ongoing support systems development, $99 increase in professional fees and taxes, $87 increase in advertising costs, and $46 increase in payroll and benefit costs.smartphones.
·  
Commission expenses increased $293$105 and $316 due primarily to the overall increase in handsethigher upgrade activity and total device sales and a year-over-year increase in smartphone sales as a percentage of total device sales.
·  USF and reseller fees increased $54 primarily due to federal USF rate increases and higher handset insurance costs. A majority of USF fees are recovered and reported as revenues.

The increase for the first nine months of 2012 was primarily due to the following:
·  Commission expenses increased $467 due to a year-over-year increase in smartphone sales as a percentage of total device sales, partially offset by the overall decline in handset upgrade activity and total device sales.
·  Selling expenses (other than commissions) and administrative expenses increased $446$36 and $377 due primarily to a $149 increaseincreases of: $35 and $197 in employee-related costs; $138 in advertising costs for the first nine months of 2013; and $40 and $148 in information technology costs in conjunction with ongoing support systems development, $117 increase in professional fees and taxes, $96 increase in payroll and benefit costs, and $93 increase indevelopment. Partially offsetting these increases were bad debt expense due to higher write-offs,declines of $36 and partially offset by a $73 decline in advertising costs.$138.
·  Network system interconnect, and long-distance costs increased $214$32 and $187 due to higher network traffic, personnel-related network support costs and cell site related costs in conjunction with our network enhancement efforts, and higher leasing costs.
·  USF and reseller fees increased $212 primarily due to federal USF rate increases and higher handset insurance costs. A majority of USF fees are recovered and reported as revenues.
·  Equipment costs increased $73 reflecting sales of the more expensive smartphones, partially offset by the overall decline in upgrade activity and total device sales.efforts.

Partially offsetting these increases incollect roaming fees decreased $101 forwere the first nine months due to rate declines and lower roaming use associated with the integration of previously acquired subscribers into our network.following:
·  Interconnect and long-distance costs decreased $114 and $326 due to third-party credits and lower usage costs in the current period.
·  USF fees decreased $4 and $102 primarily due to federal rate decreases, which are offset by lower USF revenues.

Depreciation and amortization expenses increased $110,$145, or 6.8%8.4%, in the third quarter and $351,$461, or 7.4%9.1%, for the first nine months of 2012.2013. Depreciation expense increased $184,$213, or 12.9%13.2%, in the third quarter and $582,$670, or 14.1%14.3%, for the first nine months primarily due to ongoing capital spending for network upgrades and expansion and the reclassification of shared information technology costs partially offset by certain network assets becoming fully depreciated. We expect substantially all of our GSM and EDGE network assets to be fully depreciated by end-of-year 2016.

expansion. Amortization expense decreased $74,$68, or 39.2%59.1%, in the third quarter and $231,$209, or 36.8%52.8%, for the first nine months primarily due to an accelerated methodlower amortization of amortizationintangibles for customer lists related to acquisitions.
 
 
2324 
 
AT&T INC.
SEPTEMBER 30, 20122013

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Wireline                  
Segment Results                  
  Third Quarter  Nine-Month Period 
  2013  2012  
Percent
Change
  2013  2012  
Percent
Change
 
 
Segment operating revenues                  
   Data $8,457  $7,987   5.9% $25,019  $23,722   5.5%
   Voice  5,023   5,563   (9.7)  15,470   17,151   (9.8)
   Other  1,190   1,264   (5.9)  3,609   3,777   (4.4)
Total Segment Operating Revenues  14,670   14,814   (1.0)  44,098   44,650   (1.2)
Segment operating expenses                        
   Operations and support  10,385   10,246   1.4   31,137   30,849   0.9 
   Depreciation and amortization  2,736   2,774   (1.4)  8,146   8,348   (2.4)
Total Segment Operating Expenses  13,121   13,020   0.8   39,283   39,197   0.2 
Segment Operating Income  1,549   1,794   (13.7)  4,815   5,453   (11.7)
Equity in Net Income (Loss) of
   Affiliates
  -   -   -   1   (1)   - 
Segment Income $1,549  $1,794   (13.7) % $4,816  $5,452   (11.7) %
Wireline                  
Segment Results                  
    Third Quarter   Nine-Month Period
  2012 2011 Percent Change 2012 2011 Percent Change
                   
Segment operating revenues                  
   Data $7,977  $7,459   6.9% $23,695  $21,979   7.8%
   Voice  5,565   6,242   (10.8)  17,155   19,132   (10.3)
   Other  1,271   1,354   (6.1)  3,795   4,025   (5.7)
Total Segment Operating Revenues  14,813   15,055   (1.6)  44,645   45,136   (1.1)
Segment operating expenses                        
   Operations and support  10,134   10,295   (1.6)  30,516   30,752   (0.8)
   Depreciation and amortization  2,774   2,892   (4.1)  8,348   8,726   (4.3)
Total Segment Operating Expenses  12,908   13,187   (2.1)  38,864   39,478   (1.6)
Segment Operating Income  1,905   1,868   2.0   5,781   5,658   2.2 
Equity in Net Income (Loss) of Affiliates  -   -   -   (1)   -   - 
Segment Income $1,905  $1,868   2.0% $5,780  $5,658   2.2%


Operating Income and Margin Trends
Results
Our Wireline segment operating income increased $37,margin in the third quarter decreased from 12.1% in 2012 to 10.6% in 2013, and for the first nine months decreased from 12.2% in 2012 to 10.9% in 2013. Segment operating income decreased $245, or 2.0%13.7%, in the third quarter and $123,$638, or 2.2%11.7%, for the first nine months of 2012. Segment operating income margin2013. The decrease in the third quarter increased from 12.4% in 2011 to 12.9% in 2012, and for the first nine months increased from 12.5% in 2011 to 12.9% in 2012. Our increased operating margins reflect increasedand income was driven primarily by lower voice revenue and higher operations and support expense, partially offset by data revenue growth and lower operating expenses which include depreciation and amortization. Our operating income and margins continued to be pressured as our consumer and business customers either reduced usage or disconnected traditional landlines and switched to alternative technologies, such as wireless and VoIP. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video, and U-verse voice. Additionally, we have the opportunity to increase Wireless segment revenues if customers choose AT&T Mobility as an alternative provider.amortization expenses.

