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

FORM 10-Q
                                                       
(Mark One)
 
x
 
 
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31,June 30, 2015
 
or
 
 
 o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
       
For the transition period from          to

Commission File Number 1-8610

AT&T INC.

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

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


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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                                                                                                                                            Yes [   ]   No [X]
At April 30,July 31, 2015, there were 5,1936,151 million common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.AT&T INC. AT&T INC. 
CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME 
Dollars in millions except per share amountsDollars in millions except per share amounts Dollars in millions except per share amounts 
(Unaudited)(Unaudited) (Unaudited) 
 Three months ended  Three months ended  Six months ended 
 March 31,  June 30,  June 30, 
 2015  2014   2015  2014  2015  2014 
Operating Revenues                
Service $28,962  $29,776  $29,541  $29,556  $58,503  $59,332 
Equipment  3,614   2,700   3,474   3,019   7,088   5,719 
Total operating revenues  32,576   32,476   33,015   32,575   65,591   65,051 
                        
Operating Expenses                        
Cost of services and sales (exclusive of depreciation                        
and amortization shown separately below)  14,581   13,321   15,140   14,212   29,721   27,533 
Selling, general and administrative  7,961   8,260   7,467   8,197   15,428   16,457 
Depreciation and amortization  4,578   4,617   4,696   4,550   9,274   9,167 
Total operating expenses  27,120   26,198   27,303   26,959   54,423   53,157 
Operating Income  5,456   6,278   5,712   5,616   11,168   11,894 
Other Income (Expense)                        
Interest expense  (899)  (860)  (932)  (881)  (1,831)  (1,741)
Equity in net income of affiliates  -   88   33   102   33   190 
Other income (expense) – net  70   145   48   1,269   118   1,414 
Total other income (expense)  (829)  (627)  (851)  490   (1,680)  (137)
Income Before Income Taxes  4,627   5,651   4,861   6,106   9,488   11,757 
Income tax expense  1,351   1,917   1,715   2,485   3,066   4,402 
Net Income  3,276   3,734   3,146   3,621   6,422   7,355 
Less: Net Income Attributable to Noncontrolling Interest  (76)  (82)  (102)  (74)  (178)  (156)
Net Income Attributable to AT&T $3,200  $3,652  $3,044  $3,547  $6,244  $7,199 
Basic Earnings Per Share Attributable to AT&T $0.61  $0.70  $0.58  $0.68  $1.20  $1.38 
Diluted Earnings Per Share Attributable to AT&T $0.61  $0.70  $0.58  $0.68  $1.20  $1.38 
Weighted Average Number of Common Shares Outstanding – Basic (in millions)  5,203   5,222 
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)  5,219   5,238 
Weighted Average Number of Common Shares                
Outstanding – Basic (in millions)  5,204   5,204   5,204   5,213 
Weighted Average Number of Common Shares                
Outstanding – with Dilution (in millions)
  5,220   5,220   5,220   5,229 
Dividends Declared Per Common Share $0.47  $0.46  $0.47  $0.46  $0.94  $0.92 
See Notes to Consolidated Financial Statements.                        
2
AT&T INC.                                        
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME               CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME       
Dollars in millions            
(Unaudited)                                       
  Three months ended   Three months ended  Six months ended 
 March 31,  June 30,  June 30, 
 2015  2014  2015  2014  2015  2014 
