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


FORM 10-Q
 

 (Mark One)  

 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    
  For the quarterly period ended March 31,September 30, 2013 
    
  or 
    
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    
For the transition period from       to     
 
Commission File Number 1-8610

AT&T INC.

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


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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]   No [X]
 
At April 30,October 31, 2013 there were 5,3805,268 million common shares outstanding.
 

 
 
 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.AT&T INC. AT&T INC.
CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amountsDollars in millions except per share amounts Dollars in millions except per share amounts
(Unaudited)(Unaudited) (Unaudited)
 Three months ended  Three months ended  Nine months ended
 March 31,  September 30,  September 30,
 2013  2012  2013   2012   2013   2012 
Operating Revenues $31,356  $31,822 $32,158  $31,459  $95,589  $94,856 
        
Operating Expenses                 
Cost of services and sales (exclusive of depreciation                 
and amortization shown separately below)  12,554   12,817  13,403  12,602   39,227  37,673 
Selling, general and administrative  8,333   8,344  7,952  8,308   24,406  24,657 
Depreciation and amortization  4,529   4,560  4,615  4,512   13,715  13,571 
Total operating expenses  25,416   25,721  25,970  25,422   77,348  75,901 
Operating Income  5,940   6,101  6,188  6,037   18,241  18,955 
Other Income (Expense)                 
Interest expense  (827)  (859) (829) (824)  (2,481) (2,624)
Equity in net income of affiliates  185   223  91  182   494  537 
Other income (expense) – net  32   52  50  47  370  122 
Total other income (expense)  (610)  (584) (688) (595)  (1,617) (1,965)
Income Before Income Taxes  5,330   5,517  5,500  5,442   16,624  16,990 
Income tax expense  1,557   1,865  1,595  1,741   5,066  5,672 
Net Income  3,773   3,652  3,905  3,701   11,558  11,318 
Less: Net Income Attributable to Noncontrolling Interest  (73)  (68) (91) (66)  (222) (197)
Net Income Attributable to AT&T $3,700  $3,584 $ 3,814  $ 3,635  $ 11,336  $ 11,121 
Basic Earnings Per Share Attributable to AT&T $0.67  $0.60 $0.72  $0.63  $2.10  $1.90 
Diluted Earnings Per Share Attributable to AT&T $0.67  $0.60 $0.72  $0.63  $2.09  $1.90 
Weighted Average Number of Common Shares Outstanding – Basic (in millions)
  5,513   5,918 
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)
  5,530   5,940 
Weighted Average Number of Common Shares         
Outstanding – Basic (in millions) 5,315   5,771   5,402   5,848 
Weighted Average Number of Common Shares           
Outstanding – with Dilution (in millions)
 5,331   5,792   5,419   5,869 
Dividends Declared Per Common Share $0.45  $0.44 $0.45  $0.44  $1.35  $1.32 
See Notes to Consolidated Financial Statements.                

2 
2 
 

AT&T INC.              
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      
Dollars in millions              
(Unaudited)              
 Three months ended Three months ended Nine months ended
 March 31, September 30, September 30,
 2013  2012 2013  2012  2013  2012 
Net income $3,773  $3,652 $3,905  $3,701  $11,558  $11,318 
Other comprehensive income, net of tax:                   
Foreign currency translation adjustments (includes $0 and $1 attributable to
noncontrolling interest), net of taxes of $62 and $131
  121   243 
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 $40 and $54  75   101 
Reclassification adjustment included in net income, net of taxes of $(4) and $(3)  (7)  (6)
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 $49 and $0  90   - 
Reclassification adjustment included in net income, net of taxes of $4 and $3  7   6 
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:                   
Amortization of net prior service credit included in net income, net of taxes of
$(109) and $(84)
  (178)  (137)
Other comprehensive income  108   207 
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)  -   - 
Other comprehensive income (loss) 174   167   44   (74)
Total comprehensive income  3,881   3,859  4,079   3,868   11,602   11,244 
Less: Total comprehensive income attributable to noncontrolling interest  (73)  (69) (90)  (66)  (220)  (197)
Total Comprehensive Income Attributable to AT&T $3,808  $3,790 $3,989  $3,802  $11,382  $11,047 
See Notes to Consolidated Financial Statements.                

3 
3 
 

AT&T INC.AT&T INC. AT&T INC.
CONSOLIDATED BALANCE SHEETSCONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amountsDollars in millions except per share amounts Dollars in millions except per share amounts
 March 31,  December 31, September 30, December 31,
 2013  2012 2013  2012 
Assets (Unaudited)    (Unaudited)   
Current Assets           
Cash and cash equivalents $3,875  $4,868 $1,371  $4,868 
Accounts receivable - net of allowances for doubtful accounts of $547 and $547  12,100   12,657 
Accounts receivable - net of allowances for doubtful accounts of $491 and $547 12,444   12,657 
Prepaid expenses  1,021   1,035  1,022   1,035 
Deferred income taxes  980   1,036  682   1,036 
Other current assets  2,396   3,110  2,916   3,110 
Total current assets  20,372   22,706  18,435   22,706 
Property, plant and equipment  274,035   270,907  282,445   270,907 
Less: accumulated depreciation and amortization  (164,333)  (161,140) (170,021)  (161,140)
Property, Plant and Equipment – Net  109,702   109,767  112,424   109,767 
Goodwill  69,772   69,773  70,014   69,773 
Licenses  53,507   52,352  56,304   52,352 
Customer Lists and Relationships – Net  1,190   1,391  876   1,391 
Other Intangible Assets – Net  5,022   5,032  5,020   5,032 
Investments in and Advances to Equity Affiliates  4,998   4,581  3,949   4,581 
Other Assets  6,431   6,713  7,577   6,713 
Total Assets $270,994  $272,315 $274,599  $272,315 
             
Liabilities and Stockholders’ Equity             
Current Liabilities             
Debt maturing within one year $3,446  $3,486 $7,873  $3,486 
Accounts payable and accrued liabilities  17,523   20,494  20,433   20,494 
Advanced billing and customer deposits  4,167   4,225  4,013   4,225 
Accrued taxes  2,210   1,026  1,488   1,026 
Dividends payable  2,440   2,556  2,376   2,556 
Total current liabilities  29,786   31,787  36,183   31,787 
Long-Term Debt  70,686   66,358  68,350   66,358 
Deferred Credits and Other Noncurrent Liabilities             
Deferred income taxes  28,918   28,491  30,666   28,491 
Postemployment benefit obligation  41,663   41,392  42,036   41,392 
Other noncurrent liabilities  11,603   11,592  11,234   11,592 
Total deferred credits and other noncurrent liabilities  82,184   81,475  83,936   81,475 
             
Stockholders’ Equity             
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2013 and        
December 31, 2012: issued 6,495,231,088 at March 31, 2013 and December 31, 2012)  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  90,940   91,038  91,021   91,038 
Retained earnings  23,787   22,481  26,648   22,481 
Treasury stock (1,072,424,764 at March 31, 2013 and 913,836,325        
Treasury stock (1,214,987,626 at September 30, 2013 and 913,836,325     
at December 31, 2012, at cost)  (38,568)  (32,888) (43,731)  (32,888)
Accumulated other comprehensive income  5,344   5,236  5,282   5,236 
Noncontrolling interest  340   333  415   333 
Total stockholders’ equity  88,338   92,695  86,130   92,695 
Total Liabilities and Stockholders’ Equity $270,994  $272,315 $274,599  $272,315 
See Notes to Consolidated Financial Statements.            

4 
4 
 

AT&T INC.AT&T INC. AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millionsDollars in millions Dollars in millions
(Unaudited)(Unaudited) (Unaudited)
 Three months ended Nine months ended
 March 31, September 30,
 2013  2012 2013  2012 
Operating Activities           
Net income $3,773  $3,652 $ 11,558  $ 11,318 
Adjustments to reconcile net income to net cash provided by operating activities:             
Depreciation and amortization  4,529   4,560   13,715    13,571 
Undistributed earnings from investments in equity affiliates  (185)  (223)  (232)   (483)
Provision for uncollectible accounts  262   328   653    835 
Deferred income tax expense and noncurrent unrecognized tax benefits  509   337   2,389    3,441 
Net (gain) loss from sale of investments, net of impairments  (11)  (9)  (272)   (27)
Changes in operating assets and liabilities:             
Accounts receivable  295   73   (440)   (571)
Other current assets  864   1,120   520    1,581 
Accounts payable and accrued liabilities  (1,675)  (1,655)  (420)   (156)
Retirement benefit funding  (175)   - 
Other - net
  (162)  (338)  (417)   (853)
Total adjustments  4,426   4,193   15,321    17,338 
Net Cash Provided by Operating Activities  8,199   7,845   26,879    28,656 
             
Investing Activities            
Construction and capital expenditures:            
Capital expenditures  (4,252)  (4,261)  (15,565)   (13,619)
Interest during construction  (66)  (65)  (213)   (197)
Acquisitions, net of cash acquired  (1,045)  (433)  (4,025)   (551)
Dispositions  5   16   846    807 
Sales (purchases) of securities, net  -   5   -    311 
Return of advances to and investments in equity affiliates  301    - 
Other  1   1   (4)   (2)
Net Cash Used in Investing Activities  (5,357)  (4,737)  (18,660)   (13,251)
             
Financing Activities             
Net change in short-term borrowings with original maturities of three months or less  274   -   1,851    - 
Issuance of other short-term borrowings  1,474   -   1,476    - 
Repayment of other short-term borrowings  (1,476)   - 
Issuance of long-term debt  4,875   2,986   6,416    6,935 
Repayment of long-term debt  (1,791)  (2,204)  (2,131)   (8,042)
Purchase of treasury stock  (5,911)  (2,066)  (11,134)   (8,374)
Issuance of treasury stock  56   218   108    460 
Dividends paid  (2,502)  (2,606)  (7,325)   (7,738)
Other  (310)  (130)  499    98 
Net Cash Used in Financing Activities  (3,835)  (3,802)  (11,716)   (16,661)
Net decrease in cash and cash equivalents  (993)  (694)  (3,497)   (1,256)
Cash and cash equivalents beginning of year  4,868   3,045   4,868    3,045 
Cash and Cash Equivalents End of Period $3,875  $2,351 $ 1,371  $ 1,789 
        
Cash paid during the three months ended March 31 for:        
Cash paid during the nine months ended September 30 for:    
Interest $1,081  $1,224 $ 2,980  $ 3,214 
Income taxes, net of refunds $(1,114) $(712)$ 1,573  $ 390 
See Notes to Consolidated Financial Statements.        See Notes to Consolidated Financial Statements.