Operating Results
Data revenues increased $518,$470, or 6.9%5.9%, in the third quarter and $1,716,$1,297, or 7.8%5.5%, for the first nine months of 2012.2013. Data revenues accounted for approximately 53%57% of wireline operating revenues for the first nine months of 20122013 and 49%53% for the first nine months of 2011.2012. Data revenues include transport,revenue includes IP, strategic business and packet-switchedtraditional data services.
·  Strategic business services, which include Ethernet, Virtual Private Networks (VPN), Hosting, IP Conferencing and application services, increased $164, or 11.5%, in the third quarter and $598, or 14.5%, for the first nine months of 2012. These increases were driven by increased VPN revenues, which contributed additional revenues of $85 and $351 and Ethernet revenues, which increased by $75 and $216 in the third quarter and for the first nine months.
·  IP data revenues (excluding strategic services)business services below) increased $512,$428, or 14.9%11.5%, in the third quarter and $1,502,$1,237, or 15.1%11.4%, for the first nine months of 20122013 primarily driven by higher U-verse penetration.penetration, customer additions, and migration from our legacy voice and DSL services. In the third quarter and for the first nine months U-verse video revenuesrevenue from consumer customers increased $263$318 and $794, broadband high-speed$957 for high speed Internet access, $244 and $736 for video and $76 and $198 for voice, respectively. These increases were partially offset by a decrease of $191 and $557 in DSL revenue increased $161 and $433 and U-verse voice revenue increased $63 and $182, respectively. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based services. New and existing U-verseas customers are shifting from traditional landlinescontinue to shift to our U-verse Voice and from DSL to our premium High Speedor competitors’ high speed Internet access offerings. We expect DSL revenue to continue to decline as a percentage of our overall data revenues.
·  Strategic business services, which include VPNs, Ethernet, hosting, IP conferencing, VoIP, Ethernet-access to Managed Internet Service (EaMIS), security services, and U-verse services provided to business customers, increased $293, or 15.7%, in the third quarter and $772, or 14.1%, for the first nine months of 2013 primarily driven by migration from our legacy services. In the third quarter and for the first nine months revenue from Ethernet increased $76 and $215, VPN increased by $116 and $251, U-verse services increased $32 and $103, VoIP increased $27 and $78 and EaMIS increased $22 and $78, respectively.
·  Traditional data revenues, which include transport (excluding Ethernet)circuit-based and packet-switched data services, decreased $158,$251, or 6.1%10.5%, in the third quarter and $384,$719, or 4.9%9.7%, for the first nine months of 2012.2013. This decrease was primarily due to lower demand as customers continue to shift to more advanced IP-based technology such as Ethernet, VPN, U-verse High Speed Internet access and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.

 
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SEPTEMBER 30, 20122013

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

Voice revenues decreased $677,$540, or 10.8%9.7%, in the third quarter and $1,977,$1,681, or 10.3%9.8%, for the first nine months of 20122013 primarily due to declining demand for traditional voice services by our consumer and business customers. Included in voice revenues are revenues from local voice, long-distance (including international) and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.
·  Local voice revenues decreased $388,$341, or 10.2%9.9%, in the third quarter and $1,183,$1,051, or 10.1%9.9%, for the first nine months of 2012.2013. The decrease was driven primarily by a 12.8%15.6% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by increased competition from alternative technologies, primarily wireless and the disconnection of additional lines.VoIP.
·  Long-distance revenues decreased $285,$192, or 13.2%10.3%, in the third quarter and $779,$617, or 11.9%10.7%, for the first nine months of 2012.2013. Lower demand for long-distance service from global businessesour business and consumer customers decreased revenues $242$158 in the third quarter and $650$514 for the first nine months of 2012.2013. Additionally, continuingexpected declines in the number of our national mass-market customers decreased revenues $43$33 in the third quarter and $129$103 for the first nine months of 2012.2013.

Other operating revenues decreased $83,$74, or 6.1%5.9%, in the third quarter and $230,$168, or 5.7%4.4%, for the first nine months of 2012.2013. Major items included in other operating revenues are integration services and customer premises equipment, government-related services and outsourcing, which account for approximately 60% of total other revenue for both periods.the periods reported.

Operations and support expenses decreased $161,increased $139, or 1.6%1.4%, in the third quarter and $236,$288, or 0.8%0.9%, for the first nine months of 2012.2013. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

The decreaseincrease in the third quarter of 2013 was primarily due to increased cost of sales of $167, primarily related to U-verse related expenses, contract services of $56, and materials and supplies expense of $32. These increases were partially offset by lower employee related expenses of $138.

The increase for the first nine months of 20122013 was primarily due to lower nonemployee related expenses of $36 and $270, employee related expenses of $128 and $236, reflecting ongoing workforce reduction initiatives, traffic compensation expenses of $121 and $229, and contract services of $27 and $100, respectively. These decreases were partially offset by increased cost of sales of $127 and $389,$533, primarily related to U-verse related expenses, contract services of $166, and advertising expense of $131. These increases were partially offset by lower employee related expenses of $382 and USF fees of $39 and $237, respectively.$122, which are offset by lower USF revenue.

Depreciation and amortization expenses decreased $118,$38, or 4.1%1.4%, in the third quarter and $378,$202, or 4.3%2.4%, for the first nine months of 2012.2013. The decrease was primarily related to lower amortization of intangibles for the customer lists associated with acquisitions and lower depreciation as assets become fully depreciated.

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SEPTEMBER 30, 20122013

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

Supplemental Information

Telephone, Wireline Broadband, Telephone and Video Connections Summary
Our broadband, switched access lines and other services provided by our local exchange telephone subsidiaries at September 30, 20122013 and 20112012 are shown below.below and trends are addressed throughout the preceding segment discussion.