Net income $3,276  $3,734  $3,146  $3,621  $6,422  $7,355 
Other comprehensive income, net of tax:        
Foreign currency:        
Foreign currency translation adjustment (includes $0 and $0 attributable to
noncontrolling interest), net of taxes of $(104) and $(9)
  (186)  (20)
Reclassification adjustment included in net income, net of taxes of $0 and $14  -   25 
Other comprehensive income (loss), net of tax:                
Foreign Currency:                
Translation adjustment (includes $0, $1, $0 and $1
attributable to noncontrolling interest), net of taxes of
$1, $15, $(103) and $5
  1   26   (185)  6 
Reclassification adjustment included in net income,
net of taxes of $0, $210, $0 and $224
  -   391   -   416 
Available-for-sale securities:                        
Net unrealized gains, net of taxes of $19 and $10  34   16 
Reclassification adjustment included in net income, net of taxes of $(3) and $(7)  (5)  (11)
Net unrealized gains, net of taxes of $0, $24, $19
and $34
  -   43   34   59 
Reclassification adjustment realized in net income, net of
taxes of $(2), $(1), $(5) and $(8)
  (4)  (3)  (9)  (14)
Cash flow hedges:                        
Net unrealized (losses) gains, net of taxes of $(190) and $3  (354)  6 
Reclassification adjustment included in net income, net of taxes of $4 and $4  7   7 
Net unrealized gains (losses), net of taxes of $(52), $(56),
$(242) and $(53)
  (95)  (104)  (449)  (98)
Reclassification adjustment included in net income,
net of taxes of $5, $7, $9 and $11
  10   14   17   21 
Defined benefit postretirement plans:                        
Amortization of net prior service credit included in net income, net of taxes of $(131)
and $(147)
  (215)  (240)
Reclassification adjustment included in net income, net of taxes of $0 and $2  -   3 
Amortization of net prior service credit included in
net income, net of taxes of $(131), $(142), $(262)
and $(289)
  (214)  (239)  (429)  (479)
Reclassification adjustment included in net income, net of
taxes $0, $31, $0 and $33
  -   58   -   61 
Other comprehensive income (loss)  (719)  (214)  (302)  186   (1,021)  (28)
Total comprehensive income  2,557   3,520   2,844   3,807   5,401   7,327 
Less: Total comprehensive income attributable to noncontrolling interest  (76)  (82)  (102)  (75)  (178)  (157)
Total Comprehensive Income Attributable to AT&T $2,481  $3,438  $2,742  $3,732  $5,223  $7,170 
See Notes to Consolidated Financial Statements.                        
3
AT&T INC.AT&T INC. AT&T INC. 
CONSOLIDATED BALANCE SHEETSCONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS 
Dollars in millions except per share amountsDollars in millions except per share amounts Dollars in millions except per share amounts 
 March 31,  December 31,  June 30,  December 31, 
 2015  2014  2015  2014 
Assets (Unaudited)    (Unaudited)   
Current Assets        
Cash and cash equivalents $4,444  $8,603  $20,956  $8,603 
Accounts receivable - net of allowances for doubtful accounts of $488 and $454  13,592   14,527 
Accounts receivable - net of allowances for doubtful accounts of $492 and $454  13,821   14,527 
Prepaid expenses  930   831   834   831 
Deferred income taxes  1,538   1,142   1,131   1,142 
Other current assets  6,906   6,925   6,421   6,925 
Total current assets  27,410   32,028   43,163   32,028 
Property, plant and equipment  285,133   282,295   289,856   282,295 
Less: accumulated depreciation and amortization  (171,935)  (169,397)  (175,508)  (169,397)
Property, Plant and Equipment – Net  113,198   112,898   114,348   112,898 
Goodwill  70,341   69,692   70,920   69,692 
Licenses  80,560   60,824   80,922   60,824 
Other Intangible Assets – Net  6,423   6,139   6,385   6,139 
Investments in Equity Affiliates  266   250   288   250 
Other Assets  9,830   10,998   10,463   10,998 
Total Assets $308,028  $292,829  $326,489  $292,829 
                
