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
 
 
o 
For the quarterly period ended JuneSeptember 30, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period fromto

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                                                                                                                                        Yes [X]    No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
                                                                                                                                                               Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated"accelerated filer,” “large" "large accelerated filer”filer" and “smaller"smaller reporting company”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 JulyOctober 31, 2014, there were 5,1865,187 million common shares outstanding.

 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC. 
CONSOLIDATED STATEMENTS OF INCOME 
Dollars in millions except per share amounts 
(Unaudited) 
  Three months ended  Six months ended 
  June 30,  June 30, 
  2014  2013  2014  2013 
Operating Revenues $32,575  $32,075  $65,051  $63,431 
Operating Expenses                
Cost of services and sales (exclusive of depreciation                
   and amortization shown separately below)  14,212   13,270   27,533   25,824 
Selling, general and administrative  8,197   8,121   16,457   16,454 
Depreciation and amortization  4,550   4,571   9,167   9,100 
Total operating expenses  26,959   25,962   53,157   51,378 
Operating Income  5,616   6,113   11,894   12,053 
Other Income (Expense)                
Interest expense  (881)  (825)  (1,741)  (1,652)
Equity in net income of affiliates  102   218   190   403 
Other income (expense) – net  1,269   288   1,414   320 
Total other income (expense)  490   (319)  (137)  (929)
Income Before Income Taxes  6,106   5,794   11,757   11,124 
Income tax expense  2,485   1,914   4,402   3,471 
Net Income  3,621   3,880   7,355   7,653 
Less: Net Income Attributable to Noncontrolling Interest  (74)  (58)  (156)  (131)
Net Income Attributable to AT&T $3,547  $3,822  $7,199  $7,522 
Basic Earnings Per Share Attributable to AT&T $0.68  $0.71  $1.38  $1.38 
Diluted Earnings Per Share Attributable to AT&T $0.68  $0.71  $1.38  $1.38 
Weighted Average Number of Common Shares                
   Outstanding – Basic (in millions)  5,204   5,381   5,213   5,446 
Weighted Average Number of Common Shares                
   Outstanding – with Dilution (in millions)
  5,220   5,397   5,229   5,463 
Dividends Declared Per Common Share $0.46  $0.45  $0.92  $0.90 
See Notes to Consolidated Financial Statements.                

AT&T INC. 
CONSOLIDATED STATEMENTS OF INCOME 
Dollars in millions except per share amounts 
(Unaudited) 
  Three months ended  Nine months ended 
  September 30,  September 30, 
  2014  2013  2014  2013 
Operating Revenues $32,957  $32,158  $98,008  $95,589 
Operating Expenses                
Cost of services and sales (exclusive of depreciation                
   and amortization shown separately below)  14,541   13,403   42,074   39,227 
Selling, general and administrative  8,475   7,952   24,932   24,406 
Depreciation and amortization  4,539   4,615   13,706   13,715 
Total operating expenses  27,555   25,970   80,712   77,348 
Operating Income  5,402   6,188   17,296   18,241 
Other Income (Expense)                
Interest expense  (1,016)  (829)  (2,757)  (2,481)
Equity in net income (loss) of affiliates  (2)  91   188   494 
Other income (expense) – net  42   50   1,456   370 
Total other income (expense)  (976)  (688)  (1,113)  (1,617)
Income Before Income Taxes  4,426   5,500   16,183   16,624 
Income tax expense  1,367   1,595   5,769   5,066 
Net Income  3,059   3,905   10,414   11,558 
Less: Net Income Attributable to Noncontrolling Interest  (57)  (91)  (213)  (222)
Net Income Attributable to AT&T $3,002  $3,814  $10,201  $11,336 
Basic Earnings Per Share Attributable to AT&T $0.58  $0.72  $1.96  $2.10 
Diluted Earnings Per Share Attributable to AT&T $0.58  $0.72  $1.95  $2.09 
Weighted Average Number of Common Shares                
   Outstanding – Basic (in millions)  5,198   5,315   5,208   5,402 
Weighted Average Number of Common Shares                
   Outstanding – with Dilution (in millions)
  5,214   5,331   5,224   5,419 
Dividends Declared Per Common Share $0.46  $0.45  $1.38  $1.35 
See Notes to Consolidated Financial Statements.                
2
 
AT&T INC.        
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME       
Dollars in millions        
(Unaudited)        
  Three months ended  Nine months ended 
  September 30,  September 30, 
  2014  2013  2014  2013 
Net income $3,059  $3,905  $10,414  $11,558 
Other comprehensive income, net of tax:                
    Foreign Currency:                
        Translation adjustments (includes $(1), $(1), $0
           and $(2) attributable to noncontrolling interest), net of taxes of
           $(22), $(21), $(17) and $(86)
  (35)  (37)  (29)  (155)
        Reclassification adjustment included in net income,
            net of taxes of $0, $0, $224 and $19
  -   -   416   34 
    Available-for-sale securities:                
        Net unrealized gains (losses), net of taxes of $(15), $38,
           $19 and $84
  (29)  69   30   155 
        Reclassification adjustment realized in net income, net of
           taxes of $(1), $(2), $(9) and $(7)
  (1)  (3)  (15)  (13)
     Cash flow hedges:                
        Net unrealized gains, net of taxes of $201, $171,
           $148 and $286
  370   316   272   526 
        Reclassification adjustment included in net income,
           net of taxes of $3, $4, $14 and $12
  8   7   29   22 
     Defined benefit postretirement plans:                
        Reclassification adjustment included in net income, net of
           taxes $0, $0, $33 and $5
  -   -   61   8 
        Amortization of net prior service credit included in
           net income, net of taxes of $(146), $(109), $(435)
           and $(327)
  (239)  (178)  (718)  (533)
Other comprehensive income  74   174   46   44 
Total comprehensive income  3,133   4,079   10,460   11,602 
Less: Total comprehensive income attributable to
     noncontrolling interest
  (56)  (90)  (213)  (220)
Total Comprehensive Income Attributable to AT&T $3,077  $3,989  $10,247  $11,382 
See Notes to Consolidated Financial Statements.                
3
AT&T INC.            
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME          
Dollars in millions            
(Unaudited)            
  Three months ended  Six months ended 
  June 30,  June 30, 
  2014  2013  2014  2013 
Net income $3,621  $3,880  $7,355  $7,653 
Other comprehensive income, net of tax:                
    Foreign Currency:                
        Translation adjustments (includes $1, $(1), $1
           and $(1) attributable to noncontrolling interest), net of taxes
           of $15, $(127), $5 and $(65)
  26   (239)  6   (118)
        Reclassification adjustment included in net income,
            net of taxes of $210, $19, $224 and $19
  391   34   416   34 
    Available-for-sale securities:                
        Net unrealized gains, net of taxes of $24, $6, $34
           and $46
  43   11   59   86 
        Reclassification adjustment realized in net income, net of
           taxes of $(1), $(1), $(8) and $(5)
  (3)   (3)  (14)  (10)
     Cash flow hedges:                
        Net unrealized gains (losses), net of taxes of $(56), $66,
           $(53) and $115
  (104)  120   (98)  210 
        Reclassification adjustment included in net income,
           net of taxes of $7, $4, $11 and $8
  14   8   21   15 
     Defined benefit postretirement plans:                
        Reclassification adjustment included in net income, net of
           taxes $31, $5, $33 and $5
  58   8   61   8 
        Amortization of net prior service credit included in
           net income, net of taxes of $(142), $(109), $(289)
           and $(218)
  (239)  (177)  (479)  (355)
Other comprehensive income (loss)  186   (238)  (28)  (130)
Total comprehensive income  3,807   3,642   7,327   7,523 
Less: Total comprehensive income attributable to
     noncontrolling interest
  (75)  (57)  (157)  (130)
Total Comprehensive Income Attributable to AT&T $3,732  $3,585  $7,170  $7,393 
See Notes to Consolidated Financial Statements.                

AT&T INC. 
CONSOLIDATED BALANCE SHEETS 
Dollars in millions except per share amounts 
  September 30,  December 31, 
  2014  2013 
Assets (Unaudited)   
Current Assets    
Cash and cash equivalents $2,458  $3,339 
Accounts receivable - net of allowances for doubtful accounts of $482 and $483  13,445   12,918 
Prepaid expenses  869   960 
Deferred income taxes  1,030   1,199 
Other current assets  8,033   4,780 
Total current assets  25,835   23,196 
Property, plant and equipment  286,987   274,798 
   Less: accumulated depreciation and amortization  (171,853)  (163,830)
Property, Plant and Equipment – Net  115,134   110,968 
Goodwill  70,131   69,273 
Licenses  60,784   56,433 
Other Intangible Assets – Net  6,252   5,779 
Investments in Equity Affiliates  166   3,860 
Other Assets  9,637   8,278 
Total Assets $287,939  $277,787 
         
Liabilities and Stockholders' Equity        
Current Liabilities        
Debt maturing within one year $5,109  $5,498 
Accounts payable and accrued liabilities  24,119   21,107 
Advanced billing and customer deposits  4,038   4,212 
Accrued taxes  4,328   1,774 
Dividends payable  2,385   2,404 
Total current liabilities  39,979   34,995 
Long-Term Debt  70,516   69,290 
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes  37,393   36,308 
Postemployment benefit obligation  29,918   29,946 
Other noncurrent liabilities  17,014   15,766 
Total deferred credits and other noncurrent liabilities  84,325   82,020 
         
Stockholders' Equity        
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2014 and        
   December 31, 2013: issued 6,495,231,088 at September 30, 2014 and December 31, 2013)  6,495   6,495 
Additional paid-in capital  91,064   91,091 
Retained earnings  34,165   31,141 
Treasury stock (1,310,226,392 at September 30, 2014 and 1,268,914,913        
   at December 31, 2013, at cost)  (47,037)  (45,619)
Accumulated other comprehensive income  7,926   7,880 
Noncontrolling interest  506   494 
Total stockholders' equity  93,119   91,482 
Total Liabilities and Stockholders' Equity $287,939  $277,787 
See Notes to Consolidated Financial Statements.        
4
3 

AT&T INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
Dollars in millions 
(Unaudited) 
  Nine months ended 
  September 30, 
  2014  2013 
Operating Activities    
Net income $10,414  $11,558 
Adjustments to reconcile net income to net cash provided by operating activities:        
   Depreciation and amortization  13,706   13,715 
   Undistributed earnings from investments in equity affiliates  (45)  (232)
   Provision for uncollectible accounts  692   653 
   Deferred income tax expense  1,304   2,505 
   Net gain from sale of investments, net of impairments  (1,374)  (272)
   Changes in operating assets and liabilities:        
      Accounts receivable  (1,269)  (440)
      Other current assets  (813)  520 
      Accounts payable and accrued liabilities  4,763   (420)
   Retirement benefit funding  (420)  (175)
   Other - net
  (1,365)  (533)
Total adjustments  15,179   15,321 
Net Cash Provided by Operating Activities  25,593   26,879 
         
Investing Activities        
Construction and capital expenditures:        
   Capital expenditures  (16,829)  (15,565)
   Interest during construction  (178)  (213)
Acquisitions, net of cash acquired  (2,053)  (4,025)
Dispositions  6,074   846 
Purchases of securities  (1,996)  - 
Return of advances to and investments in equity affiliates  3   301 
Other  (1)  (4)
Net Cash Used in Investing Activities  (14,980)  (18,660)
         
Financing Activities        
Net change in short-term borrowings with original maturities of three months or less  (16)  1,851 
Issuance of other short-term borrowings  -   1,476 
Repayment of other short-term borrowings  -   (1,476)
Issuance of long-term debt  8,564   6,416 
Repayment of long-term debt  (10,376)  (2,131)
Purchase of treasury stock  (1,617)  (11,134)
Issuance of treasury stock  34   108 
Dividends paid  (7,170)  (7,325)
Other  (913)  499 
Net Cash Used in Financing Activities  (11,494)  (11,716)
Net decrease in cash and cash equivalents  (881)  (3,497)
Cash and cash equivalents beginning of year  3,339   4,868 
Cash and Cash Equivalents End of Period $2,458  $1,371 
Cash paid during the nine months ended September 30 for:        
   Interest $3,351  $2,980 
   Income taxes, net of refunds $1,337  $1,573 
See Notes to Consolidated Financial Statements. 
5

AT&T INC. 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 
Dollars and shares in millions except per share amounts 
(Unaudited) 
  September 30, 2014 
  Shares  Amount 
Common Stock    
Balance at beginning of year  6,495  $6,495 
Issuance of stock  -   - 
Balance at end of period  6,495  $6,495 
         
Additional Paid-In Capital        
Balance at beginning of year     $91,091 
Issuance of treasury stock      3 
Share-based payments      3 
Change related to acquisition of interests held by noncontrolling owners      (33)
Balance at end of period     $91,064 
         
Retained Earnings        
Balance at beginning of year     $31,141 
Net income attributable to AT&T ($1.95 per diluted share)      10,201 
Dividends to stockholders ($1.38 per share)      (7,177)
Balance at end of period     $34,165 
         
Treasury Stock        
Balance at beginning of year  (1,269) $(45,619)
Repurchase of common stock  (48)  (1,617)
Issuance of treasury stock  7   199 
Balance at end of period  (1,310) $(47,037)
         
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax        
Balance at beginning of year     $7,880 
Other comprehensive income attributable to AT&T      46 
Balance at end of period     $7,926 
         
Noncontrolling Interest        
Balance at beginning of year     $494 
Net income attributable to noncontrolling interest      213 
Distributions      (200)
Acquisitions of noncontrolling interests      69 
Acquisition of interests held by noncontrolling owners      (70)
Balance at end of period     $506 
         
Total Stockholders' Equity at beginning of year     $91,482 
Total Stockholders' Equity at end of period     $93,119 
See Notes to Consolidated Financial Statements.        
6


AT&T INC. 
CONSOLIDATED BALANCE SHEETS 
Dollars in millions except per share amounts 
  June 30,  December 31, 
  2014  2013 
Assets (Unaudited)    
Current Assets      
Cash and cash equivalents $11,305  $3,339 
Accounts receivable - net of allowances for doubtful accounts of $461 and $483  13,001   12,918 
Prepaid expenses  928   960 
Deferred income taxes  1,180   1,199 
Other current assets  6,698   4,780 
Total current assets  33,112   23,196 
Property, plant and equipment  283,252   274,798 
   Less: accumulated depreciation and amortization  (168,892)  (163,830)
Property, Plant and Equipment – Net  114,360   110,968 
Goodwill  70,094   69,273 
Licenses  59,655   56,433 
Other Intangible Assets – Net  6,380   5,779 
Investments in Equity Affiliates  159   3,860 
Other Assets  9,706   8,278 
Total Assets $293,466  $277,787 
         
Liabilities and Stockholders’ Equity        
Current Liabilities        
Debt maturing within one year $10,482  $5,498 
Accounts payable and accrued liabilities  22,966   21,107 
Advanced billing and customer deposits  3,990   4,212 
Accrued taxes  3,962   1,774 
Dividends payable  2,388   2,404 
Total current liabilities  43,788   34,995 
Long-Term Debt  73,570   69,290 
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes  36,835   36,308 
Postemployment benefit obligation  30,070   29,946 
Other noncurrent liabilities  16,578   15,766 
Total deferred credits and other noncurrent liabilities  83,483   82,020 
         
Stockholders’ Equity        
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2014 and        
   December 31, 2013: issued 6,495,231,088 at June 30, 2014 and December 31, 2013)  6,495   6,495 
Additional paid-in capital  91,057   91,091 
Retained earnings  33,554   31,141 
Treasury stock (1,304,409,511 at June 30, 2014 and 1,268,914,913        
   at December 31, 2013, at cost)  (46,825)  (45,619)
Accumulated other comprehensive income  7,851   7,880 
Noncontrolling interest  493   494 
Total stockholders’ equity  92,625   91,482 
Total Liabilities and Stockholders’ Equity $293,466  $277,787 
See Notes to Consolidated Financial Statements.        