5 
5 
 

AT&T INC.AT&T INC. AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amountsDollars and shares in millions except per share amounts Dollars and shares in millions except per share amounts
(Unaudited)(Unaudited) (Unaudited)
 March 31, 2013 September 30, 2013
 Shares  Amount Shares Amount
Common Stock          
Balance at beginning of year  6,495  $6,495 6,495  $6,495 
Issuance of stock  -   -  -   - 
Balance at end of period  6,495  $6,495 6,495  $6,495 
            
Additional Paid-In Capital            
Balance at beginning of year     $91,038   $91,038 
Issuance of treasury stock      (10)   (8)
Share-based payments      (88)   (9)
Balance at end of period     $90,940   $91,021 
           
Retained Earnings           
Balance at beginning of year     $22,481   $22,481 
Net income attributable to AT&T ($0.67 per diluted share)      3,700 
Dividends to stockholders ($0.45 per share)      (2,440)
Other      46 
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     $23,787   $26,648 
           
Treasury Stock           
Balance at beginning of year  (914) $(32,888) (914) $(32,888)
Repurchase of common stock  (168)  (5,911) (312) (11,134)
Issuance of treasury stock  10   231 11  291 
Balance at end of period  (1,072) $(38,568) (1,215) $(43,731)
            
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax:        
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax   
Balance at beginning of year     $5,236   $5,236 
Other comprehensive income attributable to AT&T      108    46 
Balance at end of period     $5,344   $5,282 
            
Noncontrolling Interest:        
Noncontrolling Interest    
Balance at beginning of year     $333   $333 
Net income attributable to noncontrolling interest      73    222 
Distributions      (66)   (161)
Acquisitions of noncontrolling interests   23 
Translation adjustments attributable to noncontrolling interest, net of taxes   (2)
Balance at end of period     $340   $415 
            
Total Stockholders’ Equity at beginning of year     $92,695   $92,695 
Total Stockholders’ Equity at end of period     $88,338   $86,130 
See Notes to Consolidated Financial Statements.       

 
6
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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


NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation  Throughout this document, AT&T Inc. is referred to as “AT&T,” “we” or the “Company.” We believe that these consolidated financial statements include all adjustments, consisting only of normal recurring accruals, that are necessary to present fairly the results for the presented interim periods. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates operate in the communications services industry both domestically and internationally, providing wireless communications services, traditional wireline voice services, data/broadband and internetInternet services, video services, telecommunications equipment, managed networking and wholesale services.

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

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

Stock Repurchase Program  During the first quarter ofIn May 2013, we repurchased 168 million shares for $5,911 undercompleted a repurchase authorization that was approved by our Board of Directors in July 2012. At March 31, 2013, we had 61 million shares remaining under that authorization. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. During the first nine months of 2013, we repurchased 312 million shares for $11,134 under these authorizations. At September 30, 2013, we had 216 million shares remaining under the March 2013 authorization. The planauthorization has no expiration date.
 
 
7 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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 March 31,September 30, 2013 and 2012, is shown in the table below:

Three months endedThree months ended Nine months ended
March 31,September 30, September 30,
2013  2012 2013  2012  2013  2012 
Numerators               
Numerator for basic earnings per share:              
Net income$3,773  $3,652 $3,905  $3,701  $11,558  $11,318 
Net income attributable to noncontrolling interest (73) (68) (91)  (66)  (222)  (197)
Net income attributable to AT&T 3,700  3,584  3,814   3,635   11,336   11,121 
Dilutive potential common shares:               
Other share-based payment 4  3 
Share-based payment 3   3   9   9 
Numerator for diluted earnings per share$3,704  $3,587 $3,817  $3,638  $11,345  $11,130 
Denominators (000,000)               
Denominator for basic earnings per share:               
Weighted average number of common shares outstanding 5,513  5,918  5,315   5,771   5,402   5,848 
Dilutive potential common shares:               
Share-based payment 17  22  16   21   17   21 
Denominator for diluted earnings per share 5,530  5,940  5,331   5,792   5,419   5,869 
Basic earnings per share attributable to AT&T$0.67  $0.60 $0.72  $0.63  $2.10  $1.90 
Diluted earnings per share attributable to AT&T$0.67  $0.60 $0.72  $0.63  $2.09  $1.90 

At March 31,September 30, 2013 and 2012, we had issued and outstanding options to purchase approximately 1512 million and 2818 million shares of AT&T common stock. For the quarter ended March 31,September 30, 2013 and 2012, the exercise prices of 43 million and 52 million shares were above the market price of AT&T stock for the respective periods. Accordingly, we did not include these amounts in determining the dilutive potential common shares. At March 31,September 30, 2013 and 2012, the exercise prices of 119 million and 2216 million vested stock options were below market price.

 
8 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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 of other comprehensive income (OCI) included in accumulated OCI for the threenine months ended March 31,September 30, 2013, are presented below. All amounts are net of tax and exclude noncontrolling interest.

At March 31, 2013 and for the period ended:
        
At September 30, 2013 and for the period ended: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  
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, 2013Balance as of January 1, 2013$ (284) $ 272  $ (110) $ 5,358  $ 5,236 Balance as of January 1, 2013$ (284) $ 272  $ (110) $ 5,358  $ 5,236 
Other comprehensive income
before reclassifications
  121   75   90   -   286 
Other comprehensive income
(loss) before reclassifications
Other comprehensive income
(loss) before reclassifications
  (153)   155    526    -    528 
Amounts reclassified
from accumulated OCI
Amounts reclassified
from accumulated OCI
  -  
 (7) 
1 
 7  
2 
 (178) 
3  (178)
Amounts reclassified
from accumulated OCI
  34 1   (13)2   22 3   (525)4   (482)
Net other comprehensive
income (loss)
Net other comprehensive
income (loss)
  121   68   97   (178)  108 
Net other comprehensive
income (loss)
  (119)   142    548    (525)   46 
Balance as of March 31, 2013$ (163) $ 340  $ (13) $ 5,180  $ 5,344 
Balance as of September 30, 2013Balance as of September 30, 2013$ (403) $ 414  $ 438  $ 4,833  $ 5,282 
1 Pre-tax gains of $11 are included in Other income (expense) - net in the consolidated income statement. Pre-tax translation loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
2 (Gains) losses are included in interest expense on the consolidated income statement. See Note 6 for additional information. Realized gains are included in Other income (expense) - net in the consolidated statements of income.
3 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 on the 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
consolidated income statement. See Note 5 for additional information. reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our various operating segments based on segment income before income taxes. We make our capital allocation 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 reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have three reportable segments: (1) Wireless, (2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included our Advertising Solutions segment, which was subsequently sold.

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

The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, AT&T U-verse® high-speed broadband, 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.arrangements are included in the segment.

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 costs to support corporate-driven activities and operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.

 
9 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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


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

For the three months ended March 31, 2013:                
For the three months ended September 30, 2013For the three months ended September 30, 2013    Advertising      
Consolidated
Results 
 Wireless  Wireline  Advertising Solutions  Other  Consolidations  Consolidated Results  Wireless  Wireline  Solutions Other  Consolidations  
Data $5,125  $8,162  $-  $-  $-  $13,287 $ 5,509  $ 8,457  $ -  $ -  $ -  $ 13,966 
Voice, text and other  9,937   5,306    -   -   -   15,243   9,951   5,023   -     -   -   14,974 
Equipment and other  1,629   1,187    -   10   -   2,826   2,020   1,190   -   8   -   3,218 
Total segment operating revenues  16,691   14,655    -   10   -   31,356   17,480   14,670   -   8   -   32,158 
Operations and support expenses  10,180   10,335    -   372   -   20,887   10,982   10,385   -   (12)  -   21,355 
Depreciation and amortization expenses  1,835   2,688    -   6   -   4,529   1,875   2,736   -   4   -   4,615 
Total segment operating expenses  12,015   13,023    -   378   -   25,416   12,857   13,121   -   (8)  -   25,970 
Segment operating income (loss)  4,676   1,632    -   (368)  -   5,940   4,623   1,549   -   16   -   6,188 
Interest expense  -   -   -   -   827   827   -   -   -   -   829   829 
Equity in net income (loss) of affiliates  (18)  1   -   202   -   185   (18)  -   -   109   -   91 
Other income (expense) – net  -   -    -   -   32   32   -   -   -   -   50   50 
Segment income (loss) before income taxes $4,658  $1,633  $-  $(166) $(795) $5,330 $ 4,605  $  1,549  $  -  $  125  $  (779) $ 5,500 
                                        