Liabilities and Stockholders' Equity                
Current Liabilities                
Debt maturing within one year $8,181  $6,056  $8,603  $6,056 
Accounts payable and accrued liabilities  20,418   23,592   21,560   23,592 
Advanced billing and customer deposits  4,221   4,105   4,075   4,105 
Accrued taxes  2,390   1,091   3,848   1,091 
Dividends payable  2,441   2,438   2,441   2,438 
Total current liabilities  37,651   37,282   40,527   37,282 
Long-Term Debt  88,272   76,011   105,067   76,011 
Deferred Credits and Other Noncurrent Liabilities                
Deferred income taxes  38,019   37,544   38,516   37,544 
Postemployment benefit obligation  37,074   37,079   36,638   37,079 
Other noncurrent liabilities  19,908   17,989   18,240   17,989 
Total deferred credits and other noncurrent liabilities  95,001   92,612   93,394   92,612 
                
Stockholders' Equity                
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2015 and        
December 31, 2014: issued 6,495,231,088 at March 31, 2015 and December 31, 2014)  6,495   6,495 
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2015 and        
December 31, 2014: issued 6,495,231,088 at June 30, 2015 and December 31, 2014)  6,495   6,495 
Additional paid-in capital  90,977   91,108   91,032   91,108 
Retained earnings  28,490   27,736   29,086   27,736 
Treasury stock (1,302,176,826 at March 31, 2015 and 1,308,318,131        
Treasury stock (1,301,916,280 at June 30, 2015 and 1,308,318,131        
at December 31, 2014, at cost)  (46,804)  (47,029)  (46,793)  (47,029)
Accumulated other comprehensive income  7,341   8,060   7,039   8,060 
Noncontrolling interest  605   554   642   554 
Total stockholders' equity  87,104   86,924   87,501   86,924 
Total Liabilities and Stockholders' Equity $308,028  $292,829  $326,489  $292,829 
See Notes to Consolidated Financial Statements.                
4
AT&T INC.AT&T INC. AT&T INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS 
Dollars in millionsDollars in millions Dollars in millions 
(Unaudited)(Unaudited) (Unaudited) 
 Three months ended  Six months ended 
 March 31,  June 30, 
 2015  2014  2015  2014 
Operating Activities        
Net income $3,276  $3,734  $6,422  $7,355 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  4,578   4,617   9,274   9,167 
Undistributed earnings from investments in equity affiliates  -   17   (23)  (58)
Provision for uncollectible accounts  285   241   535   444 
Deferred income tax expense  214   578   1,183   546 
Net (gain) loss from sale of investments, net of impairments  (33)  (122)
Net gain from sale of investments, net of impairments  (50)  (1,365)
Changes in operating assets and liabilities:                
Accounts receivable  739   (498)  434   (566)
Other current assets  13   (340)  743   (771)
Accounts payable and accrued liabilities  (1,817)  1,025   (1,125)  2,894 
Retirement benefit funding  (140)  (140)  (455)  (280)
Other - net
  (377)  (313)  (1,040)  (497)
Total adjustments  3,462   5,065   9,476   9,514 
Net Cash Provided by Operating Activities  6,738   8,799   15,898   16,869 
                
Investing Activities                
Construction and capital expenditures:                
Capital expenditures  (3,848)  (5,716)  (8,328)  (11,649)
Interest during construction  (123)  (55)  (339)  (118)
Acquisitions, net of cash acquired  (19,514)  (662)  (20,954)  (857)
Dispositions  8   351   72   4,921 
Sale of securities  1,890   -   1,890   - 
Return of advances to and investments in equity affiliates  -   2 
Other  (1)  - 
Net Cash Used in Investing Activities  (21,587)  (6,082)  (27,660)  (7,701)
                
Financing Activities                
Net change in short-term borrowings with original maturities of three months or less  -   (17)  -   134 
Issuance of long-term debt  16,572   2,987   33,958   8,564 
Repayment of long-term debt  (596)  (1,867)  (2,919)  (3,508)
Purchase of treasury stock  -   (1,237)  -   (1,396)
Issuance of treasury stock  8   13   20   27 
Dividends paid  (2,434)  (2,398)  (4,873)  (4,784)
Other  (2,860)  74   (2,071)  (239)
Net Cash Provided by (Used in) Financing Activities  10,690   (2,445)  24,115   (1,202)
Net (decrease) increase in cash and cash equivalents  (4,159)  272 
Net increase in cash and cash equivalents  12,353   7,966 
Cash and cash equivalents beginning of year  8,603   3,339   8,603   3,339 
Cash and Cash Equivalents End of Period $4,444  $3,611  $20,956  $11,305 
        
Cash paid (received) during the three months ended March 31 for:        
Cash paid (received) during the six months ended June 30 for:        
Interest $1,021  $976  $2,178  $2,292 
Income taxes, net of refunds $(247) $(40) $(71) $987 
See Notes to Consolidated Financial Statements.        See Notes to Consolidated Financial Statements. 
5
AT&T INC.AT&T INC. AT&T INC. 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITYCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 
Dollars and shares in millions except per share amountsDollars and shares in millions except per share amounts Dollars and shares in millions except per share amounts 
(Unaudited)(Unaudited) (Unaudited) 
 March 31, 2015  June 30, 2015 
 Shares  Amount  Shares  Amount 
Common Stock        
Balance at beginning of year  6,495  $6,495   6,495  $6,495 
Issuance of stock  -   -   -   - 
Balance at end of period  6,495  $6,495   6,495  $6,495 
                