  September 30,  September 30,  Percent
(in 000s) 2012  2011  Change
Switched Access Lines         
Retail Consumer  16,489   19,799   (16.7)%
Retail Business1 
  14,619   15,989   (8.6)
Retail Subtotal1 
  31,108   35,788   (13.1)
             
Wholesale Subtotal1 
  1,930   2,118   (8.9)
             
Total Switched Access Lines2 
  33,088   37,956   (12.8)%
             
Total Retail Consumer Voice Connections3 
  19,222   21,941   (12.4)%
             
Total Wireline Broadband Connections4,5
  16,392   16,476   (0.5)%
             
Satellite service6 
  1,633   1,809   (9.7)%
U-verse video  4,344   3,583   21.2 
Video Connections  5,977   5,392   10.8%
  September 30,  September 30,  Percent 
(in 000s) 2013  2012  Change 
U-verse High Speed Internet  9,745   7,108   37.1%
DSL and Other Broadband Connections  6,682   9,284   (28.0)
Total Wireline Broadband Connections1 
  16,427   16,392   0.2 
             
Total U-verse Video Connections  5,266   4,344   21.2 
             
Retail Consumer Switched Access Lines  13,133   16,486   (20.3)
U-verse Consumer VoIP Connections  3,616   2,733   32.3 
Total Retail Consumer Voice Connections  16,749   19,219   (12.9)
             
Switched Access Lines            
Retail Consumer  13,133   16,486   (20.3)
Retail Business  10,633   11,784   (9.8)
Retail Subtotal  23,766   28,270   (15.9)
             
Wholesale Subtotal  1,654   1,848   (10.5)
             
Total Switched Access Lines2 
  25,680   30,443   (15.6) %
1
Prior-period amounts restated to conform to current-period reporting methodology.
2
Total switched access lines includes payphone access lines of 50 at September 30, 2012 and 50 at September 30, 2011.
3
Includes consumer U-verse VoIP connections of 2,733 at September 30, 2012 and 2,142 at September 30, 2011.
4
Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband.
5
2		Includes U-verse High Speed Internet connectionsTotal switched access lines includes access lines provided to national mass markets and private payphone service providers of 7,107260 at September 30, 20122013 and 4,636325 at September 30, 2011.2012.
6
Satellite service includes connections under our agency and resale agreements.

Advertising Solutions                  
Segment Results                  
 Third Quarter Nine-Month Period 
 2013 2012  
Percent
Change
 2013 2012  
Percent
Change
 
Total Segment Operating Revenues $-  $-   -  $-  $1,049   - 
Segment operating expenses                        
   Operations and support  -   -   -   -   773   - 
   Depreciation and amortization  -   -   -   -   106   - 
Total Segment Operating Expenses  -   -   -   -   879   - 
Segment Income $-  $-   -  $-  $170   - 
Advertising Solutions                  
Segment Results                  
  Third Quarter Nine-Month Period
  2012  2011  Percent Change 2012  2011  Percent Change
Total Segment Operating Revenues $-  $803   -  $1,049  $2,512   (58.2)%
Segment operating expenses                        
   Operations and support  -   554   -   773   1,707   (54.7)
   Depreciation and amortization  -   94   -   106   301   (64.8)
Total Segment Operating Expenses  -   648   -   879   2,008   (56.2)
Segment Income $-  $155   -  $170  $504   (66.3)%

Operating Results
On May 8, 2012, we completed the sale of our Advertising Solutions segment to an affiliate of Cerberus Capital Management, L.P. Following the sale, we are no longer recording operating results for this segment. Our Advertising Solutions segment operating income margin for the first nine months decreased from 20.1% in 2011 to 16.2% in 2012. Operating revenues decreased $1,463, or 58.2%, and operating expenses decreased $1,129, or 56.2%, for the first nine months of 2012.

 
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SEPTEMBER 30, 20122013

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Other                  
Segment Results                  
 Third Quarter Nine-Month Period 
 2013 2012  Percent Change 2013 2012  Percent Change 
 
Total Segment Operating Revenues $8  $13   (38.5)% $29  $36   (19.4)%
Total Segment Operating Expenses  (8)   240   -   580   733   (20.9) 
Segment Operating Income (Loss)  16   (227)   -   (551)   (697)   20.9 
Equity in Net Income of Affiliates  109   199   (45.2)   548   583   (6.0) 
Segment Income (Loss) $125  $(28)   -  $(3)  $(114)   97.4%
Other                  
Segment Results                  
  Third Quarter    
Nine-Month Period
   2012   2011   Percent Change  2012   2011   Percent Change
Total Segment Operating Revenues $14  $14   -  % $41  $53   (22.6)%
Total Segment Operating Expenses  235   412   (43.0)  729   762   (4.3)
Segment Operating Loss  (221)   (398)   44.5   (688)   (709)   3.0 
Equity in Net Income of Affiliates  199   201   (1.0)  583   668   (12.7)
Segment Income (Loss) $(22)  $(197)   88.8% $(105)  $(41)   - 


The Other segment includes our portion of the results from América Móvil, our international equity investments, our 47 percent equity interest in YP Holdings, and all corporatecosts to support corporate-driven activities and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including the interest costcosts and expected return on plan assets for our pension and postretirement benefit plan assets.plans.

Segment operating revenues were flatdecreased $5, or 38.5%, in the third quarter and decreased $12,$7, or 22.6%19.4%, for the first nine months of 2012 primarily due to reduced2013. Operating revenues are from leased equipment programs.

Segment operating expenses decreased $177, or 43.0%,$248 in the third quarter and $33,$153, or 4.3%20.9%, for the first nine months of 2012. The decrease was primarily2013. Operating expenses in the third quarter and for the first nine months of 2013 include gains of $293 associated with the transfers of Advanced Wireless Service (AWS) licenses as part of our 700 MHz spectrum acquisitions. Lower operating expenses were also due to T-Mobile related expenses in 2011,lower Pension/OPEB financing costs, which were partially offset by higher employee related charges.

Our Other segment also includes our equity investments in América Móvilnew product development expenses and YP Holdings, the income from which we report as equity in net income of affiliates. Our earnings from foreign affiliates are sensitive to exchange-rate changes in the value of the respective local currencies.higher corporate support and capital leasing operations costs.

Equity in net income of affiliates decreased $2,$90, or 1.0%45.2%, in the third quarter and $85,$35, or 12.7%6.0%, for the first nine months of 2012.2013. Decreased equity in net income of affiliates in the third quarter was primarily due to reduced earnings from América Móvil and YP Holdings. The decrease for the first nine months was primarily due to decreased earnings byforeign exchange impacts at América Móvil, during 2012, resulting from foreign exchange losses and increased taxes. Decreases were partially offset by earnings from YP Holdings.