  4

AT&T INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
Dollars in millions 
(Unaudited) 
  Six months ended 
  June 30, 
  2014  2013 
Operating Activities      
Net income $7,355  $7,653 
Adjustments to reconcile net income to net cash provided by operating activities:        
   Depreciation and amortization  9,167   9,100 
   Undistributed earnings from investments in equity affiliates  (58)  (198)
   Provision for uncollectible accounts  444   439 
   Deferred income tax expense  546   1,081 
   Net gain from sale of investments, net of impairments  (1,365)  (260)
   Changes in operating assets and liabilities:        
      Accounts receivable  (566)  (290)
      Other current assets  (771)  784 
      Accounts payable and accrued liabilities  2,894   (340)
   Retirement benefit funding  (280)  - 
   Other - net
  (497)  (258)
Total adjustments  9,514   10,058 
Net Cash Provided by Operating Activities  16,869   17,711 
         
Investing Activities        
Construction and capital expenditures:        
   Capital expenditures  (11,649)  (9,665)
   Interest during construction  (118)  (140)
Acquisitions, net of cash acquired  (857)  (1,182)
Dispositions  4,921   825 
Return of advances to and investments in equity affiliates  2   301 
Other  -   (4)
Net Cash Used in Investing Activities�� (7,701)  (9,865)
         
Financing Activities        
Net change in short-term borrowings with original maturities of three months or less  134   - 
Issuance of other short-term borrowings  -   1,476 
Repayment of other short-term borrowings  -   (233)
Issuance of long-term debt  8,564   6,416 
Repayment of long-term debt  (3,508)  (1,823)
Purchase of treasury stock  (1,396)  (9,217)
Issuance of treasury stock  27   104 
Dividends paid  (4,784)  (4,930)
Other  (239)  41 
Net Cash Used in Financing Activities  (1,202)  (8,166)
Net increase (decrease) in cash and cash equivalents  7,966   (320)
Cash and cash equivalents beginning of year  3,339   4,868 
Cash and Cash Equivalents End of Period $11,305  $4,548 
Cash paid during the six months ended June 30 for:        
   Interest $2,292  $2,002 
   Income taxes, net of refunds $987  $591 
See Notes to Consolidated Financial Statements. 

5 

AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
 June 30, 2014
 Shares Amount
Common Stock    
Balance at beginning of year6,495  $6,495 
Issuance of stock -   - 
Balance at end of period6,495  $6,495 
     
Additional Paid-In Capital    
Balance at beginning of year  $91,091 
Issuance of treasury stock   4 
Share-based payments   (34)
Change related to acquisition of interests held by noncontrolling owners   (4)
Balance at end of period  $91,057 
     
Retained Earnings    
Balance at beginning of year  $31,141 
Net income attributable to AT&T ($1.38 per diluted share)   7,199 
Dividends to stockholders ($0.92 per share)   (4,786)
Balance at end of period  $33,554 
     
Treasury Stock    
Balance at beginning of year (1,269) $(45,619)
Repurchase of common stock (42)  (1,396)
Issuance of treasury stock7   190 
Balance at end of period (1,304) $(46,825)
     
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax    
Balance at beginning of year  $7,880 
Other comprehensive loss attributable to AT&T   (29)
Balance at end of period  $7,851 
     
Noncontrolling Interest    
Balance at beginning of year  $494 
Net income attributable to noncontrolling interest   156 
Distributions   (158)
Translation adjustments attributable to noncontrolling interest, net of taxes   1 
Balance at end of period  $493 
     
Total Stockholders’ Equity at beginning of year  $91,482 
Total Stockholders’ Equity at end of period  $92,625 
See Notes to Consolidated Financial Statements. 

6 
AT&T INC.
JUNESEPTEMBER 30, 2014

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

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation  Throughout this document, AT&T Inc. is referred to as “AT"AT&T,” “we”" "we" or the “Company.”"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, 2013. On March 13, 2014, we closed our acquisition of Leap Wireless International, Inc. (Leap) (see Note 7), and we incorporated Leap into our wireless operations following the date of acquisition.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates operate in the communications services industry both domestically and internationally, providing wireless communications services, traditional wireline voice services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale services. On March 13, 2014, we closed our acquisition of Leap Wireless International, Inc. (Leap) (see Note 7), and we incorporated Leap into our wireless operations following the date of acquisition.

All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships 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 recordrecorded our proportionate share of our equity method investees’investees' other comprehensive income (OCI) items, including actuarial gains and losses on pension and other postretirement benefit obligations. On June 30, 2014, we completed the sale of our investment in América Móvil, S.A.B. de C.V. (América Móvil) to an unrelated third party (see Note 7).

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’speriod's presentation.

During the fourth-quarter we conduct our annual impairment testing of intangible assets, remeasure the plan assets and obligations of our benefit plans and, due to our continued access line losses and technology changes, we are assessing certain network assets for under-utilization and/or abandonment.

Stock Repurchase Program  During the first sixnine months of 2014, we repurchased approximately 4248 million shares for $1,396$1,617 under a repurchase authorization that was approved by our Board of Directors in March 2013. In March 2014, our Board of Directors approved anothera fourth authorization to repurchase 300 million shares of our common stock. At JuneAs of September 30, 2014, we had 421approximately 415 million shares remaining underfrom these authorizations. The repurchase authorizations have no expiration date, and we expect to make future repurchases opportunistically.
 
Software Costs  During 2014, we completed a studystudies evaluating the periods that we were utilizing our non-network software assets. As of April 1 and July 1, 2014, we modifiedextended our amortization periodestimated useful lives for capitalized non-network and network software, respectively, to five years to better reflect the estimated periods during which these assets will remain in service and to align with amortization periodsthe estimated useful lives used in the industry. Had we not revised the amortization period, our depreciation and amortization expense would have been $4,763This change in accounting estimate increased net income $198, or $0.04 per diluted share, in the secondthird quarter and $9,380$330, or $0.06 per diluted share, for the first six months.
nine months of 2014.

New Accounting Standards  In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, “Revenue"Revenue from Contracts with Customers (Topic 606)”" (ASU 2014-09), which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues between service and equipment, and the timing in which those revenues are recognized. ASU 2014-09 also specifies that incremental costs of obtaining or fulfilling our contracts with customers should be deferred. ASU 2014-09 becomes effective for annual reporting periods beginning after December 15, 2016.
7

AT&T INC.
SEPTEMBER 30, 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The FASB will allow two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of January 1, 2017, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and provide additional disclosures comparing results to previous rules. We continue to evaluate the impact of the new standard and available adoption methods.

7 
AT&T INC.
JUNE 30, 2014

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

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings for the three and sixnine months ended JuneSeptember 30, 2014 and 2013, is shown in the table below:

 Three months ended  Six months ended  Three months ended  Nine months ended 
 June 30,  June 30,  September 30,  September 30, 
 2014  2013  2014  2013  2014  2013  2014  2013 
Numerators                    
Numerator for basic earnings per share:                    
Net Income $3,621  $3,880  $7,355  $7,653  $3,059  $3,905  $10,414  $11,558 
Less: Net income attributable to noncontrolling interest  (74)  (58)  (156)  (131)  (57)  (91)  (213)  (222)
Net Income attributable to AT&T  3,547   3,822   7,199   7,522   3,002   3,814   10,201   11,336 
Dilutive potential common shares:                                
Share-based payment  3   2   7   6   3   3   10   9 
Numerator for diluted earnings per share $3,550  $3,824  $7,206  $7,528  $3,005  $3,817  $10,211  $11,345 
Denominators (000,000)                                
Denominator for basic earnings per share:                                
Weighted average number of common shares outstanding  5,204   5,381   5,213   5,446   5,198   5,315   5,208   5,402 
Dilutive potential common shares:                                
Share-based payment (in shares)  16   16   16   17   16   16   16   17 
Denominator for diluted earnings per share  5,220   5,397   5,229   5,463   5,214   5,331   5,224   5,419 
Basic earnings per share attributable to AT&T $0.68  $0.71  $1.38  $1.38  $0.58  $0.72  $1.96  $2.10 
Diluted earnings per share attributable to AT&T $0.68  $0.71  $1.38  $1.38  $0.58  $0.72  $1.95  $2.09 

At JuneSeptember 30, 2014 and 2013, we had issued and outstanding options to purchase approximately 11 million and 1312 million shares of AT&T common stock. For the quarter ended JuneSeptember 30, 2014 and 2013, the exercise prices of 3 million and 2 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.

8

AT&T INC.
JUNESEPTEMBER 30, 2014

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

NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) for the sixnine months ended JuneSeptember 30, 2014 and 2013, are presented below. For the period ended JuneSeptember 30, 2014, the amounts reclassified from accumulated OCI include the adjustments resulting from our change in accounting for América Móvil (see Note 7). All amounts are net of tax and exclude noncontrolling interest.

At June 30, 2014 and for the period ended:
        
At September 30, 2014 and for the period ended:
At September 30, 2014 and for the period ended:
       
Foreign
Currency
Translation
Adjustment
 
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
 
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
 
Defined Benefit
 Postretirement
Plans
 
Accumulated
Other
Comprehensive
  Income
Foreign
Currency
Translation
Adjustment
  
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
 
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
 
Defined Benefit
Postretirement
Plans
 
Accumulated
Other
Comprehensive
Income
 
Balance as of December 31, 2013Balance as of December 31, 2013$ (367) $ 450  $ 445  $ 7,352  $ 7,880 $(367) $450 $445 $7,352  $7,880 
Other comprehensive income
(loss) before reclassifications
Other comprehensive income
(loss) before reclassifications
  5    59    (98)   -    (34) (29)  30  272  -   273 
Amounts reclassified
from accumulated OCI
Amounts reclassified
from accumulated OCI
  416  1   (14) 2   21  3   (418) 4  5  416 1  (15
)2
  29 3  (657
)4
   (227)
Net other comprehensive
income (loss)
Net other comprehensive
income (loss)
  421    45    (77)   (418)   (29) 387   15  301  (657)   46 
Balance as of June 30, 2014$ 54  $ 495  $ 368  $ 6,934  $ 7,851 
Balance as of September 30, 2014$20  $465 $746 $6,695  $7,926 
                                
At June 30, 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
Gains (Losses)
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
Gains (Losses)
on Available-
for-Sale
Securities
 
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
 
Defined Benefit
Postretirement
Plans
 
Accumulated
Other
Comprehensive
Income
 
Balance as of December 31, 2012Balance as of December 31, 2012$ (284) $ 272  $ (110) $ 5,358  $ 5,236 $(284) $272 $(110) $5,358  $5,236 
Other comprehensive income
(loss) before reclassifications
Other comprehensive income
(loss) before reclassifications
  (117)   86    210    -    179  (153)  155  526  -   528 
Amounts reclassified
from accumulated OCI
Amounts reclassified
from accumulated OCI
  34  1   (10) 2   15  3   (347) 4   (308) 34 1  (13
)2
  22 3  (525
)4
   (482)
Net other comprehensive
income (loss)
Net other comprehensive
income (loss)
  (83)   76    225    (347)   (129) (119)  142  548  (525)   46 
Balance as of June 30, 2013$ (367) $ 348  $ 115  $ 5,011  $ 5,107 
1  Pre-tax translation loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
2  Pre-tax gains are included in Other income (expense) - net in the consolidated statements of income.
3  (Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
4  The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).
 Actuarial loss reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.
Balance as of September 30, 2013$(403) $414 $438 $4,833  $5,282 
1 Pre-tax translation loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
2 Pre-tax gains are included in Other income (expense) - net in the consolidated statements of income.
3 (Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
4 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).
  Actuarial loss reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.
 
9

AT&T INC.
JUNESEPTEMBER 30, 2014

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

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and demands to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each segment’ssegment's reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have two reportable segments: (1) Wireless and (2) Wireline.


The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment includes our portion of the results from our SoftcardTM mobile wallet joint venture which is accounted for as an equity 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 Internet, video and VoIP services and managed networking to business customers.