Additional Paid-In Capital                
Balance at beginning of year     $91,108      $91,108 
Issuance of treasury stock      3       8 
Share-based payments      (123)      (84)
Change related to acquisition of interests held by noncontrolling owners      (11)
Balance at end of period     $90,977      $91,032 
                
Retained Earnings                
Balance at beginning of year     $27,736      $27,736 
Net income attributable to AT&T ($0.61 per diluted share)      3,200 
Dividends to stockholders ($0.47 per share)      (2,446)
Net income attributable to AT&T ($1.20 per diluted share)      6,244 
Dividends to stockholders ($0.94 per share)      (4,894)
Balance at end of period     $28,490      $29,086 
                
Treasury Stock                
Balance at beginning of year  (1,308) $(47,029)  (1,308) $(47,029)
Repurchase of common stock  (1)  (10)
Issuance of treasury stock  6   225   7   246 
Balance at end of period  (1,302) $(46,804)  (1,302) $(46,793)
                
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax                
Balance at beginning of year     $8,060      $8,060 
Other comprehensive loss attributable to AT&T      (719)      (1,021)
Balance at end of period     $7,341      $7,039 
                
Noncontrolling Interest                
Balance at beginning of year     $554      $554 
Net income attributable to noncontrolling interest      76       178 
Distributions      (54)      (119)
Acquisition of noncontrolling interests      29       29 
Balance at end of period     $605      $642 
                
Total Stockholders' Equity at beginning of year     $86,924      $86,924 
Total Stockholders' Equity at end of period     $87,104      $87,501 
See Notes to Consolidated Financial Statements.                
6
AT&T INC.
MARCH 31,JUNE 30, 2015

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

Basis of Presentation  Throughout this document, AT&T Inc. is referred to as "AT&T," "we" or the "Company." We believe that these consolidated financial statements include all adjustments, consisting only of normal recurring accruals, that are necessary to present fairly the results for the presented interim periods. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.

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

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

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

New Accounting Standards

Revenue Recognition  In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, "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. ASU 2014-09 becomes effective for annual reporting periods beginning after December 15, 2016. In April2017, following the July 2015 the FASB issued an exposure draft to delayapproval of a one-year deferral of the effective date of ASU 2014-09 by one year.the FASB. We continue to evaluate the impact of the new standard and available adoption methods.

Long-Term Debt and Debt Issuance Costs  In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03), which will result in the reclassification of debt issuance costs from "Other Assets" to inclusion as a reduction of our reportable "Long-term"Long-Term Debt" balance on our consolidated balance sheets. ASU 2015-03 becomes effective January 1, 2016, subject to early adoption, and will require full retrospective application. We do not expect this new standard to have a material impact on our consolidated balance sheets.
7
AT&T INC.
MARCH 31,JUNE 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ContinuedContinued
Dollars in millions except per share amounts
NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for the three and six months ended March 31,June 30, 2015 and 2014, is shown in the table below:

 Three months ended  Three months ended  Six months ended 
 March 31,  June 30,  June 30, 
 2015  2014  2015  2014  2015  2014 
Numerators            
Numerator for basic earnings per share:            
Net income $3,276  $3,734 
Net Income $3,146  $3,621  $6,422  $7,355 
Less: Net income attributable to noncontrolling interest  (76)  (82)  (102)  (74)  (178)  (156)
Net income attributable to AT&T  3,200   3,652 
Net Income attributable to AT&T  3,044   3,547   6,244   7,199 
Dilutive potential common shares:                        
Share-based payment  4   4   2   3   6   7 
Numerator for diluted earnings per share $3,204  $3,656  $3,046  $3,550  $6,250  $7,206 
Denominators (000,000)                        
Denominator for basic earnings per share:                        
Weighted-average number of common shares outstanding  5,203   5,222 
Weighted average number of common shares outstanding  5,204   5,204   5,204   5,213 
Dilutive potential common shares:                        
Share-based payment (in shares)  16   16   16   16   16   16 
Denominator for diluted earnings per share  5,219   5,238   5,220   5,220   5,220   5,229 
Basic earnings per share attributable to AT&T $0.61  $0.70  $0.58  $0.68  $1.20  $1.38 
Diluted earnings per share attributable to AT&T $0.61  $0.70  $0.58  $0.68  $1.20  $1.38 
8
AT&T INC.
MARCH 31,JUNE 30, 2015

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

NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.
               