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

  Third Quarter Nine-Month Period
  2012  2011  2012  2011 
América Móvil$126 $176 $490 $594
YP Holdings 75  -  94  -
Telmex1 
 -  26  -  75
Other (2)  (1)  (1)  (1)
Other Segment Equity in Net Income of Affiliates$199 $201 $583 $668
1
Acquired by América Móvil in late 2011.
  Third Quarter Nine-Month Period
  2013  2012  2013  2012 
América Móvil$85  $126  $410  $490 
YP Holdings 23   75   138   94 
Other 1   (2)   -   (1)
Other Segment Equity in Net Income of Affiliates$109  $199  $548  $583 
 
 
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AT&T INC.
SEPTEMBER 30, 20122013

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

OTHER BUSINESS MATTERS

U-verse Services  We had approximately 4.3 million U-verse TV subscribers asAs of September 30, 2012.2013, we are marketing U-verse penetrationservices to approximately 26.0 million customer locations (locations eligible to receive U-verse service). As of eligible living units atSeptember 30, 2013, we had 10.0 million total U-verse subscribers (high-speed Internet and video), including 9.7 million Internet and 5.3 million video subscribers (subscribers to both services are only counted once in the endtotal). As part of the third quarterProject Velocity IP (VIP), we plan to expand our U-verse services to a total of 2012 was approximately 18.0%.33 million customer locations and expect to be essentially complete by year-end 2015.

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

Retiree Phone Concession LitigationAtlantic Tele-Network, Inc. Transaction  In May 2005,September 2013, we were served with a purported class actionacquired Atlantic Tele-Network, Inc.’s U.S. retail wireless operations, operated under the Alltel brand, for $806 in U.S. District Court, Western District of Texas (Stoffels v. SBC Communications Inc.), incash, which includes closing adjustments. Under the plaintiffs, who are retirees of Pacific Bell Telephone Company, Southwestern Bell and Ameritech, contend that the cash reimbursement formerly paid to retirees living outside their company’s local service area, for telephone service they purchased from another provider, is a “defined benefit plan” within the meaningterms of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In January 2011, the trial court entered a final judgment in our favor. Plaintiffs appealed the judgment to the Fifth Circuit Court of Appealsagreement, we acquired wireless properties, including licenses, network assets, retail stores and in April 2012, the Fifth Circuit affirmed the lower court’s judgment in our favor dismissing the case. In July 2012, Plaintiffs filed a petition for a writ of certiorari in the U.S. Supreme Court, which was denied on October 1, 2012, thereby ending the litigation.approximately 550,000 subscribers.

NSA LitigationSpectrum Acquisitions  Twenty-four lawsuits were filed alleging thatIn September 2013, we acquired spectrum in the 700 MHz B band from Verizon Wireless for $1,900 in cash and other telecommunications carriers unlawfully provided assistancean assignment of AWS spectrum licenses in five markets. The 700 MHz licenses acquired by AT&T cover 42 million people in 18 states.

Leap Acquisition  In July 2013, we announced an agreement to acquire Leap Wireless International, Inc. (Leap), a provider of prepaid wireless service, for fifteen dollars per outstanding share of Leap’s common stock, or approximately $1,260, plus one non-transferable contingent value right (CVR) per share. The CVR will entitle each Leap stockholder to a pro rata share of the National Security Agencynet proceeds of the future sale of the Chicago 700 MHz A-band FCC license held by Leap. As of June 30, 2013, Leap had approximately $2,700 of debt, net of cash. Under the terms of the agreement, we will acquire all of Leap’s stock and, thereby, acquire all of its wireless properties, including spectrum licenses, network assets, retail stores and approximately 5 million subscribers. Leap’s spectrum licenses include Personal Communications Services (PCS) and AWS bands and are largely complementary to our licenses. Leap’s network covers approximately 96 million people in connection with intelligence activities that were initiated following35 states and consists of a 3G CDMA network and an LTE network covering approximately 21 million people.

The agreement was approved by more than 99 percent of votes cast by Leap’s stockholders on October 30, 2013. The transaction is subject to review by the eventsFCC and Department of September 11, 2001. InJustice (DOJ). The review process is underway at both agencies. The transaction is expected to close in the first filed case, Hepting et al v.quarter of 2014. The agreement provides both parties with certain termination rights if the transaction does not close by July 11, 2014, which can be extended until January 11, 2015 if certain conditions have not been met by that date. Under certain circumstances, Leap may be required to pay a termination fee or AT&T Corp.,may be required to provide Leap with a three-year roaming agreement for LTE data coverage in certain Leap markets lacking LTE coverage, if the transaction does not close. If Leap enters into the roaming agreement, AT&T Inc. and Does 1-20, a purported class action filed in U.S. District Court inwill then have the Northern District of California, plaintiffs alleged thatoption within 30 days after entry into the defendants disclosed and are currently disclosingroaming agreement to the U.S. Government content and call records concerning communicationspurchase certain specified Leap spectrum assets. If AT&T does not exercise its right to which Plaintiffs were a party. Plaintiffs sought damages, a declaratory judgment and injunctive relief for violations of the First and Fourth Amendments to the U.S. Constitution, the Foreign Intelligence Surveillance Act (FISA), the Electronic Communications Privacy Act and other federal and California statutes. We filed a motion to dismiss the complaint. The United States asserted the “state secrets privilege” and related statutory privileges and also filed a motion asking the court to dismiss the complaint. The court denied the motions, and we and the United States appealed. In August 2008, the U.S. Court of Appeals for the Ninth Circuit remanded the case to the district court without deciding the issue in light of the passage of the FISA Amendments Act, a provision of which addresses the allegations in these pending lawsuits (immunity provision). The immunity provision requires the pending lawsuits to be dismissed if the Attorney General certifies to the court either that the alleged assistance was undertaken by court order, certification, directive or written request or that the telecom entity did not provide the alleged assistance. In September 2008, the Attorney General filed his certification and asked the district court to dismisspurchase all of the lawsuits pending against thespecified Leap spectrum assets, Leap can then within 60 days after expiration of AT&T’s option require AT&T Inc. telecommunications companies. The court granted the Government's motion to dismiss and entered final judgments in July 2009. In addition, a lawsuit seeking to enjoin the immunity provision’s application on grounds that it is unconstitutional was filed. In March 2009, we and the Government filed motions to dismiss this lawsuit. The court granted the motion to dismiss and entered final judgment in July 2009. All cases brought against the AT&T entities have been dismissed. In August 2009, plaintiffs inpurchase all cases filed an appeal with the Ninth Circuit Court of Appeals. In December 2011, the Ninth Circuit Court of Appeals affirmed the dismissals in all cases. In March 2012, the Plaintiffs in all but three cases filed a petition for writ of certiorari with the United States Supreme Court. The plaintiffs in two of the three cases filed petitions for rehearing with the Ninth Circuit Court of Appeals, both of which have been denied. The plaintiffs in the third case did not file a petition in either court. On October 9, 2012, the U.S. Supreme Court denied the remaining plaintiffs’ petition, thereby ending the litigation.

specified spectrum assets.
 