The Corporate and Other column includes unallocated corporate expenses, which includes costs to support corporate-driven activities and operations, 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 as well as our actuarial gains and losses on our pension and postretirement plan valuations. Results from equity method investments in América Móvil (prior to our Maythe June 2014 announcement of our intention to disposedisposal of our investment), YP Holdings LLC, and Otter Media (our joint venture with The Chernin Group), are also excluded from our segment results as those results are nonoperational and not considered in our assessment of segment performance. We have revised our prior-period presentation to conform to our current reporting.

10

AT&T INC.
JUNESEPTEMBER 30, 2014

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

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

For the three months ended June 30, 2014          
  Wireless  Wireline  
Corporate
and Other
  
Consolidated
Results
 
Service $15,148  $14,408  $-  $29,556 
Equipment  2,782   229   8   3,019 
Total segment operating revenues  17,930   14,637   8   32,575 
Operations and support expenses  11,568   10,700   141   22,409 
Depreciation and amortization expenses  2,035   2,514   1   4,550 
Total segment operating expenses  13,603   13,214   142   26,959 
Segment operating income (loss)  4,327   1,423   (134)  5,616 
Interest expense  -   -   881   881 
Equity in net income (loss) of affiliates  (29)  -   131   102 
Other income (expense) – net  -   -   1,269   1,269 
Segment income before income taxes $4,298  $1,423  $385  $6,106 
                 
For the six months ended June 30, 2014          
Consolidated
Results
 
  Wireless  Wireline  
Corporate
and Other
 
Service $30,535  $28,797  $-  $59,332 
Equipment  5,261   441   17   5,719 
Total segment operating revenues  35,796   29,238   17   65,051 
Operations and support expenses  22,450   21,157   383   43,990 
Depreciation and amortization expenses  3,966   5,198   3   9,167 
Total segment operating expenses  26,416   26,355   386   53,157 
Segment operating income (loss)  9,380   2,883   (369)  11,894 
Interest expense  -   -   1,741   1,741 
Equity in net income (loss) of affiliates  (49)  1   238   190 
Other income (expense) – net  -   -   1,414   1,414 
Segment income (loss) before income taxes $9,331  $2,884  $(458) $11,757 

For the three months ended September 30, 2014       
  Wireless  Wireline  
Corporate
and Other
  
Consolidated 
Results
Service $15,423  $14,368  $-  $29,791 
Equipment  2,914   247   5   3,166 
Total segment operating revenues  18,337   14,615   5   32,957 
Operations and support expenses  11,855   10,761   400   23,016 
Depreciation and amortization expenses  1,965   2,571   3   4,539 
Total segment operating expenses  13,820   13,332   403   27,555 
Segment operating income (loss)  4,517   1,283   (398)  5,402 
Interest expense  -   -   1,016   1,016 
Equity in net income (loss) of affiliates  (26)  1   23   (2)
Other income (expense) – net  -   -   42   42 
Segment income (loss) before income taxes $4,491  $1,284  $(1,349) $4,426 
                 
For the nine months ended September 30, 2014          
Consolidated 
 Results
  Wireless  Wireline  
Corporate
and Other
 
Service $45,958  $43,165  $-  $89,123 
Equipment  8,175   688   22   8,885 
Total segment operating revenues  54,133   43,853   22   98,008 
Operations and support expenses  34,305   31,918   783   67,006 
Depreciation and amortization expenses  5,931   7,769   6   13,706 
Total segment operating expenses  40,236   39,687   789   80,712 
Segment operating income (loss)  13,897   4,166   (767)  17,296 
Interest expense  -   -   2,757   2,757 
Equity in net income (loss) of affiliates  (75)  2   261   188 
Other income (expense) – net  -   -   1,456   1,456 
Segment income (loss) before income taxes $13,822  $4,168  $(1,807) $16,183 
11

AT&T INC.
JUNESEPTEMBER 30, 2014

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


For the three months ended June 30, 2013          
For the three months ended September 30, 2013For the three months ended September 30, 2013       
 Wireless  Wireline  
Corporate
and Other
  
Consolidated 
Results
Service $15,460  $14,403  $-  $29,863 
Equipment  2,020   267   8   2,295 
Total segment operating revenues  17,480   14,670   8   32,158 
Operations and support expenses  10,982   10,385   (12)  21,355 
Depreciation and amortization expenses  1,875   2,736   4   4,615 
Total segment operating expenses  12,857   13,121   (8)  25,970 
Segment operating income  4,623   1,549   16   6,188 
Interest expense  -   -   829   829 
Equity in net income (loss) of affiliates  (18)  -   109   91 
Other income (expense) – net  -   -   50   50 
Segment income (loss) before income taxes $4,605  $1,549  $(654) $5,500 
                
For the nine months ended September 30, 2013For the nine months ended September 30, 2013          
 
Consolidated
 Results
 Wireless  Wireline  
Corporate
and Other
  
Consolidated
Results
  Wireless  Wireline  
Corporate
and Other
 
Service $15,370  $14,482  $-  $29,852  $45,892  $43,266  $-  $89,158 
Equipment  1,921   291   11   2,223   5,570   832   29   6,431 
Total segment operating revenues  17,291   14,773   11   32,075   51,462   44,098   29   95,589 
Operations and support expenses  10,770   10,417   204   21,391   31,932   31,137   564   63,633 
Depreciation and amortization expenses  1,843   2,722   6   4,571   5,553   8,146   16   13,715 
Total segment operating expenses  12,613   13,139   210   25,962   37,485   39,283   580   77,348 
Segment operating income (loss)  4,678   1,634   (199)  6,113   13,977   4,815   (551)  18,241 
Interest expense  -   -   825   825   -   -   2,481   2,481 
Equity in net income (loss) of affiliates  (19)  -   237   218   (55)  1   548   494 
Other income (expense) – net  -   -   288   288   -   -   370   370 
Segment income (loss) before income taxes $4,659  $1,634  $(499) $5,794  $13,922  $4,816  $(2,114) $16,624 
                
For the six months ended June 30, 2013          
Consolidated
Results
 
 Wireless  Wireline  
Corporate
and Other
 
Service $30,432  $28,863  $-  $59,295 
Equipment  3,550   565   21   4,136 
Total segment operating revenues  33,982   29,428   21   63,431 
Operations and support expenses  20,950   20,752   576   42,278 
Depreciation and amortization expenses  3,678   5,410   12   9,100 
Total segment operating expenses  24,628   26,162   588   51,378 
Segment operating income (loss)  9,354   3,266   (567)  12,053 
Interest expense  -   -   1,652   1,652 
Equity in net income (loss) of affiliates  (37)  1   439   403 
Other income (expense) – net  -   -   320   320 
Segment income (loss) before income taxes $9,317  $3,267  $(1,460) $11,124 

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’plans' obligations to provide benefits to employees upon their retirement.

In July 2014, the U.S. Department of Labor (DOL) published in the Federal Register their final retroactive approval of our September 9, 2013 voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $9,187$9,114 at JuneSeptember 30, 2014. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as contributions. We distributed $280$420 to the trust during the sixnine months ended JuneSeptember 30, 2014. So long as we make the distributions, the terms of the preferred interest will impose no limitations on our ability to declare a dividend, or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan’splan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.
 
12
 
AT&T INC.
JUNESEPTEMBER 30, 2014

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


We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income, expense credits are denoted with parentheses. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded.

 Three months ended  Six months ended  Three months ended  Nine months ended 
 June 30,  June 30,  September 30,  September 30, 
 2014  2013  2014  2013  2014  2013  2014  2013 
Pension cost:                    
Service cost – benefits earned during the period $282  $330  $564  $660  $282  $331  $846  $991 
Interest cost on projected benefit obligation  662   607   1,323   1,214   661   608   1,984   1,822 
Expected return on assets  (851)  (828)  (1,700)  (1,656)  (849)  (828)  (2,549)  (2,484)
Amortization of prior service credit  (23)  (23)  (47)  (46)  (24)  (25)  (71)  (71)
Net pension cost $70  $86  $140  $172  $70  $86  $210  $258 
                                
Postretirement cost:                                
Service cost – benefits earned during the period $58  $96  $116  $191  $59  $95  $175  $286 
Interest cost on accumulated postretirement benefit obligation  364   389   729   779   365   389   1,094   1,168 
Expected return on assets  (162)  (178)  (326)  (356)  (165)  (177)  (491)  (533)
Amortization of prior service credit  (362)  (262)  (724)  (525)  (362)  (263)  (1,086)  (788)
Net postretirement (credit) cost $(102) $45  $(205) $89  $(103) $44  $(308) $133 
                                
Combined net pension and postretirement (credit) cost $(32) $131  $(65) $261  $(33) $130  $(98) $391 

Our combined net pension and postretirement cost decreased $163 in the secondthird quarter and $326$489 for the first sixnine months of 2014. The decrease reflects higher amortization of prior service credits due to plan changes, including changes to future costs for continued retiree healthcare coverage. The decrease also reflects increasing corporate bond rates, which contributed to lower service cost and higher interest costs.

Our fourth-quarter 2014 results will include the effects of settlement accounting for a portion of our pension plan. Due in part to our 2013 enhanced retirement offer and projected distribution levels, we expect thatother distributions, lump sum distributions from the plan during 2014 could exceedexceeded service and interest costs resulting in settlement accounting for a portion of our pension plan. This would result in remeasurement of the plans assets and obligations, with remeasurement for each interim period thereafter.early October.

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 $29 in the secondthird quarter of 2014, of which $28$27 was interest cost, and $58$87 for the first sixnine months, of which $55$82 was interest cost. In 2013, net supplemental retirement pension benefits cost was $28$27 in the secondthird quarter, of which $26$25 was interest cost, and $55$82 for the first sixnine months, of which $51$76 was interest cost.
 
13


AT&T INC.
JUNESEPTEMBER 30, 2014

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

NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

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

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

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

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

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

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2013.

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

June 30, 2014 December 31, 2013 September 30, 2014 December 31, 2013 
Carrying Fair Carrying Fair Carrying Fair Carrying Fair 
Amount Value Amount Value Amount Value Amount Value 
Notes and debentures $83,548  $91,833  $74,484  $79,309 $75,226  $82,938  $74,484  $79,309 
Commercial paper  150   150   20   20  -   -   20   20 
Bank borrowings  5   5   1   1  5   5   1   1 
Investment securities  2,708   2,708   2,450   2,450  2,643   2,643   2,450   2,450 

The carrying value of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
 
14

AT&T INC.
JUNESEPTEMBER 30, 2014

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


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

 September 30, 2014 
 Level 1 Level 2 Level 3 Total 
Available-for-Sale Securities       
   Domestic equities$1,108  $-  $-  $1,108 
   International equities 541   -   -   541 
   Fixed income bonds -   913   -   913 
Asset Derivatives1 
               
   Interest rate swaps -   131   -   131 
   Cross-currency swaps -   1,536   -   1,536 
Liability Derivatives1 
               
   Interest rate swaps -   (10)  -   (10)
   Cross-currency swaps -   (901)  -   (901)
                
 December 31, 2013 
 Level 1 Level 2 Level 3 Total 
Available-for-Sale Securities               
   Domestic equities$1,049  $-  $-  $1,049 
   International equities 563   -   -   563 
   Fixed income bonds -   759   -   759 
Asset Derivatives1 
               
   Interest rate swaps -   191   -   191 
   Cross-currency swaps -   1,951   -   1,951 
Liability Derivatives1 
               
   Interest rate swaps -   (7)  -   (7)
   Cross-currency swaps -   (519)  -   (519)
1 Derivatives designated as hedging instruments are reflected as Other assets, Other noncurrent liabilities and, for a portion of interest rate swaps, Other current assets.
 
  June 30, 2014
  Level 1  Level 2  Level 3  Total 
Available-for-Sale Securities            
   Domestic equities $1,113  $-  $-  $1,113 
   International equities  566   -   -   566 
   Fixed income bonds  -   949   -   949 
Asset Derivatives1 
                
   Interest rate swaps  -   203   -   203 
   Cross-currency swaps  -   2,011   -   2,011 
Liability Derivatives1 
                
   Cross-currency swaps  -   (503)  -   (503)
                 
  December 31, 2013
   Level 1   Level 2   Level 3   Total 
Available-for-Sale Securities                
   Domestic equities $1,049  $-  $-  $1,049 
   International equities  563   -   -   563 
   Fixed income bonds  -   759   -   759 
Asset Derivatives1 
                
   Interest rate swaps  -   191   -   191 
   Cross-currency swaps  -   1,951   -   1,951 
Liability Derivatives1 
                
   Interest rate swaps  -   (7)  -   (7)
   Cross-currency swaps  -   (519)  -   (519)
1 Derivatives designated as hedging instruments are reflected as Other assets, Other noncurrent liabilities and, for a portion of interest rate swaps, Other current assets.

Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in “Other"Other income (expense) – net”net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in “Other"Other income (expense) – net”net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $90$91 have maturities of less than one year, $285$277 within one to three years, $300$292 within three to five years, and $274$253 for five or more years.

Our cash equivalent (money market securities) short-term investments (including money market securities)(certificate and time deposits) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Our short-term investments of $1,890 are recorded in "Other current assets" and our investment securities are recorded in “Other Assets”"Other Assets" on the consolidated balance sheets.

15 
AT&T INC.
JUNE 30, 2014

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

Derivative Financial Instruments
We employ derivatives to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.
15
AT&T INC.
SEPTEMBER 30, 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
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 in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.