For the three months ended March 31, 2012:                 Consolidated Results 
For the nine months ended September 30, 2013For the nine months ended September 30, 2013     Advertising       
Consolidated
Results 
 Wireless  Wireline  
Advertising
Solutions
  Other  Consolidations  Consolidated Results  Wireless Wireline  Solutions Other  Consolidations  
Data $4,235  $7,800  $-  $-  $- $ 15,990  $ 25,019  $-  $ -  $ -  $ 41,009 
Voice, text and other  10,331   5,892    -   -   -   16,223   29,902   15,470  -   -   -   45,372 
Equipment and other  1,570   1,237   744   13   -   3,564   5,570   3,609    -   29   -   9,208 
Total segment operating revenues  16,136   14,929   744   13   -   31,822   51,462   44,098    -   29   -   95,589 
Operations and support expenses  9,978   10,402    547   234   -   21,161   31,932   31,137    -      564   -   63,633 
Depreciation and amortization expenses  1,666   2,808    77   9   -   4,560   5,553   8,146    -   16   -   13,715 
Total segment operating expenses  11,644   13,210   624   243   -   25,721   37,485   39,283    -   580   -   77,348 
Segment operating income (loss)  4,492   1,719    120   (230)  -   6,101   13,977   4,815    -   (551)  -   18,241 
Interest expense  -   -   -   -   859   859   -   -    -   -   2,481   2,481 
Equity in net income of affiliates  (13)  -   -   236   -   223 
Equity in net income (loss) of affiliates  (55)  1    -   548   -   494 
Other income (expense) – net  -   -   -   -   52   52   -   -    -   -   370   370 
Segment income (loss) before income taxes $4,479  $1,719  $120  $6  $(807) $5,517 $  13,922  $  4,816  $   -  $  (3) $  (2,111) $ 16,624 

10 
AT&T INC.
SEPTEMBER 30, 2013

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

For the three months ended September 30, 2012      Advertising        
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    14,814      -    13    -    31,459 
Operations and support expenses  10,432    10,246      -    232    -    20,910 
Depreciation and amortization expenses  1,730    2,774      -    8    -    4,512 
Total segment operating expenses  12,162    13,020      -    240    -    25,422 
Segment operating income (loss)  4,470    1,794      -    (227)   -    6,037 
Interest expense  -    -      -    -    824    824 
Equity in net income (loss) of affiliates  (17)   -      -    199    -    182 
Other income (expense) – net  -    -      -    -    47    47 
Segment income (loss) before
   income taxes
$  4,453  $  1,794  $    -  $  (28) $  (777) $ 5,442 
                  
For the nine months ended September 30, 2012      Advertising        
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    44,650      1,049    36    -    94,856 
Operations and support expenses  30,000    30,849      773    708    -    62,330 
Depreciation and amortization expenses  5,092    8,348      106    25    -    13,571 
Total segment operating expenses  35,092    39,197      879    733    -    75,901 
Segment operating income (loss)  14,029    5,453      170    (697)   -    18,955 
Interest expense  -    -      -    -    2,624    2,624 
Equity in net income (loss) of affiliates  (45)   (1)     -    583    -    537 
Other income (expense) – net  -    -      -    -    122    122 
Segment income (loss) before
   income taxes
$  13,984  $  5,452  $    170 $  (114) $  (2,502) $ 16,990 

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance, and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs as active employees earn these benefits. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to meet the plans’ obligations to provide benefits to employees upon their retirement. During

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

In October 2012, we filed an application with the U.S. Department of Labor for approval to makemade a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our Mobilitywireless business, to the trust used to pay qualified pension benefits under plans sponsored by AT&T. At the time we filed the application, theour qualified pension plans. The preferred equity interest had a fair market value of $9,500. We anticipate approval in 2013, and expect to make$9,104 on the contribution at that time. As currently proposed,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 will constitute a qualified plan asset for ERISA funding purposes, but willis not beunconditionally transferable to an unrelated party, it is not included in plan assets in our consolidated financial statements upon contribution. Final determinationstatements. At the time of whether it will qualify as a plan asset for financial reporting purposes is subject to the final termscontribution of the preferred equity interest.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 year-end.

 
1011 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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


The following table details pension and postretirement benefit costs included in operating expenses (in cost of services and sales, and selling, general and administrative expenses) in the accompanying consolidated statements of income.
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 expensescosts is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded.

 Three months ended Three months ended Nine months ended
 March 31, September 30, September 30,
 2013  2012 2013  2012  2013  2012 
Pension cost:                
Service cost – benefits earned during the period $330  $310 $331  $301  $991  $915 
Interest cost on projected benefit obligation  607   700  608   700   1,822   2,100 
Expected return on assets  (828)  (880) (828)  (880)  (2,484)  (2,640)
Amortization of prior service (credit)  (23)  (4) (25)  (3)  (71)  (11)
Net pension cost $86  $126 $86  $118  $258  $364 
                   
Postretirement cost:                   
Service cost – benefits earned during the period $95  $84 $95  $81  $286  $247 
Interest cost on accumulated postretirement benefit obligation  390   447  389   446   1,168   1,340 
Expected return on assets  (178)  (200) (177)  (200)  (533)  (601)
Amortization of prior service (credit)  (263)  (217) (263)  (215)  (788)  (647)
Net postretirement cost $44  $114 $44  $112  $133  $339 
                   
Combined net pension and postretirement cost $130  $240 $130  $230  $391  $703 

Our combined net pension and postretirement cost decreased $110$100 in the third quarter and $312 for the first quarternine months of 2013. The decrease reflectsis driven by lower interest costs, which reflect the prior year’s declining bond rates which contribute to lower interest costs,used when valued at the beginning of the year and reflects higher amortization of prior service credits due to plan changes, including changes to retiree costs for continued healthcare coverage. This decrease is partially offset by lower expected long-term return on plan assets reflecting theeach plan’s asset mix and continued uncertainty in the securities markets and the U.S. economy and plan’s asset mix.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 $27 in the firstthird quarter of 2013, of which $25 was interest cost, and $31$82 for the first quarternine 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.

 
1112 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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


NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

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

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

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

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

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

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2012.

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

March 31, 2013 December 31, 2012 September 30, 2013 December 31, 2012
Carrying Fair Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value Amount Value
Notes and debentures $72,120  $81,691  $69,578  $81,310 $ 74,103  $ 79,156  $ 69,578  $ 81,310 
Commercial paper  1,748   1,748   -   -   1,851    1,851    -    - 
Bank borrowings  1   1   1   1   1    1    1    1 
Investment securities  2,359   2,359   2,218   2,218   2,525    2,525    2,218    2,218 

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.

 
1213 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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


Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities werewas estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in “Other income (expense) – net” in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated other comprehensive income (accumulated OCI).OCI. Unrealized losses that are considered other than temporary are recorded in “Other income (expense) – net” with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $91$109 have maturities of less than one year, $294$279 within one to three years, $200$175 within three to five years, and $258$252 for five or more years, which approximate fair value.years.

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

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

 March 31, 2013 September 30, 2013
 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Available-for-Sale SecuritiesAvailable-for-Sale Securities        Available-for-Sale Securities           
Domestic equities Domestic equities$ 977  $ -  $ -  $ 977  Domestic equities$ 1,065  $ -  $ -  $ 1,065 
International equities International equities  493   -   -   493  International equities  583   -   -   583 
Fixed income bonds Fixed income bonds  -   843   -   843  Fixed income bonds  -   815   -   815 
Asset Derivatives1
Asset Derivatives1
        
Asset Derivatives1
        
Interest rate swaps Interest rate swaps  -   262   -   262  Interest rate swaps  -   216   -   216 
Cross-currency swaps Cross-currency swaps  -   457   -   457  Cross-currency swaps  -   1,657   -   1,657 
Liability Derivatives1
Liability Derivatives1
        
Liability Derivatives1
        
Interest rate swaps Interest rate swaps  -   (4)  -   (4)
Cross-currency swaps Cross-currency swaps  -   (783)  -   (783) Cross-currency swaps  -   (557)  -   (557)
                  
 December 31, 2012 December 31, 2012
 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Available-for-Sale SecuritiesAvailable-for-Sale Securities        Available-for-Sale Securities           
Domestic equities Domestic equities$ 873  $ -  $ -  $ 873  Domestic equities$ 873  $ -  $ -  $ 873 
International equities International equities  469   -   -   469  International equities  469    -    -    469 
Fixed income bonds Fixed income bonds  -   837   -   837  Fixed income bonds  -   837   -   837 
Asset Derivatives1
Asset Derivatives1
        
Asset Derivatives1
        
Interest rate swaps Interest rate swaps  -   287   -   287  Interest rate swaps  -   287   -   287 
Cross-currency swaps Cross-currency swaps  -   752   -   752  Cross-currency swaps  -   752   -   752 
Foreign exchange contracts Foreign exchange contracts  -   1   -   1  Foreign exchange contracts  -   1   -   1 
Liability Derivatives1
Liability Derivatives1
        
Liability Derivatives1
        
Cross-currency swaps Cross-currency swaps  -   (672)  -   (672) 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.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.
MARCH 31,SEPTEMBER 30, 2013

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


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

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

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense on the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed-rate notes payable they hedge due to changes in the designated benchmark interest rate and are recognized in interest expense. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the threenine months ended March 31,September 30, 2013 and March 31,September 30, 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. In the threenine months ended March 31,September 30, 2013 and March 31,September 30, 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.

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. In the threenine months ended March 31,September 30, 2013 and March 31,September 30, 2012, no ineffectiveness was measured.
 