 
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AT&T INC.
SEPTEMBER 30, 20122013

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

Universal Service Fees LitigationTower Transaction  In October 2010, our wireless subsidiary was served with a purported class action in Circuit Court, Cole County, Missouri (MBA Surety Agency, Inc. v. AT&T Mobility, LLC), in which the plaintiffs contend that we violated the FCC’s rules by collecting Universal Service Fees on certain services not subject to such fees, including Internet access service provided over wireless handsets commonly called “smartphones” and wireless data cards, as well as collecting certain other state and local fees. Plaintiffs define the class as all persons who from April 1, 2003, until the present had a contractual relationship with us for Internet access through a smartphone or a wireless data card. Plaintiffs seek an unspecified amount of damages as well as injunctive relief. On October 25, 2012, the Circuit Court in St. Louis, Missouri, to which the case had been transferred, granted preliminary approval to a settlement in which we receive a complete release of claims from members of the settlement class. Under the settlement, our liability to the class and its counsel is capped at approximately $150, the amount that was collected from customers but not owed or remitted to the government. The Court has scheduled a final fairness hearing in February20, 2013, at which time the Court will consider, among other things, whether the settlement should be finally approved as fair, reasonable and adequate.

Wage and Hour Litigation  Two wage and hour cases were filed in federal court in December 2009 each asserting claims under the Fair Labor Standards Act (Luque et al. v. AT&T Corp. et al., U.S. District Court in the Northern District of California) (Lawson et al. v. BellSouth Telecommunications, Inc., U.S. District Court in the Northern District of Georgia). Luque also alleges violations of a California wage and hour law, which varies from the federal law. In each case, plaintiffs allege that certain groups of wireline supervisory managers were entitled to paid overtime and seek class action status as well as damages, attorneys’ fees and/or penalties. Plaintiffs have been granted conditional collective action status for their federal claims and also are expected to seek class action status for their state law claims. We have contested the collective and class action treatment of the claims, the merits of the claims and the method of calculating damages for the claims. A jury verdict was entered in favor of the Company in October 2011 in the U.S. District Court in Connecticut on similar FLSA claims. In April 2012, we settled these cases, subject to court approval, on terms that will not have a material effect on the Company’s financial statements. On October 12, 2012, the court granted preliminary approval of the settlement in Luque.

Advertising Solutions and Interactive Business Sale  In May 2012, we completed the sale of our Advertising Solutions segment to an affiliate of Cerberus Capital Management, L.P. We received approximately $740 in cash after closing price adjustments, a $200 note and a 47% equity interest in the new entity YP Holdings. This transaction did not have a material effect on our financial statements.

NextWave Acquisition  On August 2, 2012, we announced an agreement with Crown Castle International Corp. (Crown Castle) in which Crown Castle will have the exclusive rights to acquire NextWave Wireless Inc. (NextWave), which holds wireless licenses in the Wireless Communication Services (WCS)lease and Advanced Wireless Service (AWS) bands. We will acquire all the equityoperate approximately 9,100 and purchase a portionapproximately 600 of our wireless towers for $4,850. Under the terms of the debtleases, Crown Castle will have exclusive rights to lease and operate the towers over an average term of NextWaveapproximately 28 years. As the leases expire, Crown Castle will have fixed price purchase options for $600. In addition certain of NextWave's assets will be paid to its holders of debt in redemption of the remainder of its debt. NextWave's shareholders voted to approve the mergerthese towers totaling approximately $4,200, based on October 2, 2012, and the holders of NextWave’s debt have agreed to support our acquisition. This acquisition is subject to regulatory approval and other customary closing conditions. We anticipate closing this transaction bytheir estimated fair market values at the end of 2012.the lease terms. We will sublease capacity on the towers from Crown Castle for a minimum of 10 years at current market rates, with options to renew. We plan to account for the proceeds as a financing obligation and expect this transaction to close by year-end 2013, subject to standard closing conditions.

WCS Spectrum  WCS spectrum has not been suitable for mobile Internet usage due to technical rules designed to avoid possible interference to satellite radio users in adjacent spectrum bands. In June 2012, AT&T and Sirius XM filed a joint proposal with the FCC that would protect the adjacent satellite radio spectrum from interference and enable WCS spectrum to be used for mobile Internet service. On October 17, 2012, the FCC approved our joint proposal thereby allowing us to add needed spectrum for mobile broadband service. We expect to begin to deploy this spectrum within approximately three years of approval by the FCC for WCS spectrum currently held by the Company and within a similar period of closing for pending WCS spectrum acquisitions.

Labor Contracts  Contracts covering approximately 40,000 collectively-bargained wireline employees expired in early April 2012 (covering AT&T’s Midwest, West and East regions as well as AT&T Corp.). An additional contract covering approximately 22,000 wireline employees in the AT&T Southeast region expired on August 4, 2012. The Company and the employees’ union continue to negotiate new contracts in the Southeast, West and East regions and have reached certain agreements, as updated below. In the absence of an effective contract, the union is entitled to call a work stoppage.

In August 2012, members of the Communications Workers of America (CWA) ratified three-year agreements covering approximately 13,000 and 5,700 wireline employees in the AT&T Midwest region and AT&T Corp., respectively, which expired in April. Additionally, we have extended a contract with the International Brotherhood of Electrical Workers covering nearly 7,000 employees in primarily the Midwest region by one year until June 2013, bringing the total employees under new contracts to approximately 25,000. In addition, in early October a new four-year national agreement covering healthcare benefits for more than 40,000 Mobility employees represented by the CWA was ratified. The agreement provides modest increases to employee costs over the four-year term.