Cash Flow Hedging  We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling and Canadian dollar denominated debt. These agreements include initial and final exchanges of principal from fixed foreign denominations to fixed U.S. denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed foreign-denominated rate to a fixed U.S. denominated interest rate.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities, both for the period they are outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as “Other"Other income (expense) – net”net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to “Other"Other income (expense) – net”net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $43$42 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. 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"Other income (expense) – net”net" in the consolidated statements of income. In the sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

16 
AT&T INC.
JUNE 30, 2014
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At JuneSeptember 30, 2014, we had posted collateral of $3$58 (a deposit asset) and held collateral of $1,755$1,396 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Moody’sMoody's Investors Service and Standard & Poor’sPoor's Rating Services and two rating levels by Fitch Ratings, before the final collateral exchange in June,September, we would have been required to post additional collateral of $50.$71. At December 31, 2013, we had posted collateral of $8 (a deposit asset) and held collateral of $1,600 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), against the fair value of the derivative instruments.
16
AT&T INC.
SEPTEMBER 30, 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Following is the notional amount of our outstanding derivative positions:

June 30, December 31, September 30, December 31, 
2014 2013 2014 2013 
Interest rate swaps $6,350  $4,750  $6,550  $4,750 
Cross-currency swaps  20,650   17,787   20,650   17,787 
Total $27,000  $22,537  $27,200  $22,537 

Following is the related hedged items affecting our financial position and performance:Following is the related hedged items affecting our financial position and performance: Following is the related hedged items affecting our financial position and performance: 
                   
Effect of Derivatives on the Consolidated Statements of IncomeEffect of Derivatives on the Consolidated Statements of Income         Effect of Derivatives on the Consolidated Statements of Income       
 
Three months ended
  
Six months ended
 
Fair Value Hedging RelationshipsThree months ended Nine months ended 
 June 30, 2014  June 30, 2013  June 30, 2014  June 30, 2013 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
 
Interest rate swaps (Interest expense):                   
Gain (Loss) on interest rate swaps $22  $(63) $11  $(87)$(70) $9  $(59) $(78)
Gain (Loss) on long-term debt  (22)  63   (11)  87  70   (9)  59   78 

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

 Three months ended  Nine months ended 
Cash Flow Hedging Relationships 
September 30,
2014
  
September 30,
2013
  
September 30,
2014
  
September 30,
2013
 
Cross-currency swaps:        
     Gain (Loss) recognized in accumulated OCI $567  $482  $418  $807 
                 
Interest rate locks:                
     Interest income (expense) reclassified from
        accumulated OCI into income
  (11)  (11)  (33)  (34)
                 
Foreign exchange contracts:                
     Gain (Loss) recognized in accumulated OCI  -   5   (2)  5 
  Three months ended  Six months ended 
Cash Flow Hedging Relationships June 30, 2014  June 30, 2013  June 30, 2014  
June 30, 2013
 
Cross-currency swaps:            
     Gain (Loss) recognized in accumulated OCI $(160) $184  $(149) $325 
                 
Interest rate locks:                
     Interest income (expense) reclassified from
        accumulated OCI into income
  (11)  (12)  (22)  (23)
                 
Foreign exchange contracts:                
     Gain (Loss) recognized in accumulated OCI  -   2   (2)  - 
17

17 
AT&T INC.
JUNESEPTEMBER 30, 2014

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

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions
Leap  On March 13, 2014, we acquired Leap, a provider of prepaid wireless service, for fifteen dollars per outstanding share of Leap’sLeap's common stock, or $1,248 (excluding Leap’sLeap's cash on hand), plus one nontransferable 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.

The preliminary values of assets acquired under the terms of the agreement were: $3,000 in licenses, $510 in property, plant and equipment, $520 of customer lists, $340 for trade names and $716$744 of goodwill. The estimated fair value of debt associated with the acquisition of Leap was $3,889, all of which was redeemed or matured by July 31, 2014.

Pending Acquisition
DIRECTV  OnIn May 18, 2014, we announced ana merger agreement to acquire DIRECTV in a stock-and-cash transaction for ninety-five dollars per share of DIRECTV’sDIRECTV's common stock, or approximately $48,500 at the date of announcement. As of JuneSeptember 30, 2014, DIRECTV had approximately $17,691$16,852 in net debt.debt based on DIRECTV's financial statements included in the Form 10-Q for the third quarter of 2014. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our stock price is below $34.90 per share at closing and 1.724 AT&T shares if our stock price is above $38.58 at closing. If our average stock price (calculated in accordance with the merger agreement with DIRECTV) is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. DIRECTV is a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers.

The merger agreement must bewas adopted by DIRECTV’sDIRECTV's stockholders on September 25, 2014 and isremains subject to review by the FCC and the Department of Justice and to other closing conditions. It is also a condition that all necessary consents by certain state public utility commissions and foreign governmental entities have been obtained and are in full force and effect. We have obtained all required state regulatory consents. The transaction is expected to close within 12 monthsin the first half of the announcement.2015. The merger agreement provides certain mutual termination rights for us and DIRECTV, including the right of either party to terminate the agreement if the merger is not consummated by May 18, 2015, subject to extension in certain cases to a date no later than November 13, 2015. Either party may also terminate the agreement if the DIRECTV stockholders' approval has not been obtained at a duly convened meeting of DIRECTV stockholders or an order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and non-appealable.nonappealable. In addition, we may terminateOctober 2014, DIRECTV and the agreement if the DIRECTV board of directors changes its recommendation of the merger in a manner adverse to AT&T prior to the DIRECTV stockholders’ approval having been obtained. The parties also have agreed that in the event that DIRECTV’sNational Football League renewed their agreement for the “NFL"NFL Sunday Ticket”Ticket" service is not renewed substantially on the terms discussed between AT&T and DIRECTV, satisfying one of the parties,conditions to closing the Company may elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as DIRECTV used its reasonable best efforts to obtain such renewal.merger. Under certain circumstances relating to a competing transaction, DIRECTV may be required to pay a termination fee to us in connection with or following a termination of the agreement.

18 
Dispositions
AT&T INC.
JUNE 30, 2014

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

Disposition
América Móvil  In May 2014, in conjunction with the announcement of our intention to dispose of our investment in América Móvil and the resignation of our board members from the board of América Móvil, we discontinued accounting for this investment under the equity method due to our lack of significant influence. On June 30, 2014, we sold our remaining stake in América Móvil for approximately $5,566 and recorded a pre-tax gain of $1,243. At closing, we received $4,565 cash and have agreed to receive a finalwe received the remaining cash payment of approximately $1,001 within 60 days. To date we have received partial payments totaling $650.in the third quarter.

Pending Disposition18

AT&T INC.
SEPTEMBER 30, 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Connecticut Wireline  In December 2013, we entered into an agreementagreed to sell our incumbent local exchange operations in Connecticut to Frontier Communications Corporation for $2,000 in cash. The transaction was approved by the FCC onin July 25, 2014 and is pending beforewas approved by the Connecticut Public Utilities Regulatory Authority and other state regulatory authorities. We expect the deal to close in the fourth quarter of 2014, subject to customary closing conditions.on October 15, 2014. The transaction closed on October 24, 2014.

We applied held-for-sale treatment to the assets and liabilities of the Connecticut operations, and, accordingly, included the assets in “Other"Other current assets,”" and the related liabilities in “Accounts"Accounts payable and accrued liabilities,”" on our consolidated balance sheets. However, the business does not qualify as discontinued operations as we expect significant continuing direct cash flows related to the disposed operations. Assets and liabilities of the Connecticut operations included the following:

  September 30,  December 31, 
  2014  2013 
Assets held for sale:    
Current assets $138  $155 
Property, plant and equipment - net  1,436   1,289 
Goodwill  799   799 
Other assets  18   17 
Total assets $2,391  $2,260 
         
Liabilities related to assets held for sale:        
Current liabilities $122  $128 
Noncurrent liabilities  537   480 
Total liabilities $659  $608 
  June 30,  December 31, 
  2014  2013 
Assets held for sale:      
Current assets $122  $155 
Property, plant and equipment - net  1,388   1,289 
Goodwill  799   799 
Other assets  18   17 
Total assets $2,327  $2,260 
         
Liabilities related to assets held for sale:        
Current liabilities $125  $128 
Noncurrent liabilities  478   480 
Total liabilities $603  $608 

19

19 
AT&T INC.
JUNESEPTEMBER 30, 2014

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

NOTE 8. SALESALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 24 months, with the right to trade in the original equipment for a new device and have the remaining unpaid balance satisfied. As of JuneSeptember 30, 2014, gross equipment installment receivables of $2,427$3,002 were included on our consolidated balance sheets.
sheets, of which $1,861 are notes receivable that are included in "Accounts receivable, net."
On June 27, 2014, we entered into uncommitted agreements pertaining to the sale of equipment installment receivables and related security with Citibank, N.A. and various other relationship banks as purchasers (collectively, the Purchasers) with a funding amount not expected to exceed $2,000 at any given time. Under the agreement, we may transfer the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables. Under the terms of the arrangement, we continue to bill and collect on behalf of our customers for the receivables sold.
On June 27, 2014, we sold to the PurchasersThe following table sets forth a summary of equipment installment receivables totaling $1,637 (or $1,391 net of allowance, imputed interestsold during the three months and trade-in right guarantees) and received cash proceeds of $819 and will collect the remaining balance over the remaining term of the equipment installment contracts. We have recorded a deferred purchase price of $565 that assumes customers elect to trade-in their device and agree to a new contract with AT&T; however, if customers choose not to trade-in, we expect to receive the remaining installments. nine months ended September 30, 2014:
 Three months  Nine months 
Net receivables sold1
 $885  $2,276 
Cash proceeds received  556   1,375 
Deferred purchase price recorded  324   889 
1 Gross receivables sold were $1,028 and $2,665 for the third quarter and the first nine months of 2014, respectively, before deducting the allowance, imputed interest and trade-in right guarantees.
 

The deferred purchase price was initially recorded at estimated fair value, which was based on remaining installment payments expected to be collected, adjusted by the expected timing and value of the device trade-ins.trade-ins, and is subsequently carried at the lower of cost or net realizable value. The value of the device trade-ins considers estimated prices offered to us by independent, third parties that contemplate changes in value after the launch of a device. At September 30, 2014, our deferred purchase price receivable was $901, which is included in "Other Assets" on our consolidated balance sheets. Our maximum exposure to loss as a result of selling these receivables is limited to the amount of our deferred purchase price at any point in time.
This transactionThese transactions did not have a material impact in our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheet.sheets. We will reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.
 

20

AT&T INC.
JUNESEPTEMBER 30, 2014

Item 2.  Management’sManagement'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”"we," "AT&T" or the “Company”"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 the United States and internationally, providing wireless and wireline telecommunication services and equipment. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’smanagement'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, 2013. A reference to a “Note”"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’speriod's presentation.

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

 Second Quarter  Six-Month Period  Third Quarter  Nine-Month Period 
 2014  2013  
Percent
Change
  2014  2013  
Percent
Change
  2014  2013  
Percent
Change
  2014  2013  
Percent
Change
 
Operating Revenues $32,575  $32,075   1.6  % $65,051  $63,431   2.6  % $32,957  $32,158   2.5 % $98,008  $95,589   2.5 %
Operating expenses                                                
Cost of services and sales  14,212   13,270   7.1   27,533   25,824   6.6   14,541   13,403   8.5   42,074   39,227   7.3 
Selling, general and administrative  8,197   8,121   0.9   16,457   16,454   -   8,475   7,952   6.6   24,932   24,406   2.2 
Depreciation and amortization  4,550   4,571   (0.5)  9,167   9,100   0.7   4,539   4,615   (1.6)  13,706   13,715   (0.1)
Total Operating Expenses  26,959   25,962   3.8   53,157   51,378   3.5   27,555   25,970   6.1   80,712   77,348   4.3 
Operating Income  5,616   6,113   (8.1)  11,894   12,053   (1.3)  5,402   6,188   (12.7)  17,296   18,241   (5.2)
Income Before Income Taxes  6,106   5,794   5.4   11,757   11,124   5.7   4,426   5,500   (19.5)  16,183   16,624   (2.7)
Net Income  3,621   3,880   (6.7)  7,355   7,653   (3.9)  3,059   3,905   (21.7)  10,414   11,558   (9.9)
Net Income Attributable to AT&T $3,547  $3,822   (7.2) % $7,199  $7,522   (4.3) % $3,002  $3,814   (21.3)% $10,201  $11,336   (10.0)%

Overview
Operating income decreased $497,$786, or 8.1%12.7%, in the secondthird quarter and $159,$945, or 1.3%5.2%, for the first sixnine months of 2014. Operating income in the secondthird quarter reflects lower wireless service revenues resulting fromand for the popularity of Mobile Share plans,first nine months reflects continued decline in legacy voice and data product revenues as well as higher AT&T U-verse® (U-verse) content costs. This decline is partially offset by higher wireless equipment revenue for device sales under our AT&T NextSM (AT&T Next) program as well as continued growth in our U-verse and strategic business services. Our operating results include the operations of Leap Wireless International, Inc. (Leap) from March 13, 2014, the date of acquisition.

Operating revenues increased $500,$799, or 1.6%2.5%, in the secondthird quarter and $1,620,$2,419, or 2.6%2.5%, for the first sixnine months of 2014. Growth in wireless revenues reflected the continuing trend by our postpaid subscribers to choose devices on installment purchase rather than the device subsidy model, which resulted in increased equipment revenue recognized for device sales, partially offset by lower wireless service revenues.sales. Wireline revenues were slightly lower and continue to be driven by service revenues from our U-verse services and strategic business services, which almost offset decreases from our legacy voice and data products.

The telecommunications industry is rapidly evolving from fixed location, voice-oriented services into an industry driven by customer demand for instantly available, data-based services (including video). Our products, services and plans are changing as we transition to sophisticated, high-speed, IP-based alternatives. In addition to re-designing our networks to accommodate these new demands and to take advantage of related technological efficiencies, we are also repositioning our wireless model by moving to simple pricing and no-device-subsidy plans. We expect continued growth in our wireless and wireline IP-based services as we bundle and price plans with greater focus on data and video offerings. We expect continued declines in voice services and our basic wireline data services as customers choose these next-generation services.

21
21 
 
AT&T INC.
JUNESEPTEMBER 30, 2014

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

Cost of services and sales expenses increased $942,$1,138, or 7.1%8.5%, in the secondthird quarter and $1,709,$2,847, or 6.6%7.3%, for the first sixnine months of 2014. The increases were primarily due to higher sales volume and customers choosing higher-priced devices, which contributed to increased wireless equipment costs, and handset insurance costs. The increases also reflect higher wireless network costs and wireline costs attributable to U-verse content costs and subscriber growth and employee-related charges.