 
1415 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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


Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31,September 30, 2013, we had posted collateral of $139$17 (a deposit asset) and held collateral of $410$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 March,September, we would have been required to post additional collateral of $149.$55. At December 31, 2012, we had posted collateral of $22 (a deposit asset) and 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:

 March 31,  December 31,  September 30,  December 31, 
 2013  2012  2013  2012 
Interest rate swaps $3,000  $3,000  $4,750  $3,000 
Cross-currency swaps  12,576   12,071   14,136   12,071 
Foreign exchange contracts  4   51   4   51 
Total $15,580  $15,122  $18,890  $15,122 

Following is the related hedged items affecting our financial position and performance:Following is the related hedged items affecting our financial position and performance: Following is the related hedged items affecting our financial position and performance: 
                  
Effect of Derivatives on the Consolidated Statements of Income      Effect of Derivatives on the Consolidated Statements of Income         
 Three months ended 
 March 31,  March 31, 
Fair Value Hedging RelationshipsThree months ended Nine months ended 
 2013  2012 
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
 
Interest rate swaps (Interest expense):                  
Gain (Loss) on interest rate swaps $(24)  $(61)  $9  $(21) $(78) $(158)
Gain (Loss) on long-term debt  24    61    (9)  21   78   158 

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

 Three months ended 
 March 31,  March 31,  Three months ended  Nine months ended 
Cash Flow Hedging Relationships 2013  2012  
September 30,
2013
  
September 30,
2012
  
September 30,
2013
  
September 30,
2012
 
Cross-currency swaps:                  
Gain (Loss) recognized in accumulated OCI $141   $(5)  $482  $355  $807  $190 
                        
Interest rate locks:                        
Interest income (expense) reclassified from accumulated OCI into income  (11)   (9)   (11)  (12)  (34)  (32)
                        
Foreign exchange contracts:                        
Gain (Loss) recognized in accumulated OCI  (2)   5    5   3   5   3 

 
1516 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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 and wireline telecommunicationstelecommunication services and equipment. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012. 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 quarternine months of 2013 and 2012 are summarized as follows:

 First Quarter  Third Quarter  Nine-Month Period 
 2013  2012  
Percent
 Change
  2013  2012  
Percent
Change
  2013  2012  
Percent
Change
 
Operating Revenues $31,356  $31,822   (1.5) % $32,158  $31,459   2.2% $95,589  $94,856   0.8%
Operating expenses                                    
Cost of services and sales  12,554   12,817   (2.1)   13,403   12,602   6.4   39,227   37,673   4.1 
Selling, general and administrative  8,333   8,344   (0.1)   7,952   8,308   (4.3)  24,406   24,657   (1.0)
Depreciation and amortization  4,529   4,560   (0.7)   4,615   4,512   2.3   13,715   13,571   1.1 
Total Operating Expenses  25,416   25,721   (1.2)   25,970   25,422   2.2   77,348   75,901   1.9 
Operating Income  5,940   6,101   (2.6)   6,188   6,037   2.5   18,241   18,955   (3.8)
Income Before Income Taxes  5,330   5,517   (3.4)   5,500   5,442   1.1   16,624   16,990   (2.2)
Net Income  3,773   3,652   3.3    3,905   3,701   5.5   11,558   11,318   2.1 
Net Income Attributable to AT&T $3,700  $3,584   3.2 % $3,814  $3,635   4.9% $11,336  $11,121   1.9%

Overview
Operating income decreased $161,increased $151, or 2.6%2.5%, in the third quarter and decreased $714, or 3.8%, for the first quarternine months of 2013 and our operating income margin decreased from 19.2% in 2012 to 18.9% in 2013. Both operating revenues and expenses in the first nine months of 2012 include results for our sold Advertising Solutions segment, which hashad a negative impact on comparisons to operating income for the 2013 operating income.first nine months of 2013. Operating income increased in the firstthird quarter also reflectsreflecting continued growth in wireless data and equipment revenues, increased revenues from AT&T U-verse® (U-verse) and wireline data revenues. Growth in wirelessstrategic services, and wireline data revenuesgains realized on spectrum transactions. These increases were partially offset by continued declines in our traditional voice revenue declines and data services, higher wireless equipment costs, increased expenses primarily relatedfor 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 the sale of our Advertising Solutions segment. Our operating income margin in the third quarter was 19.2% in both 2012 and 2013 and for the first nine months decreased from 20.0% in 2012 to growth19.1% in U-verse subscribers and wireless handset costs. 2013.

Operating revenues decreased $466,increased $699, or 1.5%2.2%, in the third quarter and $733, or 0.8%, for the first quarternine months of 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 sale of our Advertising Solutions segment reduced revenues $744. Also contributing to the decreaserevenue increases were thepartially offset by continued declines in wireline voice and wireless voice and text revenues. These decreases were offset by continued growth in wireless data and equipmentThe sale of our Advertising Solutions segment also contributed to lower revenues driven by growth infor the subscriber base and the increasing percentage of smartphone customers, which contribute to higher wireless data revenues. The revenue decrease was also offset by higher wireline data revenues from U-verse services from consumer customers and strategic business services.first nine months.

As the telecommunications industry continues to evolve 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 pursue the transition offrom 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 and wireline IP-based data revenues as we bundle and price plans with greater focus on the data services that our customers desire, provide new products and services, and transition customers from their current traditional services. We expect continued declines in voice revenues and our basic wireline data services as customers choose these next-generation services.

 
1618 
 
AT&T INC.
MARCH 31,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


Cost of services and sales expenses decreased $263,increased $801, or 2.1%6.4%, in the third quarter and $1,554, or 4.1%, for the first quarternine months of 2013. The sale of our Advertising Solutions segment reduced expenses $314 in the first quarter. The first-quarter decrease was alsoincreases were primarily due to lower interconnect and Universal Service Fund (USF) fees, which are offset by lower revenue. These decreases were partially offset byincreased wireless equipment costs related to device sales, increased wireline costs attributable to U-verse subscriber growth higher wireless equipment costs related to upgrades and wireless network costs. The increases were partially offset by decreased wireless interconnect and long-distance costs, and lower costs associated with Universal Service Fund (USF) fees. For the first nine months offsets also included the sale of the Advertising Solutions segment.

Selling, general and administrative expenses decreased $11,$356, or 0.1%4.3%, in the third quarter and $251, or 1.0%, for the first quarternine months of 2013. The sale of our Advertising Solutions segment reduced expenses $233 in the first quarter. The first-quarter decrease was alsodecreases were primarily due to lower wireless commissionsgains on spectrum transactions, decreased wireline employee related expenses and lower financing-related costs associated with our pension and postretirement benefits (referred to as Pension/OPEB expenses), which and, for the first nine months, the sale of the Advertising Solutions segment. These lower expenses were partially offset by increased commissions related to smartphone upgrades, wireless selling and administrative costsexpenses and advertisinghigher wireline contract service expenses.

Depreciation and amortization expense decreased $31,expenses increased $103, or 0.7%2.3%, in the third quarter and $144, or 1.1%, for the first quarternine months of 2013. The sale of our Advertising Solutions segment reduced depreciationExpenses increased due to ongoing capital spending for network upgrades and amortization expense $77 in the first quarter. Expenses also decreased due toexpansion, partially offset by fully depreciated assets and lower amortization of intangibles for customer lists related to acquisitions offset by increasedacquisitions. The sale of our Advertising Solutions segment also contributed to lower depreciation associated with ongoing capital spendingand amortization expenses for network upgrades and expansion.the first nine months.

Interest expense decreased $32,increased $5, or 3.7%0.6%, in the third quarter and decreased $143, or 5.4%, for the first quarternine months of 2013. The increase in the third quarter was due to higher average debt balances offset by lower average interest rates. The decrease in interest expense was primarily duefor the first nine months reflects our prior-year debt refinancing activity, which contributed to lower average interest rates in 2013 and one-time charges associated with the early redemption of debt in 2012. These decreases were partially offset by higher average debt balances.

Equity in net income of affiliates decreased $38,$91, or 17.0%50.0%, in the third quarter and $43, or 8.0% for the first nine months of 2013. Decreased equity in net income of affiliates in the third quarter of 2013was primarily due to lower equity income fromdecreased earnings at América Móvil, S.A. de C.V. (América Móvil) resulting fromand YP Holdings LLC (YP Holdings). Decreased equity in net income of affiliates for the first nine months was primarily due to foreign exchange impacts and increased expenses in our mobile payment joint venture, marketed as the Isis Mobile WalletTM (ISIS). These decreases wereat América Móvil, partially offset by earnings from YP Holdings LLC (YP Holdings).Holdings.

Other income (expense) – net We had other income of $32$50 in the third quarter and $370 for the first quarternine months of 2013, compared to other income of $52$47 in the third quarter and $122 for the first quarternine months of 2012. Results in the third quarter and for the first quarternine months of 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 $11net 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 gain on the sale of investments $5 of leveraged lease$83 and $82, respectively. This income and $17was partially offset by a third-quarter investment impairment of interest and dividend income. Results for first quarter 2012 included a $10 gain on the sale of investments, $33 of leveraged lease income and $15 of interest and dividend income.$55.

Income taxesdecreased $308,$146, or 16.5%8.4%, in the third quarter and $606, or 10.7%, for the first quarternine months of 2013. Our effective tax rate was 29.2%29.0% for the third quarter and 30.5% for the first quarternine months of 2013, as compared to 33.8%32.0% for the third quarter and 33.4% for the first quarternine months of 2012. The decrease in effective tax rate for both the third quarter and the first quarternine months was primarily due to recognition of benefits related to tax audit settlements.settlements and prior-year asset sales.

Selected Financial and Operating Data      
   March 31, 
   2013  2012 
Wireless customers (000)  107,251   103,940 
Network access lines in service (000)1
  28,043   32,764 
Total wireline broadband connections (000)  16,514   16,530 
Debt ratio2
  45.6%  38.4%
Ratio of earnings to fixed charges3
  5.19   5.24 
Number of AT&T employees  243,340   252,330 
 1Prior-year amounts restated to conform to current-period reporting methodology.        
 2Debt 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. 
 3See Exhibit 12.        
            
 
17 
19 
 
AT&T INC.
MARCH 31,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
Selected Financial and Operating Data   
 September 30,
 2013  2012 
Wireless subscribers (000)109,460  105,871 
Network access lines in service (000)25,680  30,443 
Total wireline broadband connections (000)16,427  16,392 
Debt ratio1 
46.9% 38.6%
Ratio of earnings to fixed charges2 
5.43  5.36 
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.
2 See exhibit 12.


Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on 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 postemployment 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, which was previously a reportable segment.

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

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

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

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

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

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


 
1820 
 
AT&T INC.
MARCH 31,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


Wireless                           
Segment Results                           
 First Quarter  Third Quarter  Nine-Month Period 
 2013  2012  
Percent
Change
  2013  2012  
Percent
Change
  2013  2012  
Percent
Change
 
Segment operating revenues                           
Data $5,125   $4,235    21.0 % $5,509  $4,686   17.6% $15,990  $13,392   19.4%
Voice, text and other service  9,937    10,331    (3.8)   9,951   10,220   (2.6)   29,902   30,845   (3.1) 
Equipment  1,629    1,570    3.8    2,020   1,726   17.0   5,570   4,884   14.0 
Total Segment Operating Revenues  16,691    16,136    3.4    17,480   16,632   5.1   51,462   49,121   4.8 
Segment operating expenses                                    
Operations and support  10,180    9,978    2.0    10,982   10,432   5.3   31,932   30,000   6.4 
Depreciation and amortization  1,835    1,666    10.1    1,875   1,730   8.4   5,553   5,092   9.1 
Total Segment Operating Expenses  12,015    11,644    3.2    12,857   12,162   5.7   37,485   35,092   6.8 
Segment Operating Income  4,676    4,492    4.1    4,623   4,470   3.4   13,977   14,029   (0.4) 
Equity in Net Loss of Affiliates  (18)   (13)   (38.5) 
Equity in Net Income (Loss) of
Affiliates
  (18)   (17)   (5.9)   (55)   (45)   (22.2) 
Segment Income $4,658   $4,479    4.0 % $4,605  $4,453   3.4% $13,922  $13,984   (0.4)%
 
The following table highlights other key measures of performance for the Wireless segment: 
           
   First Quarter 
   2013  2012  
Percent
Change
 
  
Wireless Subscribers (000)1 
  107,251    103,940   3.2 %
 
Gross Subscriber Additions (000)2 
  4,727    5,278   (10.4) 
 
Net Subscriber Additions (000)2 
  291    726   (59.9) 
 
Total Churn3 
  1.38%    1.47%  (9) BP 
              
Postpaid Smartphone Subscribers (000)  48,302    41,158   17.4 %
Postpaid Data-Centric Device and Other Phone Subscribers (000)  22,447    28,245   (20.5) 
Total Postpaid Subscribers (000)  70,749    69,403   1.9  
 
Net Postpaid Subscriber Additions (000)2 
  296    187   58.3  
 
Postpaid Churn3 
  1.04%    1.10%  (6) BP 
              
Prepaid Subscribers (000)  7,104    7,368   (3.6)%
 
Net Prepaid Subscriber Additions (000)2 
  (184)   125    -  
              
Reseller Subscribers (000)  14,702    13,869   6.0 %
 
Net Reseller Subscriber Additions (000)2 
  (252)   184   -  
              
Connected Device Subscribers (000)4 
  14,696    13,300   10.5 %
 Net Connected Device Subscriber Additions (000)  431    230   87.4  
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 devices such as eReaders, automobile monitoring systems, and fleet management--excludes tablet subscribers, which are split between prepaid and postpaid. 
 
1921 
 
AT&T INC.
MARCH 31,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 
         
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.

As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models or significant revisions of existing models. We believe a broad offering of a wide variety of smartphones reduces dependence on any single operating system or manufacturer as these products continue to evolve in terms of technology and subscriber appeal. In the first quarternine months of 2013, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid phone subscriber base, 71.6%74.7% (or 48.350.6 million subscribers) use smartphones, up from 61.2%66.1% (or 41.244.5 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, and we believe our service plan offerings will help to retain our subscribers by providing incentives not to move to a new carrier. We do not expect exclusivity terminations to have a material impact on our Wireless segment income, consolidated operating margin or our cash flows from operations.

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 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. We offer our Mobile to Any Mobile feature, which enables our subscribers on these and other qualifying plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions. We also offer data plans at different price levels (usage-based data plans) to attract a wide variety of subscribers and to differentiate us from our competitors. Our postpaid subscribers on data plans increased 10.9%12.0% year over year. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with 69.3%72.0% (or 33.536.4 million) on these plans as of March 31,September 30, 2013, up from 60.9%63.9% (or 25.128.5 million) as of March 31,September 30, 2012. Approximately 75%About 80% of subscribers on tieredusage-based data plans have chosen the higher-priced plans. We recently expanded our Mobile Share data plans (which allow postpaid subscribers to share data at discounted prices among devices covered by their plan) to include additional, larger usage levels.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.

As of March 31,September 30, 2013, about 60%70% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or 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.

Wireless Metrics
Subscriber Additions As of March 31,September 30, 2013, we served 107.3109.5 million wireless subscribers, an increase of 3.2%. Market saturation3.4% 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, primarily due to increased smartphone sales and growth in the connected device subscriber base. Gross additions for the first nine months of 2013 were 1.2% lower than the comparable period of the prior year, reflecting competition in the wireless industry and market saturation, which we expect will continue to limit the rate of growth in the industry’s subscriber base, which has contributed to the 10.4% decrease in gross subscriber additions (gross additions) when compared to March 31, 2012 . Lowerbase. 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 quarternine months of 2013 were primarily attributable to resellers rationalizing their accounts due to low or no usage andlosses in reseller low-revenue accounts.

The increases in net postpaid additions reflect the migration of prepaid tablet subscribers to our postpaid plans. The increase in net postpaid additions in the first quarter of 2013 reflectedplans, contributing to an increase in postpaid tablet subscribers of 365,000, as well as lower postpaid churn.
20 
AT&T INC.
MARCH 31, 2013
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.

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

Average service revenue per user (ARPU) – Postpaid increased 0.9%1.5% in the third quarter and 1.4% for the first quarternine months of 2013. Postpaid data services ARPU increased 18.0%16.6% in the third quarter and 17.4% for the first quarternine months of 2013, reflecting greater use of smartphones and data-centric devices by our subscribers.

The growth in postpaid data services ARPU in the first quarter of 2013 was partially offset by a 6.0%5.1% decrease in postpaid voice, text and other service ARPU in the third quarter and 5.3% decrease for the first quarter.nine months of 2013. Voice, text and other service ARPU declined due to lower access and airtime charges, triggered in part by postpaid subscribers on our discount plans and lower roaming revenues.

ARPU – Total increased 0.1%0.9% in the third quarter and 0.7% for the first quarternine months of 2013, reflecting growth in data services as more subscribers are using smartphones and data-centric devices.tablets and choosing higher-priced usage-based data plans. Data services ARPU increased 17.1%14.3% in the third quarter and 15.9% for the first quarternine months of 2013. The increase was largely offset by the growth in connected device, tablet and reseller subscribers, which have lower-priced data-only plans. Voice, text and other service ARPU declined 6.9%5.3% in the third quarter and 5.9% for the first quarternine 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 revenue growth fromin data services ARPU as more subscribers use smartphones and data-centric devices and as we continue to expand our network,choose higher-priced usage-based data plans. As technology and devices evolve, we also expect continued pressure on voice, text and other service ARPU.
23 
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

Churn  The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. The 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 quarternine months of 2013 reflecting the popularity of our product offerings and network improvements. Postpaid churn rates were lowerwas primarily due to our policy change in calculating churn for third party retailers; however, even without that change, churn rates were lower. Reseller subscribers have traditionally had the lowest churn rate among our wireless subscribers; however,associated with the disconnection of low or no usage customers has partially offset other improvementsreseller low-revenue accounts. The postpaid churn rate was slightly lower in our total churn rate.the third quarter and for the first nine months of 2013.

Operating Results
Our Wireless segment operating income margin in the firstthird quarter increaseddecreased from 27.8%26.9% in 2012 to 28.0%26.4% in 2013 and for the first nine months decreased from 28.6% in 2012 to 27.2% in 2013. Our Wireless segment operating income increased $184,$153, or 4.1%3.4%, in the third quarter and decreased $52, or 0.4%, for the first quarternine months of 2013. The increasedecreases in operating margin and year-to-date operating income reflected continuing data revenue growthhigher costs associated with upgrade activity and operating efficiencies, partially offset by high subsidies associated with growing smartphone sales. While we subsidize the sales, prices of various smartphones, we expect to recover that cost over time from increased usage of the devices, especiallypartially offset by continued data usagerevenue growth. The increase in third-quarter operating income reflected continued data growth and higher smartphone sales and upgrades, partially offset by the subscriber.costs of higher smartphone sales and upgrade activity.

Voice, text and other service revenues decreased $394,$269, or 3.8%2.6%, in the third quarter and $943, or 3.1%, for the first quarternine months of 2013. While we had a 3.4% year-over-year increase in the number of wireless subscribers, increased 3.2% in the first quarter of 2013, these revenues continue to decline due to voicelower access declines, as noted in the ARPU and subscriber relationships discussions above. In 2013, to better reflect our service pricing plans, we have chosen to combine text messaging revenue with voice and other services; we have adjusted previously reported voice, text and other, and data revenues to reflect this change.airtime charges.

Data service revenues increased $890,$823, or 21.0%17.6%, in the third quarter and $2,598, or 19.4%, for the first quarternine months of 2013. The increase wasincreases were primarily due to the increased number of subscribers using smartphones and data-centric devices, such as tablets, eReaders, tablets, and mobile navigation devices. Data service revenues accounted for 34.0%34.8% of our wireless service revenues for the first quarternine months of 2013, compared to 29.1%30.3% last year.