At March 31, 2015 and for the period ended:            
At June 30, 2015 and for the period ended:At June 30, 2015 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, 2014Balance as of December 31, 2014$ (26) $ 498  $ 741  $ 6,847  $ 8,060 Balance as of December 31, 2014$ (26) $ 498  $ 741  $ 6,847  $ 8,060 
Other comprehensive income
(loss) before reclassifications
Other comprehensive income
(loss) before reclassifications
  (186)   34    (354)   -      (506)
Other comprehensive income
(loss) before reclassifications
  (185)   34    (449)   -      (600)
Amounts reclassified
from accumulated OCI
Amounts reclassified
from accumulated OCI
  -   
 1 
  (5)
 2 
  7 
 3 
  (215)
 4 
  (213)
Amounts reclassified
from accumulated OCI
  -   
 1 
  (9)
 2 
  17 
 3 
  (429)
 4 
  (421)
Net other comprehensive
income (loss)
Net other comprehensive
income (loss)
  (186)   29    (347)   (215)   (719)
Net other comprehensive
income (loss)
  (185)   25    (432)   (429)   (1,021)
Balance as of March 31, 2015$ (212) $ 527  $ 394  $ 6,632  $ 7,341 
Balance as of June 30, 2015Balance as of June 30, 2015$ (211) $ 523  $ 309  $ 6,418  $ 7,039 
                              
At March 31, 2014 and for the period ended:            
At June 30, 2014 and for the period ended:At June 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 Balance as of December 31, 2013$ (367) $ 450  $ 445  $ 7,352  $ 7,880 
Other comprehensive income
(loss) before reclassifications
Other comprehensive income
(loss) before reclassifications
  (20)   16    6    -      2 
Other comprehensive income
(loss) before reclassifications
  5    59    (98)   -      (34)
Amounts reclassified
from accumulated OCI
Amounts reclassified
from accumulated OCI
  25 
 1 
  (11)
 2 
  7 
 3 
  (237)
 4 
  (216)
Amounts reclassified
from accumulated OCI
  416 
 1 
  (14)
 2 
  21 
 3 
  (418)
 4 
  5 
Net other comprehensive
income (loss)
Net other comprehensive
income (loss)
  5    5    13    (237)   (214)
Net other comprehensive
income (loss)
  421    45    (77)   (418)   (29)
Balance as of March 31, 2014$ (362) $ 455  $ 458  $ 7,115  $ 7,666 
Balance as of June 30, 2014Balance as of June 30, 2014$ 54  $ 495  $ 368  $ 6,934  $ 7,851 
1 Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
1 Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
1 Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
2 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
2 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
2 (Gains) losses 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.
3 (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
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
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. reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.
9
AT&T INC.
MARCH 31,JUNE 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ContinuedContinued
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/or in different geographies that 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 to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each segment's reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have three reportable segments: (1) Wireless, (2) Wireline and (3) International.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment included our portion of the results from our equity investment in the SoftcardTM mobile wallet joint venture.

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®U-verse® high speed Internet, video and VoIP services and managed networking to business customers.

The International segment uses the Iusacell, Unefon, and UnefonNextel Mexico regional and national networks to provide consumer and business customers with wireless data and voice communication services in Mexico. Beginning April 30, 2015,Results from the International segment also utilizesequity method investment in América Móvil S.A. de C.V. (prior to the regional and national networksJune 2014 disposal of Nextel Mexico to provide similar services.our investment) are included in this segment.

The Corporate and Other column includes unallocated corporate expenses, which includes costs to support corporate-driven activities and operations, and 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 S.A. de C.V. (prior to the June 2014 disposal 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 not considered in our assessment of segment performance. We have revised our prior-period presentation to conform to our current reporting.
 