Selling, general and administrative expenses increased $76,$523, or 0.9%6.6%, in the secondthird quarter and $3$526, or 2.2%, for the first sixnine months of 2014. The increases were primarily due to the 2013 gains on spectrum transactions of $293, which resulted in lower expense in the third quarter and for the first nine months of 2013. Also contributing to increased nonemployee relatedselling and administrative expenses were increased sales expense in our Wireless segment and unallocated corporate expenses related to information technology enhancements, legal and higher selling (other than commissions)new product and administrative expenses in our Wireless segment.development costs. Partially offsetting the increases were lower Wireless commissions expenses and lower employee-related costs in our Wireline segment.

Depreciation and amortization expense decreased $21,$76, or 0.5%1.6%, in the secondthird quarter and increased $67,$9, or 0.7%0.1%, for the first sixnine months of 2014. The second-quarter decrease wasdecreases were primarily due to an increase inextending the estimated useful life of non-network software and an increase in fully depreciated assets, and lower amortization of intangibles for customer lists related to acquisitions, which were partiallylargely offset by ongoing capital spending for network upgrades and expansion and additional expense fordue to assets acquired from Leap. The increase for the first six months was primarily due to increased capital spending for network upgrades and expansion.

Interest expense increased $56,$187, or 6.8%22.6%, in the secondthird quarter and $89,$276, or 5.4%11.1%, for the first sixnine months of 2014. The increases were primarily due to highercharges associated with the early redemption of debt, interest related to our December 2013 tower transaction, and higher debt balances. These increases were partially offset by lower interest incurred as a result ofrates resulting from 2013 refinancing activity.

Equity in net income (loss) of affiliates decreased $116, or 53.2%,$93 in the secondthird quarter and $213,$306, or 52.9%61.9%, for the first sixnine months of 2014. DecreasedThis decrease in equity in net income of affiliates infor the secondthird quarter and for the first sixnine months was primarily due to decreased earnings atresulted from the sale of América Móvil, S.A. de C.V. (América Móvil) and YP Holdings LLC (YP Holdings). The second-quarterin June 2014 results also reflect our change in accounting for América Móvil (see Note 7).

  Second Quarter  Six-Month Period 
  2014  2013  2014  2013 
América Móvil $99  $174  $153  $325 
YP Holdings  31   63   85   115 
Mobile Wallet Joint Venture  (29)  (19)  (49)  (37)
Other  1   -   1   - 
Equity in Net Income of Affiliates $102  $218  $190  $403 
  Third Quarter  Nine-Month Period 
  2014  2013  2014  2013 
América Móvil $-  $85  $153  $410 
YP Holdings LLC (YP Holdings)  23   23   108   138 
SoftcardTM Mobile Wallet Joint Venture
  (25)  (18)  (74)  (55)
Other  -   1   1   1 
Equity in Net Income (Loss) of Affiliates $(2) $91  $188  $494 

Other income (expense) – net We had other income of $1,269$42 in the secondthird quarter and $1,414$1,456 for the first sixnine months of 2014, compared to other income of $288$50 in the secondthird quarter and $320$370 for the first sixnine months of 2013. Results in the secondthird quarter of 2014 included interest and dividend income of $15, a net gain on the sale of various investments of $9 and leveraged lease income of $7. Results for the first sixnine months of 2014 included a net gain on the sale of América Móvil shares and other investments of $1,245 and $1,367,$1,376, interest and dividend income of $23 and $36$51 and leveraged lease income of $7 and $13, respectively.$20.

Other income in the secondthird quarter and for the first sixnine 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 net gain on the sale of América Móvil shares and other investments of $249 and $260, interest and dividend income of $23 and $40 and leveraged lease income of $10 and $15, respectively.$272.

Income taxes increased $571,decreased $228, or 29.8%14.3%, in the secondthird quarter and $931,increased $703, or 26.8%13.9%, for the first sixnine months of 2014. Our effective tax rate was 40.7%30.9% for the secondthird quarter and 37.4%35.6% for the first sixnine months of 2014, as compared to 33.0%29.0% for the secondthird quarter and 31.2%30.5% for the first sixnine months of 2013. The increase in effective tax rate for both the second quarter and the first sixnine months was primarily due to the sale of América Móvil shares in 2014. We had previously assumed that a portion of our undistributed earnings for our investment in América Móvil would be returned through dividends that, when received, would qualify for foreign tax credits. As a result of our strategic decision to sell this equity position in connection with our pending acquisition of DIRECTV, these foreign tax credits were not available to be realized.
 
22
 
AT&T INC.
JUNESEPTEMBER 30, 2014

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

Selected Financial and Operating Data          
 June 30,  September 30, 
Subscribers and connections in (000s) 2014  2013  2014  2013 
Wireless subscribers  116,634   107,884   118,650   109,460 
Network access lines in service  22,547   26,849   21,464   25,680 
U-Verse VoIP connections  4,411   3,379   4,756   3,616 
Total wireline broadband connections  16,448   16,453   16,486   16,427 
Debt ratio1
  47.6%  46.6%  44.8%  46.9%
Ratio of earnings to fixed charges2
  5.53   5.51   4.99   5.50 
Number of AT&T employees  248,170   245,350   247,700   246,740 
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.
 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
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 our strategic direction of the business, needs of the network (wireless or wireline) providing services and demands to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each segment’ssegment's reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have two reportable segments: (1) Wireless and (2) Wireline.


The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment includes our portion of the results from our mobile walletjoint venture which is accounted for as an equity 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 Internet, video and VoIP services and managed networking to business customers.

We discuss capital expenditures for each segment in “Liquidity"Liquidity and Capital Resources.”"
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23 

AT&T INC.
JUNESEPTEMBER 30, 2014

Item 2.  Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Wireless            
Segment Results            
  Third Quarter  Nine-Month Period 
  2014  2013  
Percent
Change
  2014  2013  
Percent
Change
 
 
Segment operating revenues            
   Service $15,423  $15,460   (0.2)% $45,958  $45,892   0.1 %
   Equipment  2,914   2,020   44.3   8,175   5,570   46.8 
Total Segment Operating Revenues  18,337   17,480   4.9   54,133   51,462   5.2 
Segment operating expenses                        
   Operations and support  11,855   10,982   7.9   34,305   31,932   7.4 
   Depreciation and amortization  1,965   1,875   4.8   5,931   5,553   6.8 
Total Segment Operating Expenses  13,820   12,857   7.5   40,236   37,485   7.3 
Segment Operating Income  4,517   4,623   (2.3)  13,897   13,977   (0.6)
Equity in Net Income (Loss) of                        
   Affiliates  (26)   (18)   (44.4)  (75)   (55)   (36.4)
Segment Income $4,491  $4,605   (2.5)% $13,822  $13,922   (0.7)%

24
Wireless                  
Segment Results                  
  Second Quarter  Six-Month Period 
  2014  2013  
Percent
Change
  2014  2013  
Percent
Change
 
 
Segment operating revenues                  
   Service $15,148  $15,370    (1.4) % $30,535  $30,432    0.3%
   Equipment  2,782   1,921    44.8   5,261   3,550    48.2 
Total Segment Operating Revenues  17,930   17,291    3.7   35,796   33,982    5.3 
Segment operating expenses                        
   Operations and support  11,568   10,770    7.4   22,450   20,950    7.2 
   Depreciation and amortization  2,035   1,843    10.4   3,966   3,678    7.8 
Total Segment Operating Expenses  13,603   12,613    7.8   26,416   24,628    7.3 
Segment Operating Income  4,327   4,678    (7.5)  9,380   9,354    0.3 
Equity in Net Income (Loss) of                        
   Affiliates  (29)  (19)   (52.6)  (49)  (37)   (32.4)
Segment Income $4,298  $4,659    (7.7) % $9,331  $9,317    0.2%

24 
AT&T INC.
JUNESEPTEMBER 30, 2014

Item 2.  Management’sManagement'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 
  2014  2013  
Percent
Change
  2014  2013  
Percent
Change
 
(in 000s)
Wireless Subscribers 1 
        118,650   109,460   8.4%
   Postpaid smartphones        55,791   50,637   10.2 
   Postpaid feature phones and data-centric                  
     devices        19,314   21,395   (9.7)
Postpaid        75,105   72,032   4.3 
Prepaid        11,179   7,425   50.6 
Reseller        13,884   14,089   (1.5)
Connected devices 2 
        18,482   15,914   16.1 
Total Wireless Subscribers        118,650   109,460   8.4 
                   
Net Additions 3 
                  
   Postpaid  785   363   -   2,436   1,210   - 
   Prepaid  (140)  192   -   (595)  19   - 
   Reseller  87   (285)  -   (281)  (951)  70.5 
   Connected devices2 
  1,275   719   77.3   2,143   1,634   31.2 
Net Subscriber Additions  2,007   989   -   3,703   1,912   93.7 
                         
Mobile Share connections              46,909   16,130   - 
Smartphones sold under our installment                        
   program during period  3,401   401   -   9,411   401   - 
                         
Total Churn4 
  1.36%  1.31% 5 BP   1.41%  1.35% 6 BP 
Postpaid Churn4 
  0.99%  1.07% (8) BP   0.97%  1.04% (7) BP 
1 Represents 100% of AT&T Mobility wireless subscribers.
The following table highlights other key measures of performance for the Wireless segment: 
           
  Second Quarter  Six-Month Period 
  2014  2013  
Percent
Change
  2014  2013  
Percent
Change
 
(in 000s)
Wireless Subscribers 1 
           116,634   107,884    8.1%
   Postpaid smartphones           54,629   49,462    10.4 
   Postpaid feature phones and data-centric                     
     devices           19,703   21,816    (9.7)
Postpaid           74,332   71,278    4.3 
Prepaid           11,343   7,084    60.1 
Reseller           13,756   14,330    (4.0)
Connected devices 2 
           17,203   15,192    13.2 
Total Wireless Subscribers           116,634   107,884    8.1 
                      
Net Additions 3 
                     
   Postpaid  1,026   551    86.2%  1,651   847    94.9 
   Prepaid  (405)  11    -   (455)  (173)   - 
   Reseller  (162)  (414)   60.9   (368)  (666)   44.7 
   Connected devices2 
  175   484    (63.8)  868   915    (5.1)
Net Subscriber Additions  634   632    0.3   1,696   923    83.7 
                         
Mobile Share connections              41,291   13,077    - 
Smartphones sold under our installment                        
   program during period  3,142   -    -   6,010   -    - 
                         
Total Churn4 
  1.47%   1.36%  11 BP   1.43%   1.37%  6 BP 
Postpaid Churn4 
  0.86%   1.02%  (16) BP   0.96%   1.03%  (7) BP 
2 Includes data-centric devices (e.g., eReaders and automobile systems). Excludes tablets, which are primarily included in postpaid.
 1
 Represents 100% of AT&T Mobility wireless subscribers.
3 Excludes merger and acquisition-related additions during the period.
 2
 Includes data-centric devices (eReaders and automobile monitoring systems). Excludes tablets, which are primarily included in postpaid.
 3
Excludes merger and acquisition-related additions during the period.
 4
4 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.

Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including Mobile Share and Mobile Share Value (Mobile Share) and AT&T NextSM (AT&T Next). While we have historically focused on attracting and retaining postpaid subscribers, we have recently increased our focus on prepaid subscribers with our acquisition of Leap.

At JuneSeptember 30, 2014, we served 116.6118.7 million subscribers (including approximately 4.5 million Cricket subscribers from our March 13, 2014 acquisition of Leap)Leap, which were approximately 4.5 million at closing), an increase of 8.1%8.4% from the prior year. Our subscriber base consists primarily of postpaid accounts. Our prepaid services, which include results from services sold under the Cricket brand, are monthly pay-as-you-go services.

25

AT&T INC.
JUNESEPTEMBER 30, 2014

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

ARPU
Total ARPU (average service revenue per average wireless subscribers) was down 8.9 %8.0% in the secondthird quarter and 5.5%6.4% for the first sixnine months of 2014. Postpaid ARPU was down 9.6%9.2% and 5.5%6.8% when compared to the secondthird quarter and first sixnine months of 2013, primarily due to our transition to plans that result in lower service revenues in lieu of subsidized devices, which began in the attractive Mobile Share Value pricing.first quarter of 2014. As we adjust our service offerings and pricing structures, management believes that postpaid phone-only ARPU plus Next subscriber installment billings (postpaid phone-only ARPU plus AT&T Next) is a better representation of the monthly economic value per postpaid subscriber. For the quarter and sixnine months, postpaid phone-only ARPU decreased 7.7%8.0% and 3.7%5.2% versus the year-ago periods and postpaid phone-only ARPU plus AT&T Next decreased 4.7%3.4% and 1.4%2.1% compared to the same periods last year. Compared to the second quarter of 2014, postpaid ARPU increased 0.6%, postpaid phone-only ARPU increased 0.3%, and postpaid phone-only ARPU plus AT&T Next increased 2.0%.

Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was higher in the secondthird quarter and for the first sixnine months of 2014 due to the expected pressure in prepaid with the transitionacquisition of Cricket subscribers to our network.Leap. Postpaid churn was lower for both the secondthird quarter and the first sixnine months.

Postpaid
Postpaid subscribers increased 1.4%1.0% during the secondthird quarter and 4.3% when compared to JuneSeptember 30, 2013. At JuneSeptember 30, 2014, 80%81% of our postpaid phone subscriber base used smartphones, compared to 73%75% at JuneSeptember 30, 2013. About 95%96% of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with approximately 80%82% on these plans as compared to 71%72% in the prior year, and about 49%51% of our Mobile Share accounts have chosen the 10 gigabyte or higher plans. Device connections on our Mobile Share plans now represent about 56%62% of our postpaid customer base. 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 JuneSeptember 30, 2014, approximately 84%86% 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 63%67% of our postpaid smartphone subscribers use an LTE device.

Historically, our postpaid customers have signed two-year service contracts for subsidized handsets. However, through our Mobile Share plans, we have recently begun offering postpaid services at lower prices for those customers who either bring their own devices (BYOD) or participate in our AT&T Next program. Approximately 50% of all postpaid smartphone gross adds and upgrades during the quarter chose AT&T Next. We also experienced a sharp rise in the number of BYOD gross adds to 462,000, compared to 109,000 at September 30, 2013. While BYOD customers do not generate equipment revenue, the lack of a device cost and subsidy helps improve our margins. We expect continued increases in our AT&T Next take rate as we have expanded offering to additional distributors.