Equipment revenues increased $59,$294, or 3.8%17.0%, in the third quarter and $686, or 14.0%, for the first quarternine months of 2013 due to a year-over-year increaseincreases in smartphone sales as a percentage of total device sales to postpaid subscribers and higher device upgrades.

Operations and support expenses increased $202,$550, or 2.0%5.3%, in the third quarter and $1,932, or 6.4%, for the first quarternine months of 2013. The first-quarter increase wasincreases in the third quarter and for the first nine months were primarily due to the following:
·  Equipment costs increased $521 and $1,526 reflecting an increase in upgrade activity and total device sales, as well as the sales of more expensive smartphones.
·  
Commission expenses increased $105 and $316 due primarily to higher upgrade activity and total device sales and a year-over-year increase in smartphone sales as a percentage of total device sales.
·  Selling expenses (other than commissions) and administrative expenses increased $198$36 and $377 due primarily to an $80 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, a $77 increase in employee-related costs and a $68 increase in advertising costs, partially offset by a $55 decrease indevelopment. Partially offsetting these increases were bad debt expense due to lower write-offs.
·  Equipment costs increased $130 reflecting an increase in upgrade activitydeclines of $36 and total device sales and the sales of the more expensive smartphones.$138.
·  Network system costs increased $89$32 and $187 due to higher network traffic and personnel-related network support costs and cell site related costs in conjunction with our network enhancement efforts.

Partially offsetting these increases were the 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 $145, or 8.4%, in the third quarter and $461, or 9.1%, for the first nine months of 2013. Depreciation expense increased $213, or 13.2%, in the third quarter and $670, or 14.3%, for the first nine months primarily due to ongoing capital spending for network upgrades and expansion. Amortization expense decreased $68, or 59.1%, in the third quarter and $209, or 52.8%, for the first nine months primarily due to lower amortization of intangibles for customer lists related to acquisitions.
 
2124 
 
AT&T INC.
MARCH 31,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


Partially offsetting these increases were the following:
·  Interconnect and long-distance costs decreased $104 due to third-party credits and lower access costs in the current period.
·  USF fees decreased $65 primarily due to federal rate decreases, which are offset by lower USF revenues.
·  Commission expenses decreased $47 due the decline in gross additions, offset by a year-over-year increase in smartphone sales as a percentage of total device sales and higher upgrade activity.

Depreciation and amortization expenses increased $169, or 10.1%, in the first quarter of 2013. Depreciation expense increased $241, or 15.9%, in the first quarter primarily due to ongoing capital spending for network upgrades and expansion. Amortization expense decreased $72, or 48.0%, in the first quarter primarily due to lower amortization of intangibles for customer lists related to acquisitions.

Wireline                           
Segment Results                           
 First Quarter  Third Quarter  Nine-Month Period 
 2013  2012  
Percent
Change
  2013  2012  
Percent
Change
  2013  2012  
Percent
Change
 
Segment operating revenues                           
Data $8,162  $7,800   4.6  % $8,457  $7,987   5.9% $25,019  $23,722   5.5%
Voice  5,306   5,892   (9.9)   5,023   5,563   (9.7)  15,470   17,151   (9.8)
Other  1,187   1,237   (4.0)   1,190   1,264   (5.9)  3,609   3,777   (4.4)
Total Segment Operating Revenues  14,655   14,929   (1.8)   14,670   14,814   (1.0)  44,098   44,650   (1.2)
Segment operating expenses                                    
Operations and support  10,335   10,402   (0.6)   10,385   10,246   1.4   31,137   30,849   0.9 
Depreciation and amortization  2,688   2,808   (4.3)   2,736   2,774   (1.4)  8,146   8,348   (2.4)
Total Segment Operating Expenses  13,023   13,210   (1.4)   13,121   13,020   0.8   39,283   39,197   0.2 
Segment Operating Income  1,632   1,719   (5.1)   1,549   1,794   (13.7)  4,815   5,453   (11.7)
Equity in Net Income of Affiliates  1   -   -  
Equity in Net Income (Loss) of
Affiliates
  -   -   -   1   (1)   - 
Segment Income $1,633  $1,719   (5.0) % $1,549  $1,794   (13.7) % $4,816  $5,452   (11.7) %

Operating Results
Our Wireline segment operating income margin in the firstthird quarter decreased from 11.5%12.1% in 2012 to 11.1%10.6% in 2013, and for the first nine months decreased from 12.2% in 2012 to 10.9% in 2013. Our Wireline segmentSegment operating income decreased $87,$245, or 5.1%13.7%, in the third quarter and $638, or 11.7%, for the first quarternine months of 2013. The decrease in operating marginmargins and income was driven primarily by lower voice revenue and higher operations and support expense, partially offset by data revenue growth and lower depreciation and amortization expenses.
22 
AT&T INC.
MARCH 31, 2013

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


Data revenues increased $362,$470, or 4.6%5.9%, in the third quarter and $1,297, or 5.5%, for the first quarternine months of 2013. Data revenues accounted for approximately 56%57% of wireline operating revenues infor the first quarternine months of 2013 and 52% in53% for the first quarternine months of 2012. Data revenue includes IP, strategic business and traditional data services.
·  IP data revenuerevenues (excluding strategic business services below) increased $399,$428, or 11.5%, in the third quarter and $1,237, or 11.4%, infor the first quarternine months of 2013 primarily driven by higher U-verse penetration, customer additions, and migration from our legacy voice and DSL services. In the third quarter and for the first quarter,nine months U-verse revenue from consumersconsumer customers increased $327$318 and $957 for high speed Internet access, $246$244 and $736 for video and $48$76 and $198 for voice.voice, respectively. These increases were partially offset by a decrease of $180$191 and $557 in DSL revenue as customers continue to shift to our strategicU-verse or competitors’ high speed Internet access offerings. We expect DSL revenue to continue to decline as a percentage of our overall data revenues.
·  Strategic business service revenues,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 $192,$293, or 10.8%15.7%, in the third quarter and $772, or 14.1%, for the first quarternine months of 2013 primarily driven by higher demand for these next generationmigration from our legacy services. In the third quarter and for the first quarter,nine months revenue from Ethernet increased $63,$76 and $215, VPN increased $48, EaMIS increased $28by $116 and $251, U-verse services increased $25.$32 and $103, VoIP increased $27 and $78 and EaMIS increased $22 and $78, respectively.
·  Traditional data revenues, which include circuit-based and packet-switched data services, decreased $234,$251, or 9.3%10.5%, in the third quarter and $719, or 9.7%, for the first quarter.nine months of 2013. This decrease was primarily due to lower demand as customers continue to shift to our mostmore advanced IP-based offeringstechnology such as Ethernet, VPN, U-verse High Speed Internet access and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.
25 
AT&T INC.
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

Voice revenues decreased $586,$540, or 9.9%9.7%, in the third quarter and $1,681, or 9.8%, for the first quarternine months of 2013 primarily due to declining demand for traditional voice services by our consumer and business customers. Included in voice revenues are revenuerevenues from local voice, long-distance (including international) and local wholesale services. Voice revenues do not include VoIP revenue,revenues, which isare included in data revenues.
·  Local voice revenues decreased $360,$341, or 9.9%., in the third quarter and $1,051, or 9.9%, for the first nine months of 2013. The decrease was driven primarily by a 14.4%15.6% decline in total switched access lines. We expect our local voice revenue to continue to be negatively affected by competition from alternative technologies, primarily wireless and continued declines in switched access lines.VoIP.
·  Long-distance revenues decreased $223,$192, or 11.2%.10.3%, in the third quarter and $617, or 10.7%, for the first nine months of 2013. Lower demand for long-distance service from global businessesour business and consumer customers decreased revenue $189revenues $158 in the third quarter and $514 for the first quarter.nine months of 2013. Additionally, expected declines in the number of our national mass-market customers decreased revenue $35revenues $33 in the third quarter and $103 for the first quarter.nine months of 2013.

Other operating revenues decreased $50,$74, or 4.0%5.9%, in the third quarter and $168, or 4.4%, for the first quarternine months of 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 $67,increased $139, or 0.6%1.4%, in the third quarter and $288, or 0.9%, for the first quarternine months of 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 firstincrease in the third quarter decreaseof 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 2013 was primarily due to increased cost of sales of $533, primarily related to U-verse related expenses, contract services of $166, and advertising expense of $93, reflecting ongoing workforce reduction initiatives; decreased$131. These increases were partially offset by lower employee related expenses of $382 and USF fees of $75,$122, which are offset by lower USF revenue; lower traffic compensation expense of $59; and decreased information technology costs of $53. These decreases were partially offset by increased cost of sales of $163, primarily related to U-verse related expenses, and increased advertising expense of $62.revenue.

Depreciation and amortization expenses decreased $120,$38, or 4.3%1.4%, in the third quarter and $202, or 2.4%, for the first quarternine months of 2013. Depreciation decreased $77, or 2.9%, primarily due to assets becoming fully depreciated. Amortization decreased $43, or 26.2%,2013. The decrease was primarily related to lower amortization of intangibles for the customer lists associated with acquisitions.acquisitions and lower depreciation as assets become fully depreciated.

 
2326 
 
AT&T INC.
MARCH 31,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


Supplemental Information

Wireline Broadband, Telephone and Video Connections Summary
Our broadband, switched access lines and other services provided by our local exchange telephone subsidiaries at March 31,September 30, 2013 and 2012 are shown below and trends are addressed throughout thisthe preceding segment discussion.