10
AT&T INC.
MARCH 31,JUNE 30, 2015

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

For the three months ended March 31, 2015:                        
For the three months ended June 30, 2015For the three months ended June 30, 2015                                     
 Wireless  Wireline  International  
Corporate
and Other
  
Consolidated
Results
 
Service $15,115  $13,981  $445  $-   $29,541 
Equipment  3,189   233   46   6   3,474 
Total segment operating revenues  18,304   14,214   491   6   33,015 
Operations and support expenses  11,551   10,362   529   165   22,607 
Depreciation and amortization expenses  2,073   2,488   125   10   4,696 
Total segment operating expenses  13,624   12,850   654   175   27,303 
Segment operating income (loss)  4,680   1,364   (163)  (169)  5,712 
Interest expense  -   -   -   932   932 
Equity in net income of affiliates  -   1   -   32   33 
Other income (expense) – net  -   -   -   48   48 
Segment income (loss) before income taxes $4,680  $1,365  $(163) $(1,021)  $4,861 
                    
For the six months ended June 30, 2015For the six months ended June 30, 2015              
Consolidated
Results
 
 Wireless  Wireline  International  
Corporate
and Other
  
Consolidated
Results
  Wireless  Wireline  International  
Corporate
and Other
 
Service $14,812  $13,935  $215  $-  $28,962  $29,927  $27,916  $660  $-   $58,503 
Equipment  3,374   213   21   6   3,614   6,563   446   67   12   7,088 
Total segment operating revenues  18,186   14,148   236   6   32,576   36,490   28,362   727   12   65,591 
Operations and support expenses  11,681   10,263   219   379   22,542   23,232   20,625   748   544   45,149 
Depreciation and amortization expenses  2,058   2,476   44   -   4,578   4,131   4,964   169   10   9,274 
Total segment operating expenses  13,739   12,739   263   379   27,120   27,363   25,589   917   554   54,423 
Segment operating income (loss)  4,447   1,409   (27)  (373)  5,456   9,127   2,773   (190)  (542)  11,168 
Interest expense  -   -   -   899   899   -   -   -   1,831   1,831 
Equity in net income (loss) of affiliates  (4)  (7)  -   11   -   (4)  (6)  -   43   33 
Other income (expense) – net  -   -   -   70   70   -   -   -   118   118 
Segment income (loss) before income taxes $4,443  $1,402  $(27) $(1,191) $4,627  $9,123  $2,767  $(190) $(2,212)  $9,488 
                    
For the three months ended March 31, 2014:                 
 Wireless  Wireline  International  
Corporate
and Other
  
Consolidated
Results
 
Service $15,387  $14,389  $-  $-  $29,776 
Equipment  2,479   212   -   9   2,700 
Total segment operating revenues  17,866   14,601   -   9   32,476 
Operations and support expenses  10,882   10,457   -   242   21,581 
Depreciation and amortization expenses  1,931   2,684   -   2   4,617 
Total segment operating expenses  12,813   13,141   -   244   26,198 
Segment operating income (loss)  5,053   1,460   -   (235)  6,278 
Interest expense  -   -   -   860   860 
Equity in net income (loss) of affiliates  (20)  1   -   107   88 
Other income (expense) – net  -   -   -   145   145 
Segment income (loss) before income taxes $5,033  $1,461  $-  $(843) $5,651 
11
AT&T INC.
JUNE 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2014                          
  Wireless  Wireline  International  
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)  -   99   32   102 
Other income (expense) – net  -   -   -   1,269   1,269 
Segment income before income taxes $4,298  $1,423  $99  $286   $6,106 
                     
For the six months ended June 30, 2014            �� 
Consolidated
Results
 
  Wireless  Wireline  International  
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   153   85   190 
Other income (expense) – net  -   -   -   1,414   1,414 
Segment income (loss) before income taxes $9,331  $2,884  $153  $(611)  $11,757 

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. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.

In December 2014, we offered an opportunity for certain management employees who were retirement eligible as of March 31, 2015 to elect an enhanced, full lump sum payment option of their accrued pension if they retired on or before March 31, 2015. The lump sum value totaled approximately $1,200 which will be distributed in 2015. We recorded special termination benefits of approximately $150 as a result of this offer.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,970$8,896 at March 31,June 30, 2015. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will beare distributed quarterly in equal amounts and will be accounted for as contributions. We distributed $140$280 to the trust during the threesix months ended March 31,June 30, 2015. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. We have also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2014. This contribution was made in June 2015.
 