29
AT&T INC.
SEPTEMBER 30, 2012

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

COMPETITIVE AND REGULATORY ENVIRONMENT

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

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

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

We provide wireless services in robustly competitive markets, but those services are subject to substantial and increasing governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015, and also authorized the FCC to conduct an “incentive auction,” to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees. The FCC has initiated a proceedingproceedings to establish rules that would govern this process. It also initiated a separate proceeding to review its policies governing mobile spectrum holdings and consider whether there should be limits on the amount of spectrum a wireless service provider may possess. We seek to ensure that we have the opportunity, through the incentive auction and otherwise, to obtain the spectrum we need to provide our customers with high-quality service. While wireless communications providers’ prices and service offerings are generally not subject to state regulation, states sometimes continue to attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.

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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 amounts

Intercarrier Compensation/Universal Service  In October 2011, the FCC adopted an order fundamentally overhauling its high-cost universal service program, through which it disburses approximately $4,500 per year to carriers providing telephone service in high-cost areas, and its existing intercarrier compensation (ICC) rules, which govern payments between carriers for the exchange of traffic. The order adoptsadopted rules to immediately address immediately certain practices that artificially increase ICC payments, as well as other practices to avoid such payments. The order also establishesestablished a new ICC regime that will result in the elimination of virtually all terminating switched access charges and reciprocal compensation payments over a six-year transition. In the order, the FCC also repurposed its high-cost universal service program to encourage providers to deploy broadband facilities in unserved areas. To accomplish this goal, the FCC will transition support amounts disbursed through its existing high-cost program to its new Connect America Fund, which eventually will award targeted high-cost support amounts to providers through a competitive process. We support many aspects of the order and new rules. AT&T and other parties have filed appeals of the FCC’s rules, which are pending in the Tenth Circuit Court of Appeals. Our appeal challenges only certain, narrow aspects of the order; AT&T intervened in support of the broad framework adopted by the order. Oral argument on the appeal will take place November 19, 2013. We do not expect the FCC’s rules to have a material impact on our operating results.

Transition to IP-Based Network  In November 2012, we announced plans to significantly expand and enhance our wireless and wireline broadband networks to support future IP data growth and new services (referred to as Project VIP). In conjunction with Project VIP, we filed a petition with the FCC asking it to open a proceeding to facilitate the “telephone” industry’s transition from traditional transmission platforms and services to all IP-based networks and services. Our petition asks the FCC to conduct trial runs of the transition to next-generation services, including the upgrading of traditional telephone facilities and offerings and their replacement with IP-based alternatives. The objective of the trials is to inform policymakers and other stakeholders regarding the technological and policy dimensions of the IP transition and, in the process, identify the regulatory reforms needed to promote consumer interests and preserve private incentives to upgrade America’s broadband infrastructure. In May 2013, the FCC’s Technology Transition Task Force sought comment on potential trials to obtain data to assist the FCC in managing the transition to next-generation networks. We expect to transition wireline customers to an all IP-based network by 2020.

 
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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 amounts

LIQUIDITY AND CAPITAL RESOURCES

We had $2,217$1,371 in cash and cash equivalents available at September 30, 2012.2013. Cash and cash equivalents included cash of $374$490 and money market funds and other cash equivalents of $1,843.$881. In the first nine months of 2012,2013, cash outflows were primarily used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, and repaymentthe acquisition of debt. In addition, we returnedwireless spectrum. Cash flows were also used to return value to stockholders through dividends and by repurchasing shares of common stock. These outflows were partially offset by cash received from operations and the issuance of long-term debt.stock repurchases. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities
During the first nine months of 2012,2013, cash provided by operating activities was $28,944,$26,879, compared to $27,150$28,656 for the first nine months of 2011.2012. Lower operating cash flows reflected increased income tax payments of approximately $1,183 in 2013.    

Cash Used in or Provided by Investing Activities
For the first nine months of 2012,2013, cash used in investing activities totaled $13,251,$18,660, which consisted primarily of $13,619$15,565 for capital expenditures (excluding interest during construction), and wireless spectrum and operations acquisitions of $551, which included wireless spectrum of $465.$3,984. These expenditures were partially offset by cash receipts of approximately $740 received$771 from the sale of a portion of our Advertising Solutions segment.shares in América Móvil, $200 from the repayment of advances to YP Holdings and $101 from the return of investment in YP Holdings.

Virtually all of our capital expenditures are spent on our wireless and wireline subsidiaries’ networks, our U-verse services, and support systems for our communications services. Capital spending in our Wireless segment of $7,240, excluding capitalized interest during construction,$8,231 represented 53% of our total spending and increased 6%14% in the first nine months. Wireless expenditures were primarily used for network capacity expansion, integration and upgrades to our HSPA+ network and the deployment of LTE (4G) equipment forupgrades and our commercial launch.High-Speed Downlink Packet Access network. The Wireline segment, which includes U-verse services, represented 47% of total capital expenditures excluding interest during construction, and decreased 18%increased 15% in the first nine months.months, primarily reflecting our implementation of Project VIP.

We continue to expect that our capital expenditures during 20122013 to comebe in at the low-end of$21,000 range and expect capital expenditures for 2014 and 2015 to each be in the $19,000 to $20,000 range while still meeting network build targets, assuming that the regulatory environment remains favorable for investment. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory considerations.range.

Cash Used in or Provided by Financing Activities
For the first nine months of 2012,2013, our financing activities included proceeds of $6,935$6,416 from the following long term debt issuances:
·  $1,000February 2013 issuance of 0.875%$1,000 of 0.900% global notes due 2015, $1,0002016 and $1,250 of 1.6% globalfloating rate notes due 2017, and $1,000 of 3% global notes due 2022 issued in February 2012.2016. The floating rate for the note is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 38.5 basis points.
·  £1,250March 2013 issuance of 4.875%$500 of 1.400% global notes due 2044 issued in May 20122017.
·  March 2013 issuance of €1,250 of 2.500% global notes due 2023 (equivalent to $1,979$1,626 when issued) and €400 of 3.550% global notes due 2032 (equivalent to $520 when issued).
·  $1,150May 2013 issuance of 1.7%£1,000 of 4.250% global notes due 2017 and $850 of 3% global notes due 2022 issued in June 2012.