 March 31,  March 31,  Percent  September 30,  September 30,  Percent 
(in 000s) 2013  2012  Change  2013  2012  Change 
U-verse High Speed Internet  8,447   5,941   42.2  %  9,745   7,108   37.1%
DSL and Other Broadband Connections  8,067   10,589   (23.8)   6,682   9,284   (28.0)
Total Wireline Broadband Connections1
  16,514   16,530   (0.1)   16,427   16,392   0.2 
                        
Total U-verse Video Connections  4,768   3,991   19.5    5,266   4,344   21.2 
                        
Retail Consumer Switched Access Lines  14,840   18,092   (18.0)   13,133   16,486   (20.3)
U-verse Consumer VoIP Connections  3,120   2,442   27.8    3,616   2,733   32.3 
Total Retail Consumer Voice Connections2
  17,960   20,534   (12.5) 
Total Retail Consumer Voice Connections  16,749   19,219   (12.9)
                        
Switched Access Lines                        
Retail Consumer2
  14,840   18,092   (18.0) 
Retail Business2
  11,185   12,420   (9.9) 
Retail Subtotal2
  26,025   30,512   (14.7) 
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 Subtotal2
  1,725   1,902   (9.3) 
Wholesale Subtotal  1,654   1,848   (10.5)
                        
Total Switched Access Lines2,3
  28,043   32,764   (14.4) %
Total Switched Access Lines2
  25,680   30,443   (15.6) %
1
Total wireline broadband connections include DSL, U-verse High Speed Internet and satellite broadband.
2
 Prior-period amounts restated to conform to current-period reporting methodology.
 3
Total switched access lines includeincludes access lines provided to national mass markets and private payphone service providers of 293260 at March 31,September 30, 2013 and 350325 at March 31,September 30, 2012.

Advertising Solutions                           
Segment Results                           
First Quarter Third Quarter Nine-Month Period 
2013 2012  Percent Change 2013 2012  
Percent
Change
 2013 2012  
Percent
Change
 
Total Segment Operating Revenues $-  $744   -  $-  $-   -  $-  $1,049   - 
Segment operating expenses                                    
Operations and support  -   547   -   -   -   -   -   773   - 
Depreciation and amortization  -   77   -   -   -   -   -   106   - 
Total Segment Operating Expenses  -   624   -   -   -   -   -   879   - 
Segment Income $-  $120   -  $-  $-   -  $-  $170   - 

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. We hold a 47 percent interest in the new entity, YP Holdings.

 
2427 
 
AT&T INC.
MARCH 31,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

 
Other                           
Segment Results                           
First Quarter Third Quarter Nine-Month Period 
2013 2012  Percent Change 2013 2012  Percent Change 2013 2012  Percent Change 
Total Segment Operating Revenues $10   $13    (23.1) % $8  $13   (38.5)% $29  $36   (19.4)%
Total Segment Operating Expenses  378    243    55.6    (8)   240   -   580   733   (20.9) 
Segment Operating Income (loss)  (368)   (230)   (60.0) 
Segment Operating Income (Loss)  16   (227)   -   (551)   (697)   20.9 
Equity in Net Income of Affiliates  202    236    (14.4)   109   199   (45.2)   548   583   (6.0) 
Segment Income (loss) $(166)  $6    -  
Segment Income (Loss) $125  $(28)   -  $(3)  $(114)   97.4%

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 costs to support corporate-driven activities and operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.

OperatingSegment operating revenues decreased $3$5, or 23.1%38.5%, in the third quarter and $7, or 19.4%, for the first quarternine months of 2013 primarily due to reduced2013. Operating revenues are from leased equipment programs.

OperatingSegment operating expenses increased $135, or 55.6%,decreased $248 in the third quarter and $153, or 20.9%, for the first quarternine months of 2013. Increased operatingOperating expenses in the third quarter and for the first quarternine 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 primarilyalso due to higher employee-related charges, new product development, and legal settlements. These increaseslower Pension/OPEB financing costs, which were partially offset by reduced financing costs associated with our Pension/OPEB expenses.

Our Other segment also includes our equity investments in América Móvilhigher new 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 $34,$90, or 14.4%45.2%, in the third quarter and $35, or 6.0%, for the first nine months of 2013. Decreased equity in net income of affiliates in the third quarter of 2013was primarily relateddue to reduced earnings from América Móvil and YP Holdings. The decrease for the first nine months was primarily due to foreign exchange impacts at América Móvil, partially offset by earnings from YP Holdings earnings.Holdings.

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

 First Quarter  Third Quarter Nine-Month Period
 2013  2012  2013  2012  2013  2012 
América Móvil $151   $237  América Móvil$85  $126  $410  $490 
YP Holdings  52    -  YP Holdings 23   75   138   94 
Other  (1)   (1) Other 1   (2)   -   (1)
Other Segment Equity in Net Income of Affiliates $202   $236  Other Segment Equity in Net Income of Affiliates$109  $199  $548  $583 
 
 
2528 
 
AT&T INC.
MARCH 31,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


OTHER BUSINESS MATTERS

U-verse Services  As of March 31,September 30, 2013, we are marketing U-verse services to approximately 24.926.0 million customer locations (locations eligible to receive U-verse service). As of March 31,September 30, 2013, we had 8.710.0 million total U-verse subscribers (high-speed Internet and video), including 8.49.7 million Internet and 4.85.3 million video subscribers (subscribers to both services are only counted once in the total). As part of Project VIP (see below)Velocity IP (VIP), we plan to expand our U-verse services to a total of approximately 8.533 million additional customer locations.locations and expect to be essentially complete by year-end 2015.

We believe that our U-verse TV service is a “video service” under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation. Certain municipalities have delayed our requests to offer this service or have refused us permission to use our existing or new right-of-ways to deploy or activate our U-verse-related equipment, services and products, resulting in litigation. 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.

Universal Service Fees Litigation  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 contended 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 defined 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 sought an unspecified amount of damages as well as injunctive relief. In October 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. On February 20, 2013, the Circuit Court held a final fairness hearing and subsequently issued an order granting final approval to the settlement. As of April 17, 2013, all notices of appeal had been dismissed and the time for filing appeals had elapsed. Accordingly, the order approving the settlement is final and the parties are proceeding to implement the settlement.

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 were 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 our financial statements. On April 23, 2013, the court granted approval of the settlement in Lawson. On April 26, 2013, the court granted final approval following its earlier preliminary approval of the settlement in Luque.

Project VIP  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. As part of Project Velocity IP (VIP), we plan to expand our deployment of LTE wireless technology and deploy additional technology to further improve wireless spectrum efficiencies. To that end, we announced in 2012 that we expected to cover approximately 300 million people in the United States by the end of 2014; we now expect to cover nearly 90 percent of that original 2014 goal by the end of 2013. In addition, we plan to expand our wireline IP broadband network to additional residential and small-business customer locations to cover approximately 75 percent of all such customer locations in our 22-state wireline service area by year-end 2015. This project is intended to support new revenue opportunities in four key areas: (1) wireless, (2) strategic and other network managed (“cloud”) services, (3) U-verse and (4) IP-related business services. We expect capital expenditures in the $21,000 range for 2013, and approximately $20,000 in each 2014 and 2015, with no reduction in the Project VIP broadband expansion. Previously, we expected capital spending of $22,000 annually in 2014 and 2015. We are achieving savings through greater integration efficiencies in Project VIP, accelerated LTE build in 2012 and 2013 and other ongoing initiatives.
26 
AT&T INC.
MARCH 31, 2013

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


Atlantic Tele-Network, Inc. Transaction  On January 22,In September 2013, we announced an agreement to acquireacquired Atlantic Tele-Network, Inc.’s U.S. retail wireless operations, operated under the Alltel brand, for $780$806 in cash.cash, which includes closing adjustments. Under the terms of the agreement, we will acquireacquired wireless properties, including licenses, network assets, retail stores and approximately 585,000550,000 subscribers. The transaction is subject to review by the FCC and the Department of Justice (DOJ) and to other customary closing conditions and is expected to close in the second half of 2013.

Spectrum Acquisitions  On January 24,In September 2013, we acquired NextWave Wireless Inc. (NextWave), which holds wireless licenses in the Wireless Communication Services (WCS) and Advanced Wireless Service (AWS) bands. We acquired all the equity and purchased a portion of the debt of NextWave for $600. Certain of NextWave’s assets were distributed to the holders of its debt in redemption of the remainder of that debt. As of March 31, 2013, we have also closed approximately $450 of other wireless spectrum acquisitions from various companies.

On January 25, 2013, we announced an agreement to acquire spectrum in the 700 MHz B band from Verizon Wireless for $1,900 in cash and an assignment of AWS spectrum licenses in five markets. The 700 MHz licenses to be 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 net proceeds of the future sale of the Chicago 700 MHz A-band FCC license held by Leap. As of June 30, 2013, Leap had approximately $2,700 of debt, net of cash. Under the terms of the agreement, we will acquire all of Leap’s stock and, thereby, acquire all of its wireless properties, including spectrum licenses, network assets, retail stores and approximately 5 million subscribers. Leap’s spectrum licenses include Personal Communications Services (PCS) and AWS bands and are largely complementary to our licenses. Leap’s network covers approximately 96 million people in 35 states and consists of a 3G 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 FCC and DOJ. We expectDepartment 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 second halftransaction 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 2013.
Labor Contracts  As of March 31, 2013, we employed approximately 243,000 persons. Approximately 55 percent of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions.
·  Contracts covering approximately 77,000 (as of December 31, 2012) wireline employees expired during 2012 and we have reached new contracts covering approximately 74,000 of those employees. The contract covering wireline employees in Connecticut expired in April 2012 and remains subject to negotiation.
·  Contracts covering approximately 30,000 wireline employees were scheduled to expire during 2013. We have reached a new four-year contract covering approximately 20,000 of these employees (located in our five-state Southwest region). In late March 2013, we announced a tentative four-year agreement with the IBEW covering approximately 6,500 of these employees; this agreement is subject to ratification by these employees. Contacts covering approximately 3,500 employees remain subject to negotiations.
·  Contracts covering wages and other non-benefit working terms for wireless employees are structured on a regional basis; one regional contract for 20,000 employees expired during February 2013 and we have reached a new four-year contract covering these employees.
Afterspecified Leap spectrum assets, Leap can then within 60 days after expiration of AT&T’s option require AT&T to purchase all of the current agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.specified spectrum assets.
 