Our AT&T Next program allows for postpaid subscribers to purchase certain devices in installments over a period of up to 24 months. Additionally, after a specified period of time they also have the right to trade in the original device for a new device and have the remaining unpaid balance satisfied. For customers that elect these trade-in programs, at the time of the sale, we recognize equipment revenue for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers on the AT&T Next program pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. In the second quarter of 2014, we began offering the AT&T Next program through other distributors and we plan to expandexpanded the offering to additionalalmost all of our remaining distributors during the third quarter, which is expected to further accelerate the impacts on service revenues.

Prepaid
In March 2014, we completed our acquisition of Leap, which included approximately 4.5 million prepaid subscribers at closing. Prepaid subscribers decreased 4.0%1.4% during the secondthird quarter due in part to expected transition of Cricket subscribers. Excluding merger and acquisition related additions, prepaid subscribers decreased 3.9% when compared to June 30, 2013. As of JulyOctober 31, 2014 we have approximately 1over 2 million Leap and former Aio subscribers on our GSM network.
26
AT&T INC.
JUNESEPTEMBER 30, 2014

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

Operating Results
Our Wireless segment operating income margin in the secondthird quarter decreased from 27.1%26.4% in 2013 to 24.1%24.6% in 2014 and for the first sixnine months decreased from 27.5%27.2% in 2013 to 26.2%25.7% in 2014. Our Wireless segment operating income decreased $351,$106, or 7.5%2.3%, in the secondthird quarter and increased $26,decreased $80, or 0.3%0.6%, for the first sixnine months of 2014. The decreases in operating margin and income in the secondthird quarter and for the first nine months reflected the increasing popularity of Mobile Share plans, promotional activities and our continued investment in new business initiatives. The increase in segment operating income for the first six months was primarily driven by overall growth in the number of subscribers using smartphones with larger data plans, which was mostly offset by lower service revenues from Mobile Share plans and new business initiatives.services.

Service revenues decreased $222,$37, or 1.4%0.2%, in the secondthird quarter and increased $103,$66, or 0.3%0.1%, for the first sixnine months of 2014. The decrease in the secondthird quarter is due to customers shifting to no-device subsidyno-device-subsidy plans, which allow for discounted monthly service charges under our Mobile Share plans. This decrease was largely offset by revenues from Cricket subscribers that were not included in our 2013 results. The increase in the first sixnine months was primarily due to the increased number of subscribers using smartphones with larger data plans and revenues from Cricket subscribers, which were partially offset by the expandinggrowing adoption of Mobile Share plans. While we expect monthly service revenues to continue to be pressured as customers move to Mobile Share plans, we expect equipment revenues to increase for those subscribers who elect the AT&T Next program.

Equipment revenues increased $861,$894, or 44.8%44.3%, in the secondthird quarter and $1,711,$2,605, or 48.2%46.8%, for the first sixnine months of 2014. The increases were primarily related to devices sold under our AT&T Next program. During the second quarter of 2014, with the launch of the AT&T Next program through other distributors we began deferring the recognition of equipment revenue and costs until the device is sold to the end subscriber and the trade-in right is conveyed. This lag in timing of the recognition of the sale resulted in lower revenue through these distributors duringbeginning in the second quarter of 2014.

Operations and support expenses increased $798,$873, or 7.9%, in the third quarter and $2,373, or 7.4%, in the second quarter and $1,500, or 7.2%, in the first sixnine months of 2014. The increases in the secondthird quarter and for the first sixnine months were primarily due to the following:
·Equipment costs increased $406 and $950, respectively, reflecting the sales of more expensive smartphones. Equipment costs also include Cricket and Alltel subscriber integration charges, which we expect will continue into 2015 as we complete the transition of those subscribers to our network.
·Selling (other than commissions) and administrative expenses increased $416$267 and $699$966 due primarily to increases of: $177$125 and $165 primarily due to$290, which include increased legal costs and accruals including feesnew product development expenses; $50 and costs related to acquisitions; $65 and $110 in sales expense; $41 and $56$106 in bad debt expense; $36$29 and $96$125 in customer service expense; $32 and $68$7 and $117 in information technology costssales expense. Also contributing to the increase in conjunction with ongoing support systems development;the first nine months were higher marketing and $22 and $48 in marketing expense.advertising expenses of $119. Each of these increases included additional costs related to the acquisition of Leap.acquisitions.
·Network system costs increased $242$185 and $353$538 due to higher network traffic and personnel-related network support costs and cell site related costs in conjunction with our network enhancement efforts.efforts and increased costs related to the Cricket acquisition.
·Equipment costs increased $175 and $544 reflecting the sales of more expensive smartphones.
·  Handset insurance cost increased $84$122 and $163$285 due to an increase in the cost of replacement phones.

Partially offsetting these increases were lower commission expenses of $240$182 and $340$522. Commission expense was lower in both the third quarter and first nine months of 2014 primarily due to the declinelower average commission rates and increased national equipment activation credits. A decrease in upgrade transactions andcontributed to the lower average commission rates.expense for the nine month period.

Depreciation and amortization expenses increased $192,$90, or 10.4%4.8%, in the secondthird quarter and $288,$378, or 6.8%, for the first nine months of 2014. Depreciation expense increased $80, or 4.4%, in the third quarter and $419, or 7.8%, for the first six months of 2014. Depreciation expense increased $193, or 10.8%, in the second quarter and $339, or 9.6%, for the first sixnine months primarily due to ongoing capital spending for network upgrades and expansion. expansion and acquisition of Leap partially offset by extending the estimated useful life of software.

Amortization expense decreased $1,increased $10, or 1.6%21.3%, in the secondthird quarter and $51,decreased $41, or 36.4%21.9%, for the first six monthsnine months. The increase in the third quarter is primarily due to the fact we have fully amortized customer lists acquired in our acquisition of BellSouth Corporation. The change in the second quarter includes higher amortization of intangibles for customer lists related to our acquisition of Leap, mostly offset by the completion of amortization of customer lists from our December 2006 acquisition of BellSouth Corporation (BellSouth). The decrease for the first nine months reflects the fully amortized customer lists from our acquisition of BellSouth, slightly offset by amortization of customer lists from our March 2014 acquisition of Leap.
 
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Item 2.  Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Wireline                  
Segment Results                  
  Second Quarter  Six-Month Period 
  2014  2013  
Percent
Change
  2014  2013  
Percent
Change
 
 
Segment operating revenues                  
   Service $14,408  $14,482   (0.5) % $28,797  $28,863   (0.2) %
   Equipment  229   291   (21.3)  441   565   (21.9)
Total Segment Operating Revenues  14,637   14,773   (0.9)  29,238   29,428   (0.6)
Segment operating expenses                        
   Operations and support  10,700   10,417   2.7   21,157   20,752   2.0 
   Depreciation and amortization  2,514   2,722   (7.6)  5,198   5,410   (3.9)
Total Segment Operating Expenses  13,214   13,139   0.6   26,355   26,162   0.7 
Segment Operating Income  1,423   1,634   (12.9)  2,883   3,266   (11.7)
Equity in Net Income of Affiliates  -   -   -   1   1   - 
Segment Income $1,423  $1,634   (12.9) % $2,884  $3,267   (11.7) %

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Wireline            
Segment Results            
  Third Quarter  Nine-Month Period 
  2014  2013  
Percent
Change
  2014  2013  
Percent
Change
 
 
Segment operating revenues            
   Service $14,368  $14,403   (0.2)% $43,165  $43,266   (0.2)%
   Equipment  247   267   (7.5)   688   832   (17.3) 
Total Segment Operating Revenues  14,615   14,670   (0.4)   43,853   44,098   (0.6) 
Segment operating expenses                        
   Operations and support  10,761   10,385   3.6    31,918   31,137   2.5  
   Depreciation and amortization  2,571   2,736   (6.0)   7,769   8,146   (4.6) 
Total Segment Operating Expenses  13,332   13,121   1.6    39,687   39,283   1.0  
Segment Operating Income  1,283   1,549   (17.2)   4,166   4,815   (13.5) 
Equity in Net Income of Affiliates  1   -   -    2   1   -  
Segment Income $1,284  $1,549   (17.1)% $4,168  $4,816   (13.5)%

Supplemental Information

Wireline Broadband, Telephone and Video Connections Summary
Our broadband, switched access lines and other services provided at JuneSeptember 30, 2014 and 2013 are shown below and trends are addressed throughout this segment discussion.

  September 30,  September 30,  Percent 
(in 000s) 
 2014  2013  Change 
U-verse high speed Internet  12,098   9,745   24.1 %
DSL and Other Broadband Connections  4,388   6,682   (34.3) 
Total Wireline Broadband Connections1 
  16,486   16,427   0.4  
             
Total U-verse Video Connections  6,067   5,266   15.2  
             
Retail Consumer Switched Access Lines  10,182   13,133   (22.5) 
U-verse Consumer VoIP Connections  4,698   3,616   29.9    
Total Retail Consumer Voice Connections  14,880   16,749   (11.2) 
             
Switched Access Lines            
Retail Consumer  10,182   13,133   (22.5) 
Retail Business  9,509   10,632   (10.6) 
Retail Subtotal  19,691   23,765   (17.1) 
             
Wholesale Subtotal  1,562   1,655   (5.6) 
             
Total Switched Access Lines2 
  21,464   25,680   (16.4)%
  June 30,  June 30,  Percent 
(in 000s) 2014  2013  Change 
U-verse high speed Internet  11,497   9,090   26.5  %
DSL and Other Broadband Connections  4,951   7,363   (32.8)
Total Wireline Broadband Connections1 
  16,448   16,453   - 
             
Total U-verse Video Connections  5,851   5,001   17.0 
             
Retail Consumer Switched Access Lines  10,935   13,983   (21.8)
U-verse Consumer VoIP Connections  4,379   3,379   29.6 
Total Retail Consumer Voice Connections  15,314   17,362   (11.8)
             
Switched Access Lines            
Retail Consumer  10,935   13,983   (21.8)
Retail Business  9,808   10,904   (10.1)
Retail Subtotal  20,743   24,887   (16.7)
             
Wholesale Subtotal  1,581   1,687   (6.3)
             
Total Switched Access Lines2 
  22,547   26,849   (16.0) %
1Total wireline broadband connections include DSL, U-verse high speed Internet and satellite broadband.
 1
 Total wireline broadband connections include DSL, U-verse high speed Internet and satellite broadband.
2 Total switched access lines includes access lines provided to national mass markets and private payphone service providers of 211 at September 30, 2014 and 260 at September 30, 2013.
 2
 Total switched access lines includes access lines provided to national mass markets and private payphone service providers of 223 at June 30, 2014 and 276 at June 30, 2013.
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Operating Results
Our Wireline segment operating income margin in the secondthird quarter decreased from 11.1%10.6% in 2013 to 9.7%8.8% in 2014, and for the first sixnine months decreased from 11.1%10.9% in 2013 to 9.9%9.5% in 2014. Our Wireline segment operating income decreased $211,$266, or 12.9%17.2%, in the secondthird quarter and $383,$649, or 11.7%13.5%, for the first sixnine months of 2014. The decrease in operating margins and income was driven primarily by continued decrease inrevenue decreases from our legacy voice and data products and increased U-verse content costs, largelypartially offset by increased revenues from our U-verse and IP-based strategic business services.

Service revenues decreased $74,$35, or 0.5%0.2%, in the secondthird quarter and $66,$101, or 0.2%, for the first sixnine months of 2014. Lower service revenues from business customers which(which include integration, government-related and outsourcing services) and the continued decline in revenues from legacy services that we no longer actively market were largely offset by higher service revenues from our residential customers.

Business
Service revenues from business customers decreased $197,$168, or 2.3%2.0%, in the secondthird quarter and $379,$547, or 2.2%2.1%, for the first sixnine months of 2014. The revenue decreases were due to a $115$176 and $264$440 decrease, respectively, in long-distance and local voice revenues and a $329$284 and $644$928 decrease in traditional data revenues, which include circuit-based and packet-switched data services. The decreases were primarily due to lower demand as customers continue to shift to our most advanced IP-based offerings, such as Ethernet, VPN, U-verse high speed Internet access and managed Internet services.services, or to other service providers. The lower traditional service revenues were largely offset by higher demand for our next generation services. Strategic business service revenues, which include VPNs, Ethernet, hosting, IP conferencing, VoIP, Ethernet-access to Managed Internet Service (EaMIS), security services, and U-verse services provided to business customers increased $283,$308, or 13.5%14.3%, in the secondthird quarter and $601,$909, or 14.7%14.6%, for the first sixnine months of 2014. In the secondthird quarter and for the first sixnine months, revenue from VPN increased $88$82 and $188,$270, Ethernet increased $85$87 and $165,$252, U-verse services increased $34$48 and $78$126 and EaMIS increased $37$50 and $73.$123.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Consumer
Service revenues from residential customers increased $175, or 3.1%3.2%, in the secondthird quarter and $415,$590, or 3.8%3.6%, for the first sixnine months of 2014. The increases were driven by higher IP data revenue reflecting increased U-verse penetration, customer additions, and migration from our legacy voice and DSL services. In the secondthird quarter and for the first sixnine months, U-verse revenue from consumers increased $341$327 and $702$1,029 for high-speed Internet access, $265 and $541$806 for video and $94$101 and $205$306 for voice. These increases were partially offset by a decrease of $187$184 and $352$536 in DSL revenue as customers continue to shift to our strategic high-speed Internet access offerings, and a $347$348 and $700$1,048 decrease in traditional voice revenues.

Equipment revenues decreased $62,$20, or 21.3%7.5%, in the secondthird quarter of 2014, and $124,$144, or 21.9%17.3%, for the first sixnine months of 2014. Our equipment revenues are mainly attributable to our business customers.