During the first nine months of 2012, debt redemptions totaled $8,021 with a weighted average interest rate of 5.58% and consisted of the following:
·  $1,200 of 6.375% senior notes due 2056 redeemed in February 2012.
·  $1,000 of 5.875% notes due August 2012 redeemed in March 2012.
·  $800 of 4.75% notes due November 2012, $2,500 of 4.95% notes due January 2013, and $1,500 of 6.7% notes due November 2013 redeemed in June 2012.
·  $1,000 of 4.85% notes due February 2014 redeemed in September 2012.2043 (equivalent to approximately $1,560 when issued).

In December 2010,March 2013, we repaid €1,250 of 4.375% notes (equivalent to $1,641 when repaid) and $147 of 6.5% notes. In July 2013, we repaid $300 of 7.375% notes. Additionally, in August 2013, we announced the redemption of $550 of 6.625% notes, which was completed in October 2013.

In May 2013, we completed a repurchase authorization that was approved by our Board of Directors authorized the repurchase of up to 300 million shares of AT&T common stock. We began buying back stock under this program in the first quarter ofJuly 2012. In July 2012, theMarch 2013, our Board of Directors authorized the repurchase of an additional 300 million shares. Asshares of September 30, 2012,our common stock. During the first nine months of 2013, we have repurchased 244.5312 million shares totaling $8,374.for $11,134 under these authorizations. At the end of the third quarter, we had 216 million shares remaining on the March 2013 authorization. We intendexpect to continue repurchasing shares.make future repurchases opportunistically.

 
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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 amounts

We paid dividends of $7,738$7,325 during the first nine months of 2012,2013, compared with $7,627$7,738 for the first nine months of 2011,2012, primarily reflecting anthe decline in shares outstanding due to our repurchases during the year, which offset the increase in the quarterly dividend approved by our Board of Directors in December 2011 and partially offset by the decline in shares outstanding due to our repurchases during the year.November 2012. Dividends declared by our Board of Directors totaled $0.44$0.45 per share in the third quarter of 20122013 and $1.35 per share for the first nine months of 2013 and $0.44 per share in the third quarter and $1.32 per share for the first nine months of 2012 and $0.43 per share in the third quarter and $1.29 per share for the first nine months of 2011.2012. Our dividend policy considers the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

At September 30, 2012,2013, we had $3,433$7,873 of debt maturing within one year, all$5,999 of which were long-term debt maturities.issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
·  $1,000 of annual put reset securities issued by BellSouth Corporation (BellSouth) that may be put back to us each April until maturity in 2021.
·  An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.

We have two revolving credit agreements with a syndicate of banks: a $5,000 agreement expiring in December 20152016 and a $3,000 agreement expiring in December 2012.2017. Advances under either agreement may be used for general corporate purposes, which could include repayment of maturing commercial paper.purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under each agreement. Under each agreement, we can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. Under the multi-yeareach agreement, we must maintain a debt-to-EBITDA, ratio, including modifications described in the agreement, ratio of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. Both agreements also contain a negative pledge covenant, which generally provides that if we pledge assets or permit liens on our property, then any advances must also be secured. At September 30, 2012,2013, we had no advances outstanding under either agreement and were in compliance with all covenants under each agreement.

Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by América Móvil or YP Holdings. At September 30, 2012,2013, our debt ratio was 38.6%46.9%, compared to 38.5%38.6% at September 30, 2011,2012, and 38.0%43.0% at December 31, 2011.2012. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances.

In October 2012,September 2013, we filed an application with the U.S. Departmentmade a voluntary contribution of Labor (DOL) for approval to contribute a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our Mobilitywireless business, to the trust used to pay pension benefits under plans sponsored by AT&T.our qualified pension plans. The preferred equity interest, preliminarily valued between $9,200 and $9,500, had a value of $9,104 on the contribution date, does not have any voting rights and has a liquidation value of $8,000 and$8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum.annum, which will be distributed quarterly in equal amounts. So long as we make the distributions, we will have no limitations on our ability to declare a dividend, or repurchase shares.

At December 31, 2011, the present valuetime of AT&T’s pension liabilities exceeded the fair value of trust assets by approximately $10,200. The preferred equity interest is estimated to be valued at $9,500 upon contribution and will significantly improve the funded status of the plans, enhancing the strength of the trust for AT&T’s employees and retirees. Prior to the contribution of the preferred equity interest, we made an additional cash contribution of $175 and have agreed to annual cash contributions of $175 no later than the estimated required contributiondue date for 2013 is approximately $300. We will workour federal income tax return for each of 2014, 2015 and 2016. These contributions, combined with our existing pension assets, are essentially equivalent to the DOL to obtain approval before the end of 2013.
expected pension obligation at year-end.
 
 
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AT&T INC.
SEPTEMBER 30, 20122013

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
The preferred equity interest is not transferable by the trust except through its put and call features. After a period of five years from the contribution or, if earlier, the date upon which the pension plan trust is fully funded as determined under Employee Retirement Income Security Act of 1974, as amended (ERISA), AT&T has a right to purchase from the pension plan trust some or all the preferred equity interests at the greater of their fair market value or minimum liquidation value plus any unpaid cumulative dividends. In addition, AT&T will have the right to purchase the preferred equity interests in the event AT&T’s ownership of Mobility is less than fifty percent (50%) or there is a transaction that results in the transfer of 50% or more of the pension plan trust’s assets to an entity not under common control with AT&T (collectively, a change of control). The pension plan trust has the right to require AT&T to purchase the preferred equity interests at the greater of their fair market value or minimum liquidation value plus any unpaid cumulative dividends, and in installments, as specified in the contribution agreement upon the occurrence of any of the following: (1) at any time if the ratio of debt to total capitalization of Mobility exceeds that of AT&T, (2) the date on which AT&T Inc. is rated below investment grade for two consecutive calendar quarters, (3) upon a change of control if AT&T does not exercise its purchase option, or (4) at any time after a seven-year period from the contribution date. In the event AT&T elects or is required to purchase the preferred equity interests, AT&T may elect to settle the purchase price in shares of AT&T common stock.

On September 9, 2013, the DOL published a proposed exemption that authorizes retroactive approval of this voluntary contribution. The proposal is open for public comment for 55 days from the publication date. Our retirement benefit plans, including required contributions, are subject to the provisions of ERISA.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts

At September 30, 2012,2013, we had interest rate swaps with a notional value of $3,000$4,750 and a fair value of $306.$212.

We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $9,481$14,136 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 $(319)$1,100 at September 30, 2012.2013. We have foreign exchange contracts with a notional value of $122$4 and a net fair value of $(1)less than $1 at September 30, 2012.2013.