 
2729 
 
AT&T INC.
MARCH 31,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

 
Tower Transaction  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.

COMPETITIVE AND REGULATORY ENVIRONMENT

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

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

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

We provide wireless services in robustly competitive markets, but those services are subject to substantial and increasing governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. 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 attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.

30 
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

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.
28 
AT&T INC.
MARCH 31, 2013

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


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, (see “Other Business Matters”), AT&Twe 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.

31 
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

LIQUIDITY AND CAPITAL RESOURCES

We had $3,875$1,371 in cash and cash equivalents available at March 31,September 30, 2013. Cash and cash equivalents included cash of $380$490 and money market funds and other cash equivalents of $3,495.$881. In the first threenine months of 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 the acquisition of wireless spectrum. Cash flows were also used to return value to stockholders through dividends and stock repurchases. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities
During the first threenine months of 2013, cash provided by operating activities was $8,199,$26,879, compared to $7,845$28,656 for the first threenine months of 2012, and included net2012. Lower operating cash flows reflected increased income tax refundspayments of $1,114.approximately $1,183 in 2013.    

Cash Used in or Provided by Investing Activities
For the first threenine months of 2013, cash used in investing activities totaled $5,357 and$18,660, which consisted primarily of $4,252$15,565 for capital expenditures (excluding interest during construction), and wireless spectrum and operations acquisitions of $1,045.$3,984. These expenditures were partially offset by cash receipts of approximately $771 from the sale of a portion of our shares in América Móvil, $200 from the repayment of advances to YP Holdings and $101 from the return of investment in YP Holdings.

Virtually all of our capital expenditures are spent on our wireless and wireline networks, our U-verse services, and support systems for our communications services. Capital spending in our Wireless segment of $2,248$8,231 represented 53% of our total spending and decreased 1%increased 14% in the first threenine months. Wireless expenditures were primarily used for network capacity expansion, integration and the deployment of LTE equipment upgrades toand our High-Speed Downlink Packet Access network and the deployment of LTE equipment.network. The Wireline segment, which includes U-verse services, represented 47% of the total capital expenditures and increased 2%15% in the first three months.nine months, primarily reflecting our implementation of Project VIP.

We continue to expect our capital expenditures forduring 2013 to be in the $21,000 range and now expect capital expenditures for 2014 and 2015 to each be in the $20,000 range with no reduction in the Project VIP broadband expansion. Previously, we expected capital spending of $22,000 annually in 2014 and 2015. We are achieving savings through greater integration efficiencies in Project VIP, accelerating LTE build in 2013 and other ongoing initiatives.range.

Cash Used in or Provided by Financing Activities
For the first threenine months of 2013, cash used inour financing activities totaled $3,835 and included net cash received from commercial paper borrowing of $1,748 and proceeds of $4,875$6,416 from the following long term debt issuances:
·  February 2013 issuance of $1,000 of 0.900% global notes due 2016 and $1,250 of floating rate notes due 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.
·  March 2013 issuance of $500 of 1.400% global notes due 2017.
·  March 2013 issuance of €1,250 of 2.500% global notes due 2023 (equivalent to $1,626 when issued) and €400 of 3.550% global notes due 2032 (equivalent to $520 when issued).
·  May 2013 issuance of £1,000 of 4.250% global notes due 2043 (equivalent to approximately $1,560 when issued).

In March 2013, we repaid €1,250 of 4.375% notes (equivalent to $1,641 when repaid) and $147 of 6.5% notes.

Since In July 2013, we repaid $300 of 7.375% notes. Additionally, in August 2013, we announced the beginningredemption of 2012, we have been buying back shares under two previous 300 million share repurchase authorizations. The first repurchase authorization$550 of 6.625% notes, which was completed in the fourth quarter of 2012. During the first quarter ofOctober 2013.

In May 2013, we continued buying back stock, repurchasing an additional 168 million shares for $5,911 under the second authorization. At the endcompleted a repurchase authorization that was approved by our Board of the first quarter, about 61 million shares remained on the second authorization, which we expect to completeDirectors in the second quarter.July 2012. In March 2013, theour Board of Directors authorized the repurchase of an additional 300 million shares. Aftershares of our common stock. During the second authorization is complete,first nine months of 2013, we repurchased 312 million shares 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 expect to make future repurchases opportunistically, which will slow the pace of buybacks compared to recent activity.opportunistically.

 
2932 
 
AT&T INC.
MARCH 31,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


We paid dividends of $2,502$7,325 during the first threenine months of 2013, compared with $2,606$7,738 for the first threenine months of 2012, primarily reflecting the 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 November 2012. Dividends declared by our Board of Directors totaled $0.45 per share in the third quarter of 2013 and $1.35 per share for the first quarternine months of 2013 and $0.44 per share in the third quarter and $1.32 per share for the first threenine months of 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 March 31,September 30, 2013, we had $3,446$7,873 of debt maturing within one year, $1,683$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. No such put was exercised during April 2013.
·  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 2016 and a $3,000 agreement expiring in December 2017. Advances under either agreement may be used for general corporate purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under each agreement. Under each agreement, we can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. Under each agreement, we must maintain a debt-to-EBITDA, including modifications described in the agreement, ratio of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. Both agreements also contain a negative pledge covenant, which generally provides that if we pledge assets or permit liens on our property, then any advances must also be secured. At March 31,September 30, 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.vil or YP Holdings. At March 31,September 30, 2013, our debt ratio was 45.6%46.9%, compared to 38.4%38.6% at March 31,September 30, 2012, and 43.0% at December 31, 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. The trust is entitled to receive cumulative cash distributions of $560 per 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 the time we filed the application, the interest had a fair market value of $9,500. Prior to the contribution of the preferred equity interest, we made an additional cash contribution of $175 and have agreed to annual cash contributions of $175 no later than the estimateddue date for our federal income tax return for each of 2014, 2015 and 2016. These contributions, combined with our existing pension funding contribution for 2013 (required under ERISA) is approximately $175. We continueassets, are essentially equivalent to work with the DOL to obtain approval before the end of 2013. If we receive DOL approval, we expect to make the contribution before September 15, 2013 and deduct it on our 2012 return. Our current financial statements reflect the tax deduction.expected pension obligation at year-end.

 
3033 
 
AT&T INC.
MARCH 31,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 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.
34 
AT&T INC.
SEPTEMBER 30, 2013

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


At March 31,September 30, 2013, we had interest rate swaps with a notional value of $3,000$4,750 and a fair value of $262.$212.

We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $12,576$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 $(326)$1,100 at March 31,September 30, 2013. We have foreign exchange contracts with a notional value of $4 and a net fair value of less than $1 million at March 31,September 30, 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 March 31,September 30, 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 March 31,September 30, 2013.

 
3135 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS


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

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
·  Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers’ ability to access financial markets at favorable rates and terms.
·  Changes in available technology and the effects of such changes, including product substitutions and deployment costs.
·  Increases in our benefit plans’ costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates, 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 relating to access charges,without limit, intercarrier compensation, interconnection obligations, transitioningthe transition from legacy technologies to 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, and the sunset of the traditional copper-based network services and regulatory obligations.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 further congressional action to address spending reductions, which may result in a significant reduction in government spending and reluctance of businesses and consumers to spend in general and on our products and services specifically, due to this fiscal uncertainty.

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

 
3236 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 2. Unregistered Sales of Equity Securities and Use of Proceeds  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  
                  
(c) A summary of our repurchases of common stock during the first quarter of 2013 is as follows:  
(c) A summary of our repurchases of common stock during the third quarter of 2013 is as follows:(c) A summary of our repurchases of common stock during the third quarter of 2013 is as follows:  
                  
PeriodPeriod 
(a)
 
 
 
 
Total Number of
Shares (or Units)
Purchased1,2
 
(b)
 
 
 
 
 
Average Price Paid
Per Share (or Unit)
 
(c)
 
 
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs1 
 
(d)
 
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs
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 
                   
January 1, 2013 -
January 31, 2013
  54,400,053  $ 34.08   53,705,000   175,177,255 
February 1, 2013 -
February 28, 2013
  59,281,419   35.33   59,280,000   115,897,255 
March 1, 2013 -
March 31, 2013
  54,722,247   36.30   54,720,000   361,177,255 
July 1, 2013 -
July 31, 2013
July 1, 2013 -
July 31, 2013
  24,608,211  $  35.62   24,600,000   246,947,551 
August 1, 2013 -
August 31, 2013
August 1, 2013 -
August 31, 2013
  16,500,137   34.26   16,500,000   230,447,551 
September 1, 2013 -
September 30, 2013
September 1, 2013 -
September 30, 2013
  14,001,278   33.93   14,000,000   216,447,551 
TotalTotal  168,403,719  $ 35.24   167,705,000   Total  55,109,626  $  34.78   55,100,000   
1 In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. In July 2012, our Board of Directors authorized the repurchaseof up to anIn 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.
additional 300 million shares of our common stock, and we completed repurchases under the December 2010 authorization last year. The plans have no expiration date.
The March 2013 authorization has no expiration date.
2 Of the shares repurchased, 698,719 shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options.Of the shares repurchased, 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.

 
3337 
 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2013

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.

10Stock Purchase
10-qqqAgreement and Deferral Plan amendedof Merger, dated as of July 12, 2013, by and restated April 26,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


 
3438 
 



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.




May 3,November 1, 2013                                                                                                     /s/ John J. Stephens
                    John J. Stephens
                    Senior Executive Vice President
                        and Chief Financial Officer

39