Operations and support expenses increased $283,$376, or 2.7%3.6%, in the secondthird quarter and $405,$781, or 2.0%2.5%, for the first sixnine months of 2014. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

The increases in expenses were primarily due to increased cost of sales of $111$197 and $253,$450, related to U-verse related content fees; higher nonemployee expenses of $155$108 and $242$350 in conjunction with Project Velocity IP (VIP) investments,deployment, information technology enhancements and overall growth of our U-verse business growth;services; higher Universal Service Fund (USF) fees of $44$39 and $103,$142, which are offset by higher USF revenues; higher materials and energy costs of $34$46 and $74;$120; and higher traffic compensation costs of $28 and $67.$67 for the year-to-date period. These increases were partially offset by lower employee related expense of $69$23 and $278,$301, reflecting ongoing workforce reduction initiatives.

Depreciation and amortization expenses decreased $208,$165, or 7.6%6.0%, in the secondthird quarter and $212,$377, or 3.9%4.6%, for the first sixnine months of 2014. Depreciation expense decreased $172,$130, or 6.6%4.9%, in the secondthird quarter and $140,$270, or 2.7%3.5%, for the first sixnine months of 2014 primarily due to extending the increase in theestimated useful life of non-network software, partially offset by ongoing capital spending for network upgrades and expansion. Amortization expense decreased $36,$35, or 32.1%34.0%, and $72,$107, or 30.9%31.8%, for the first sixnine months of 2014 primarily due to lower amortization of intangibles for thefully amortized customer lists associated with acquisitions.
 
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Item 2.  Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

OTHER BUSINESS MATTERS

U-verse Services  As part of Project VIP, we planannounced a goal to expand our IP-broadband service to approximately 57 million customer locations.locations and we achieved that goal during the third quarter. As of JuneSeptember 30, 2014, we had 11.812.4 million total U-verse subscribers (high-speed Internet and video), including 11.512.1 million Internet and 5.96.1 million video subscribers (subscribers to both services are only counted once in the total).

We believe that our U-verse TV service is a “video service”"video service" under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation. Petitions have been filed at the Federal Communications Commission (FCC) alleging that the manner in which we provision “public,"public, educational and governmental”governmental" (PEG) programming over our U-verse TV service conflicts with federal 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.

DIRECTV Acquisition  OnIn May 18, 2014, we announced ana merger agreement to acquire DIRECTV in a stock-and-cash transaction for ninety-five dollars per share of DIRECTV’sDIRECTV's common stock, or approximately $48,500 at the date of announcement. As of JuneSeptember 30, 2014, DIRECTV had approximately $17,691$16,852 in net debt.debt based on DIRECTV's financial statements included in its Form 10-Q for the third quarter of 2014. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our stock price is below $34.90 per share at closing and 1.724 AT&T shares if our stock price is above $38.58 at closing. If our average stock price (calculated in accordance with the merger agreement with DIRECTV) is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. DIRECTV is a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers.

The merger agreement must bewas adopted by DIRECTV’sDIRECTV's stockholders on September 25, 2014 and isremains subject to review by the FCC and the Department of Justice and to other closing conditions. It is also a condition that all necessary consents by certain state public utility commissions and foreign governmental entities have been obtained and are in full force and effect. We have obtained all required state regulatory consents. The transaction is expected to close within 12 monthsin the first half of the announcement.2015. The merger agreement provides certain mutual termination rights for us and DIRECTV, including the right of either party to terminate the agreement if the merger is not consummated by May 18, 2015, subject to extension in certain cases to a date no later than November 13, 2015. Either party may also terminate the agreement if the DIRECTV stockholders' approval has not been obtained at a duly convened meeting of DIRECTV stockholders or an order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and non-appealable.nonappealable. In addition, we may terminateSeptember 2014, DIRECTV and the agreement if the DIRECTV board of directors changes its recommendation of the merger in a manner adverse to AT&T prior to the DIRECTV stockholders’ approval having been obtained. The parties also have agreed that in the event that DIRECTV’sNational Football League renewed their agreement for the “NFL"NFL Sunday Ticket”Ticket" service is not renewed substantially on the terms discussed between AT&T and DIRECTV, satisfying one of the parties,conditions to closing the Company may elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as DIRECTV used its reasonable best efforts to obtain such renewal.merger. Under certain circumstances relating to a competing transaction, DIRECTV may be required to pay a termination fee to us in connection with or following a termination of the agreement.

Based on synergies we expect to realize with the acquisition, we have also committed to the following upon closing of the transaction: (1) expanding and enhancing our deployment of both wireline and fixed wireless broadband to at least 15 million customer locations across 48 states, with most of the locations in underserved rural areas, (2) adhering to the FCC’sFCC's Open Internet protections established in 2010 for three years after closing, regardless of whether the FCC re-establishes such protections for other industry participants following the D.C. Circuit’sCircuit's vacating of those rules, (3) for three years after closing, offering standalone retail broadband Internet access service at reasonable market-based prices, including a service of at least 6 Mbps down (where feasible) at guaranteed prices, in areas where we offer wireline broadband service today, and (4) offering, for three years after closing, standalone DIRECTV satellite video service at nationwide package prices that do not differ between customers in AT&T’s&T's wireline footprint and customers outside our current 22-state wireline footprint.
 
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Item 2.  Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

GSF Telecom AcquisitionOn November 7, 2014, we entered into an agreement to acquire 100 percent of the stock of Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, less net debt at closing, which was approximately $700 at announcement. GSF Telecom offers service under both the Iusacell and Unefon brand names in Mexico with a network that covers about 70 percent of Mexico's population of approximately 120 million. Under the terms of the purchase agreement, we will acquire all of GSF Telecom's wireless properties, including licenses, network assets, retail stores and about 8.6 million subscribers. The acquisition will occur after Grupo Salinas, the current owner of 50 percent of GSF Telecom, closes its announced purchase of the other 50 percent of GSF Telecom it does not own today. The purchase is subject to review by the Mexican Federal Telecommunications Institute and the Mexican National Foreign Investment Commission. We expect to close the purchase during the first quarter of 2015, subject to customary closing conditions.
Spectrum Acquisitions  On September 3, 2014, we completed our acquisition of 49 Advanced Wireless Services (AWS) spectrum licenses, covering nearly 50 million people in 14 states, from Aloha Partners II, L.P., for approximately $804 in cash.

Connecticut Wireline Disposition  In December 2013, we agreed to sell our incumbent local exchange operations in Connecticut to Frontier Communications Corporation for $2,000 in cash. These Connecticut operations represent approximately $1,200 in annual revenues as of 2013. The transaction was approved by the FCC onin July 25, 2014 and is pending beforewas approved by the Connecticut Public Utilities Regulatory Authority and other state regulatory authorities. We expect theon October 15, 2014. The transaction to close in the fourth quarter of 2014, subject to customary closing conditions.closed on October 24, 2014. We anticipate the cash tax impact of the transaction wouldwill be partially offset by the availability of capital loss carryforwards.losses.

Federal Trade Commission Litigation  On October 28, 2014, the Federal Trade Commission (FTC) filed a civil suit against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern AT&T's Maximum Bit Rate ("MBR") program, which temporarily reduces the download speeds of a small portion of our Unlimited Data Plan customers each month. MBR is an industry-standard practice that is authorized by the FCC and designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing, and many other applications are typically unaffected. Contrary to the FTC's allegations, which we vigorously dispute, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers.

Environmental  On March 29,In 2012, attorneys inAT&T Mobility entered into an investigation led byadministrative settlement with the California Attorney General’s Office informed us of claimedU.S. Environmental Protection Agency (EPA) regarding alleged violations of California state hazardous wastefederal environmental statutes arising fromin connection with management of back-up power systems at AT&T Mobility facilities. As part of the disposal of batteries, aerosol cans,settlement, we are required to audit our compliance at over 1,300 facilities and electronic waste at various California facilities. We are analyzing the claims while cooperating with investigators and implementing remedial measures where appropriate.to pay stipulated penalties for any violations discovered by those audits. At this time, we anticipateit is probable that as a result of these audits, we will face civil penalties in excess of one hundred thousand dollars but we do not anticipate such fines would be in an amount that would be material.

In December 2011, Harris County, Texas brought suit on behalf of itself and the Texas Commission on Environmental Quality (TCEQ) alleging AT&T to be liable for statutory civil penalties for past leakage at eleven petroleum storage tank locations. All eleven sites have been remediated (with de minimis actual impact) in accordance with state programs and the TCEQ has issued No Further Action letters closing the sites. Notwithstanding these facts, Harris County declined to dismiss its claims. In September 2014, the parties agreed to settle the case for an immaterial amount in civil penalties.

COMPETITIVE AND REGULATORY ENVIRONMENT

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

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. 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.
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

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

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

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015 (the “AWS-3 Auction”"AWS-3 Auction"), and also authorized the FCC to conduct an “incentive"incentive auction,”" to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees (the “600"600 MHz Auction”Auction"). On September 12, 2014, AT&T submitted an application to participate in the AWS auction. The FCC has initiated proceedings to establish rules that would govern these auctions. The AWS-3 Auction is expected to begin in the second half of 2014. We intend to bid at least $9,000 in connection withThe FCC recently announced that the 600 MHz Auction has been postponed until 2016. Due to the FCC's rules restricting communications regarding auction provided there is sufficient spectrum available instrategy, we will not disclose our financial plans for the auction to give us a viable path to at least a 2x10 MHz nationwide spectrum footprint.
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JUNE 30, 2014
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amountsauctions during the quiet period for these auctions, unless legally required.

In May 2014, in a separate proceeding, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case by case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation “screen”"screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of “low band”"low band" spectrum that exceeds one third of the available low band spectrum as presumptively harmful to competition. In addition, the FCC imposed limits on certain bidders in the 600 MHz Auction, including AT&T, restricting them from bidding on up to 40 percent of the available spectrum in the incentive auction in markets that cover as much as 70-80 percent of the U.S. population. On balance, the order and the new spectrum screen should allow AT&T to obtain additional spectrum to meet our customers’customers' needs, but because AT&T uses more “low band”"low band" spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions might affect AT&T’s&T's ability to expand capacity in these bands (“("low band”band" spectrum has better propagation characteristics than “high band”"high band" spectrum). We seek to ensure that we have the opportunity, through the auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service in the future.

Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing data and voice services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the FCC make new or existing spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Net Neutrality  In January 2014, the D.C. Circuit released its decision on Verizon’sVerizon's appeal of the FCC’sFCC's Net Neutrality rules. Those rules prohibited providers of fixed, mass market Internet access service from blocking access to lawful content, applications, services or non-harmful devices. The rules prohibited providers of mobile broadband Internet access service from blocking consumers from accessing lawful websites or applications that compete with the provider’sprovider's own voice or video telephony services. The rules also imposed transparency requirements on providers of both fixed and mobile broadband Internet access services, requiring public disclosure of information regarding network management practices, performance and commercial terms of their service offerings. In addition, the rules prohibited providers of fixed (but not mobile) broadband Internet access service from unreasonably discriminating in their transmission of lawful network traffic.

In its decision, the court found the FCC had authority under section 706 of the Act (which directs the FCC and state commissions to promote broadband deployment) to adopt rules designed to preserve the open Internet, but vacated and remanded the antidiscrimination and no-blocking rules on the ground that they impermissibly imposed common carrier regulation on broadband Internet access service. The court held that, having declared broadband Internet access services to be information services, the FCC could not regulate them as telecommunications services. The court did not vacate the transparency rules. 

The invalidation of the no-blocking and antidiscrimination rules means that broadband Internet access providers have greater flexibility in their provision of mass market services. However, the court’scourt's finding that section 706 provides the FCC independent authority to adopt rules to promote broadband deployment appears to give the FCC broad authority to regulate the Internet and, more generally, IP-based services, provided the FCC finds such regulation promotes deployment of broadband infrastructure. In addition, because section 706(a) grants authority to both the FCC and the states to adopt rules to promote broadband deployment, states could attempt to rely on that provision to regulate broadband services, although the states’states' authority to do so appears to be narrower than the FCC’s. OnFCC's. In May 15, 2014, the FCC released a notice of proposed rulemaking in response to the D.C. Circuit’sCircuit's January decision that also asks wide-ranging questions that appear to re-open settled issues. Most significantly, the Commission asks whether it has sufficient authority under section 706 to reestablish protections against discrimination and blocking on broadband Internet access services or whether it needs to reclassify broadband Internet access service as a telecommunications service to achieve its regulatory goals. If the FCC were to reclassify broadband as a telecommunications service, or the FCC and/or the states were to impose additional regulation of the Internet or broadband services, it could have a material adverse impact on our broadband services and operating results.

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

Intercarrier Compensation/Universal Service  In October 2011, the FCC adopted an order fundamentally overhauling its high-cost universal service program, through which it disburses approximately $4,500 per year to carriers providing telephone service in high-cost areas, and its existing intercarrier compensation (ICC) rules, which govern payments between carriers for the exchange of traffic. The order adopts rules to address immediately certain practices that artificially increase ICC payments, as well as other practices to avoid such payments. The order also establishes 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 is transitioning support amounts disbursed through its existing high-cost program to its new Connect America Fund (CAF). In 2013, the FCC awarded us approximately $100 in new CAF funding to deploy broadband in unserved areas. OnIn May 23, 2014, the United States Court of Appeals for the Tenth Circuit denied all challenges to the universal service and intercarrier compensation rules adopted in the 2011 order. TwoIt subsequently denied two petitions for rehearing onof discrete issues affirmed in the court’s decision are pending.aspects of that decision. We do not expect the FCC’sFCC's rules to have a material impact on our operating results.

Transition to IP-Based Network  In conjunction with Project VIP, we filed a petition with the FCC asking it to open a proceeding to facilitate our transition to all IP-based networks and services to promote consumer interests and incentivize private investment in broadband infrastructure. In January 2014, the FCC adopted an order authorizing a broad set of voluntary experiments to measure the impact on consumers of the IP transition. Among other things, the order invites providers to submit proposals for all-IP trials in discrete geographic areas. In February 2014, AT&T filed a detailed plan for two such trials. In June 2014, the FCC staff presented a status report on the AT&T trial to the commissioners. We do not expect any formal FCC action on the AT&T proposal at this time. We expect this transition to take several years.
 