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 September 30, 2012.2013. 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 September 30, 2012.2013.

 
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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.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 U.S.United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates, and adverse medical cost trends, and unfavorable or delayed implementation of healthcare legislation, regulations or related court decisions.decisions; and our inability to receive retroactive approval from the DOL of our voluntary contribution of a preferred interest in our wireless business.
·  The final outcome of FCC and other federal or state agency proceedings and reopenings of such proceedings and(including judicial reviews,review, if any, of such proceedings,proceedings) involving issues that are important to our business, including, issues relatingwithout limit, intercarrier compensation, interconnection obligations, the transition from legacy technologies to access charges, intercarrier compensation,IP-based infrastructure, universal service, broadband deployment, E911 services, competition policy, net neutrality, unbundled loopnetwork elements and transport elements,other wholesale obligations, availability of new spectrum from the FCC on fair and balanced terms, wireless license awards and renewals and wireless services, including data roaming agreements and spectrum allocation.renewals.
·  The final outcome of regulatory proceedings instate 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 states in which we operate and reopeningswithdrawal of such proceedings and judicial reviews, if any, of such proceedings, including proceedings relating to Interconnection terms, access charges, universal service, unbundled network elements and resale and wholesale rates; broadband deployment including our U-verse services; net neutrality; performance measurement plans; service standards; and intercarrier and other traffic compensation.services.
·  Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
·  Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures.
·  The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless operating margins.
·  Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets.
·  The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).
·  The continued development of attractive and profitable U-verse service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
·  Our continued ability to attract and offer a diverse portfolio of wireless devices, some on an exclusive basis.
·  The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.
·  Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
·  The outcome of pending, threatened or potential litigation, including patent and product safety claims by or against third parties.
·  The impact on our networks and business from major equipment failures; security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks.
·  The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
·  The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions.
·  Our ability to adequately fund our wireless operations, including payment for additional spectrum network upgrades and technological advancements.
·  Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.
·  The uncertainty surrounding the January 2013 implementation of the Budget Control Act of 2011, and associatedfurther congressional action to address spending reductions; the expiration of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010; and the uncertainty as to whether  the United States will reach the debt ceiling prior to year-endreductions, which may result in a significant reduction in government spending and reluctance of businesses and consumers to spend in general and on our products and services specifically, due to this fiscal uncertainty.

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
 
 
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SEPTEMBER 30, 20122013

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. The Risk Factor below has been updated since our Form 10-K was filed.For the third quarter 2013, there were no such material developments.

Equipment failures, natural disasters, computer hacking and terrorist attacks may materially adversely affect our operations.
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds  
           
(c) A summary of our repurchases of common stock during the third quarter of 2013 is as follows:  
           
Period 
(a)
 
 
 
 
Total Number of
Shares (or Units)
 Purchased 1,2 
 
(b)
 
 
 
 
 
Average Price Paid
Per Share (or Unit) 
 
(c)
 
 
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs 1 
 
(d)
 
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs 
            
July 1, 2013 -
July 31, 2013
  24,608,211  $  35.62   24,600,000   246,947,551 
August 1, 2013 -
August 31, 2013
  16,500,137    34.26   16,500,000   230,447,551 
September 1, 2013 -
September 30, 2013
  14,001,278    33.93   14,000,000   216,447,551 
Total  55,109,626  $  34.78   55,100,000   
 1 In March 2013, our Board of Directors authorized the repurchase of up to 300 million shares of our common stock. In July 2012, our Board of Directors also authorized the repurchase of up to 300 million shares of our common stock, which we completed in May 2013.
 The March 2013 authorization has no expiration date.
 2 Of the shares repurchased, 9,626 shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options.

Major equipment failures or natural disasters, including severe weather, computer hacking, terrorist acts or other breaches of network or IT security that affect our wireline and wireless networks, including telephone switching offices, microwave links, third-party owned local and long-distance networks on which we rely, our cell sites or other equipment, or our customer account support and information systems, could have a material adverse effect on our operations. While we have been subject to security breaches or cyber attacks, these did not result in a material adverse effect on our operations. Our inability to operate our wireline, wireless or customer-related support systems as a result of such events, even for a limited time period, could result in significant expenses, potential legal liability, a loss of customers or impair our ability to attract new customers, which could have a material adverse effect on our business, results of operations and financial condition.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds  
          
(c) A summary of our repurchases of common stock during the third quarter of 2012 is as follows:
          
Period 
(a)
 
 
Total Number of Shares (or Units) Purchased
 
(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 Programs2 
          
July 1, 2012 - July 31, 2012  37,206,416  $ 36.81   37,206,416   419,327,635 
August 1, 2012 - August 31, 2012  22,242,480    37.00   22,242,480   397,085,155 
September 1, 2012 - September 30, 2012  41,601,200    37.45   41,601,200   355,483,955 
Total  101,050,096  $ 37.12   101,050,096   
1 In December 2010, we announced our stock repurchase plan, under which our Board of Directors authorized the repurchase of up to 300 million shares of our common stock. The plan has no expiration date.
2 In July 2012, the Board authorized the repurchase of an additional 300 million shares. The plan has no expiration date.

 
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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-qqqAgreement and Plan of Merger, dated as of July 12, 2013, by and among Leap Wireless International, Inc., AT&T Inc., Laser, Inc. and Mariner Acquisition Sub Inc. (Exhibit 10.1 to Form 8-K dated July 12, 2013.)
10-rrrForm of Voting Agreement, dated as of July 12, 2013, by and among AT&T Inc., Leap Wireless International, Inc. and the stockholders listed on Schedule I thereto. (Exhibit 10.2 to Form 8-K dated July 12, 2013.)
10-sssForm of CVR Agreement, by and among AT&T Inc., Leap Wireless International, Inc., Laser, Inc. and the Rights Agent. (Exhibit 10.3 to Form 8-K dated July 12, 2013.)
12Computation of Ratios of Earnings to Fixed Charges
31
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32Section 1350 Certifications
101XBRL Instance Document


 
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SIGNATURE



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

                    
AT&T Inc.




November 2, 20121, 2013                                                                                                     /s/ John J. Stephens
                    John J. Stephens
                    Senior Executive Vice President
                        and Chief Financial Officer


 
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