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AT&T INC.
JUNESEPTEMBER 30, 2014

Item 2.  Management’sManagement'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 $11,305$2,458 in cash and cash equivalents available at JuneSeptember 30, 2014. Cash and cash equivalents included cash of $1,756$1,324 and money market funds and other cash equivalents of $9,549.$1,134. We also had $1,890 in short-term cash investments, which we included in "Other current assets" on our consolidated balance sheet. In the first sixnine months of 2014, cash inflows were primarily provided by cash receipts from operations and long-term debt issuances, with additional cash from the monetization of our investment in América Móvil and other assets. These inflows were largely offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, dividends to stockholders, debt redemptions, stock repurchases and the acquisition of operationswireless spectrum and wireless spectrum.operations. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities
During the first sixnine months of 2014, cash provided by operating activities was $16,869,$25,593, compared to $17,711$26,879 for the first sixnine months of 2013. Lower operating cash flows in 2014 were primarily due to increased inventory levels, retirement benefit funding and wireless device financing related to our AT&T Next program, which results in cash collection over the installment period instead of at the time of sale. In June 2014, we entered into uncommitted agreements to periodically sell certain equipment installment receivables for cash and future consideration (see Note 8)8 for details). Proceeds from the sale of equipment installment receivables, which we included in our operating cash flows, and the timing of working capital payments partially offset the decline in operating cash flows. We expect lower cash from operations in 2014 as our AT&T Next program continues to gain popularity with customers and as we incur Leap and other wireless integration costs and for increased tax payments resulting from prior-year deductions for our contribution to the pension plan and for changes in tax rules that allowed for us to more rapidly deduct the cost of equipment.DIRECTV merger costs.

Cash Used in or Provided by Investing Activities
For the first sixnine months of 2014, cash used in investing activities totaled $7,701$14,980 and consisted primarily of $11,649$16,829 for capital expenditures, excluding interest during construction, $1,996 in short-term investments ($1,890 of which are time deposits greater than 90 days), and $857$2,053 for the acquisitions of spectrum, Leap and other operations and spectrum.operations. These expenditures were partially offset by cash receipts of approximately $4,885$5,885 from the sale of our shares in América Móvil.

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 expenditures, excluding interest during construction, increased $1,984$1,264 in the first sixnine months. Our Wireless segment represented 56%54% of our total spending and increased 24%10% in the first sixnine months. The Wireline segment, which includes U-verse services, represented 44%46% of the total capital expenditures and increased 17%6% in the first sixnine months, primarily reflecting our ongoing implementation of Project VIP.

We continue to expect our capital expenditures during 2014 to be in the $21,000 range. We expect 2014 to be our peak investment year for Project VIP and anticipate our Wireless and Wireline segments’segments' spend to be proportionally consistent to 2013. We expect our 2015 capital expenditures for our existing businesses to be in the $18,000 range.

On October 24, 2014, we completed the sale of our Connecticut operations for approximately $2,000 in cash.
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AT&T INC.
SEPTEMBER 30, 2014

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts
Cash Used in or Provided by Financing Activities
For the first sixnine months of 2014, cash used in financing activities totaled $1,202$11,494 and included net proceeds of $8,564 from the following long-term debt issuances:
·March 2014 issuance of $1,100 of 2.300% global notes due 2019, $1,000 of 3.900% global notes due 2024 and $400 of floating rate global notes due 2019. The floating rate for the notes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 67 basis points.
·March 2014 issuance of $500 of floating rate global notes due 2017. The floating rate for the notes is based upon the three-month LIBOR, reset quarterly, plus 42 basis points.
·
May 2014 draw of $750 on a private financing agreement with Export Development Canada due 2017. The agreement is designed to encourage the purchase of Canadian-sourced equipment. The agreement contains terms similar to that provided under our revolving credit arrangements, discussed below; the interest rate was privately negotiated at market rates. The rate for this agreement is based upon the three-month LIBOR, reset quarterly, plus 50 basis points.below.
·June 2014 issuance of $2,000 of 4.800% global notes due 2044.
·June 2014 issuance of €1,600 (equivalent to $2,181 when issued) of 2.400% global notes due 2024 and €500 (equivalent to $681 when issued) of 3.375% global notes due 2034.
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AT&T INC.
JUNE 30, 2014
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

For the first sixnine months of 2014, we redeemed $3,508$10,376 of debt, primarily consisting of the following:
·March 2014 redemption of $1,814 of Cricket Communications, Inc. term loans and approximately $38 of 4.500% Leap convertible senior notes (Leap senior notes) in connection with the Leap acquisition.
·April 2014 redemption of Cricket Communications, Inc. 7.750% senior notes with a face value of $1,600 in connection with the Leap acquisition.

In July 2014, we redeemed
·July 2014 redemption of $4,393 of debt consisting of all of the outstanding BellSouth 5.200% notes due 2014, AT&T 0.875% global notes due 2015, AT&T 5.625% global notes due 2016, and BellSouth 5.200% notes due 2016 as well as $750 in principal amount of the outstanding AT&T 2.500% global notes due 2015.
·July 2014 redemption of the remaining $211 of Leap senior notes in connection with the Leap acquisition.
·September 2014 redemption of $2,250 of SBC Communications Inc. 5.100% global notes due 2014.

Our weighted average interest rate of our long-term debt portfolio was approximately 4.4% as of JuneSeptember 30, 2014, and 4.5% as of December 31, 2013. We had $83,548$75,226 of total notes and debentures outstanding at JuneSeptember 30, 2014, which included Euro, British pound sterling and Canadian dollar denominated debt of approximately $21,240.$19,823.
 
In October 2014, we initiated approximately $1,300 of Taiwan-based borrowing that will close in November.

In October 2014, we made a refundable deposit with the FCC for the upcoming AWS-3 Auction.

Since the first quarter of 2012, we have been buying back shares of AT&T common stock under three previous 300 million share repurchase authorizations approved by our Board of Directors. During the first sixnine months of 2014, we repurchased approximately 4248 million shares for $1,396.$1,617. In March 2014, our Board of Directors approved a fourth authorization to repurchase 300 million shares of our common stock, which has no expiration date. As of JuneSeptember 30, 2014, we had approximately 421415 million shares remaining from the authorizations. We expect to make future repurchases opportunistically.

We paid dividends of $4,784$7,170 during the first sixnine months of 2014, compared with $4,930$7,325 for the first sixnine months of 2013, primarily reflecting the decline in shares outstanding due to our repurchase activity, partially offset by the increase in the quarterly dividend approved by our Board of Directors in December 2013. Dividends declared by our Board of Directors totaled $0.46 per share in the secondthird quarter and $0.92$1.38 per share for the first sixnine months of 2014 and $0.45 per share in the secondthird quarter and $0.90$1.35 per share for the first sixnine months of 2013. Our dividend policy considers the expectations and requirements of stockholders, internalcapital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

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AT&T INC.
SEPTEMBER 30, 2014

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
At JuneSeptember 30, 2014, we had $10,482$5,109 of debt maturing within one year, $10,291$5,063 of which were related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
·$1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021.
·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 2018 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 JuneSeptember 30, 2014, we had no advances outstanding under either agreement and were in compliance with all covenants under each agreement.

Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’stockholders' equity. Our capital structure does not include any debt issued by YP Holdings and other investees. At JuneSeptember 30, 2014, our debt ratio was 47.6%44.8%, compared to 46.6%46.9% at JuneSeptember 30, 2013, and 45.0% at December 31, 2013. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances, debt in connection with acquisitions and stock repurchases.

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AT&T INC.
JUNE 30, 2014
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

During 2014, we also received approximately $4,994$8,074 from the monetization of various nonstrategic assets.assets, including the sale of our Connecticut operations. A majority of that cash was attributable to sales of our investment in América Móvil and real estate holdings. We plan to continue to explore similar opportunities in the remainder of 2014.

In September 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, (Mobility), the holding company for our wireless business, to the trust used to pay pension benefits under our qualified pension plans. In July 2014, the U.S. Department of Labor (DOL) published in the Federal Register their final retroactive approval of our voluntary contribution.

The preferred equity interest had a value of $9,114 as of September 30, 2014, and $9,104 on the contribution date, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts. We distributed $280$420 to the trust during the sixnine months ended JuneSeptember 30, 2014. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend, or repurchase shares.

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AT&T INC.
JUNESEPTEMBER 30, 2014

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

At JuneSeptember 30, 2014, we had interest rate swaps with a notional value of $6,350$6,550 and a net fair value of $203.$121.

We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $20,650 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 $1,508$635 at JuneSeptember 30, 2014.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’sCommission'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’sregistrant's disclosure controls and procedures as of JuneSeptember 30, 2014. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’sregistrant's disclosure controls and procedures were effective as of JuneSeptember 30, 2014.

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AT&T INC.
JUNESEPTEMBER 30, 2014

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors”"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’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’plans' costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends, and unfavorable or delayed implementation of healthcare legislation, regulations or related court decisions.
·The final outcome of FCC and other federal or state agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limit, intercarrier compensation, interconnection obligations, the transition from legacy technologies to IP-based infrastructure, universal service, broadband deployment, E911 services, competition policy, net neutrality, unbundled network elements and other wholesale obligations, availability of new spectrum from the FCC on fair and balanced terms, and wireless license awards and renewals.
·The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations, and elimination of state commission review of the withdrawal of services.
·Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
·Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures.
·The extent of competition and the resulting pressure on customer and access line totals and wireline and wireless operating margins.
·Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets.
·The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).
·The continued development of attractive and profitable U-verse service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
·Our continued ability to attract and offer a diverse portfolio of wireless service and device financing plans, devices some on an exclusive basis.and maintain margins.
·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 pending acquisition of DIRECTV.
·Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.
·Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.
·The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant reduction in government spending and reluctance of businesses and consumers to spend in general and on our products and services specifically, due to this fiscal uncertainty.

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

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AT&T INC.
JUNESEPTEMBER 30, 2014

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

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. The additional Risk Factor below reflects our pending acquisition of DIRECTV (See “Other"Other Business Matters”Matters").

The impact of our pending acquisition of DIRECTV, including our ability to obtain governmental approvals on favorable terms including any required divestitures; the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due to the issuance of additional shares; the addition of DIRECTV’sDIRECTV's existing debt to our balance sheet; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third party relationships and revenues.

As discussed in Other Business Matters, on May 18, 2014, weWe have agreed to acquire DIRECTV for approximately $48,500. We believe that the acquisition will give us the scale, resources and ability to deploy video technology to more customers than otherwise possible and to provide an integrated bundle of broadband, video and wireless services enabling us to compete more effectively against cable operators as well as other technology, media and communications companies. In addition, we believe the acquisition will result in cost savings, especially in the area of video content costs, and other potential synergies, enabling us to expand and enhance our broadband deployment and provide more video options across multiple fixed and mobile devices.

Achieving these results will depend upon obtaining governmental approvals on favorable terms within the time limits contemplated by the parties. Delays in closing, including as a result of delays in obtaining regulatory approval could divert attention from ongoing operations on the part of management and employees, adversely affecting customers and suppliers and therefore revenues. If such approvals are obtained and the transaction is consummated, then we must integrate a large number of video network and other operational systems and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. While we have successfully merged large companies into our operations in the past, delays in the process could have a material adverse effect on our revenues, expenses, operating results and financial condition. This acquisition also will increase the amount of debt on our balance sheet (both from DIRECTV’sDIRECTV's debt and the indebtedness needed to pay a portion of the purchase price) leading to additional interest expense and, due to additional shares being issued, will result in additional cash being required for any dividends declared. Both of these factors could put pressure on our financial flexibility to continue capital investments, develop new services and declare future dividends. In addition, events outside of our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition.

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AT&T INC.
JUNESEPTEMBER 30, 2014

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


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
    
(c) A summary of our repurchases of common stock during the third quarter of 2014 is as follows: 
    
Period
(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
 
    
July 1, 2014 -
July 31, 2014
  5,205,380  $35.57   5,200,000   415,550,000 
August 1, 2014 -
August 31, 2014
  1,004,945   35.67   1,000,000   414,550,000 
September 1, 2014 -
September 30, 2014
     3,379   -   -   414,550,000 
Total  6,213,704  $35.58   6,200,000     
1 In March 2014, our Board of Directors approved a fourth authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors approved a third authorization to repurchase up to an additional 300 million   shares of our common stock.
 
  The authorizations have no expiration date. 
2 Of the shares repurchased, 13,704 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.
 
  
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
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(c) A summary of our repurchases of common stock during the second quarter of 2014 is as follows:
           
Period 
(a)
 
 
 
 
Total Number of
Shares (or Units)
Purchased 1,2 
 
(b)
 
 
 
 
 
Average Price Paid
Per Share (or Unit) 
 
(c)
 
 
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs 1 
 
(d)
 
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet
Be Purchased Under The
Plans or Programs 
            
April 1, 2014 -
April 30, 2014
  4,500,637  $  35.43   4,500,000   420,750,000 
May 1, 2014 -
May 31, 2014
        7,793   -   -   420,750,000 
June 1, 2014 -
June 30, 2014
       12,851   -   -   420,750,000 
Total  4,521,281  $  35.43   4,500,000   
 1 In March 2014, our Board of Directors approved a fourth authorization to repurchase up to 300 million shares of our common stock.
 In March 2013, our Board of Directors approved a third authorization to repurchase of up to an additional 300 million shares of our common stock. The authorizations have no expiration date.
 2 Of the shares repurchased, 21,281 shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options.

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AT&T INC.
JUNESEPTEMBER 30, 2014
��

Item 6. Exhibits


Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
  
12Computation of Ratios of Earnings to Fixed Charges
31
Rule 13a-14(a)/15d-14(a) Certifications
31.1    Certification of Principal Executive Officer
31.2    Certification of Principal Financial Officer
32Section 1350 Certifications
101XBRL Instance Document

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SIGNATURE



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

November 10, 2014  
AT&T Inc.
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
    and Chief Financial Officer


 
 
                    AT&T Inc.42




August 1, 2014                                                                                                          /s/ John J. Stephens
                    John J. Stephens
                    Senior Executive Vice President
                        and Chief Financial Officer


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