11
12
AT&T INC.
MARCH 31,JUNE 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ContinuedContinued
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  Three months ended  Six months ended 
 March 31,  June 30,  June 30, 
 2015  2014  2015  2014  2015  2014 
Pension cost:                 
Service cost – benefits earned during the period $299  $282  $300  $282  $599  $564 
Interest cost on projected benefit obligation  474   661   473   662   947   1,323 
Expected return on assets  (826)  (849)  (826)  (851)  (1,652)  (1,700)
Amortization of prior service credit  (26)  (24)  (26)  (23)  (52)  (47)
Net pension (credit) cost $(79) $70  $(79) $70  $(158) $140 
                        
Postretirement cost:                        
Service cost – benefits earned during the period $55  $58  $56  $58  $111  $116 
Interest cost on accumulated postretirement benefit obligation  242   365   241   364   483   729 
Expected return on assets  (105)  (164)  (105)  (162)  (210)  (326)
Amortization of prior service credit  (320)  (362)  (319)  (362)  (639)  (724)
Net postretirement (credit) cost $(128) $(103) $(127) $(102) $(255) $(205)
                        
Combined net pension and postretirement (credit) cost $(207) $(33) $(206) $(32) $(413) $(65)

Our combined net pension and postretirement cost decreased $174 in the second quarter and $348 for the first quartersix months of 2015. The decrease is primarily due to the change in the method used to estimate the service and interest components of net periodic benefit cost for pension and other postretirement benefits. While this change in estimate, which was made in the fourth quarter of 2014, provides a more precise measurement of interim service and interest costs, it will not affect the measurement of our total benefit obligations as of December 31 or our annual net periodic benefit cost as the change in the service and interest costs is completely offset in the actuarial gain or loss reported. The decrease from this change was partially offset by lower amortization of prior service credits as previous postretirement plan changes have become fully amortized, our lower expected long-term rate of return on our postretirement plan assets and updated assumed mortality rates.

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 $20$21 in the firstsecond quarter of 2015, of which $19$18 was interest cost, and $29$41 for the first six months, of which $37 was interest cost. In 2014, net supplemental retirement pension benefits cost was $29 in the second quarter, of 2014,which $28 was interest cost, and $58 for the first six months, of which $27$55 was interest cost.

12
13
AT&T INC.
MARCH 31,JUNE 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ContinuedContinued
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, 2014.

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

March 31, 2015 December 31, 2014 June 30, 2015 December 31, 2014 
Carrying Fair Carrying Fair Carrying Fair Carrying Fair 
Amount Value Amount Value Amount Value Amount Value 
Notes and debentures$96,026  $105,084  $81,632  $90,367 $113,167  $116,669  $81,632  $90,367 
Bank borrowings 5   5   5   5  5   5   5   5 
Investment securities 2,740   2,740   2,735   2,735  2,758   2,758   2,735   2,735 

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.

13
14
AT&T INC.
MARCH 31,JUNE 30, 2015

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

Following is the fair value leveling for available-for-sale securities and derivatives as of March 31,June 30, 2015 and December 31, 2014:

 March 31, 2015 
 Level 1 Level 2 Level 3 Total 
Available-for-Sale Securities        
   Domestic equities$1,176  $-  $-  $1,176 
   International equities 592   -   -   592 
   Fixed income bonds -   793   -   793 
Asset Derivatives1 
               
   Interest rate swaps -   194   -   194 
   Cross-currency swaps -   706   -   706 
Liability Derivatives1 
               
   Cross-currency swaps -   (3,528)  -   (3,528)
   Interest rate locks -   (444)  -   (444)
                
 December 31, 2014 
 Level 1 Level 2 Level 3 Total 
Available-for-Sale Securities               
   Domestic equities$1,160  $-  $-  $1,160 
   International equities 553   -   -   553 
   Fixed income bonds -   836   -   836 
Asset Derivatives1 
               
   Interest rate swaps -   157   -   157 
   Cross-currency swaps -   1,243   -   1,243 
   Interest rate locks -   5   -   5 
Liability Derivatives1 
               
   Cross-currency swaps -   (1,506)  -   (1,506)
   Interest rate locks -   (133)  -   (133)
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
 
14
 June 30, 2015 
 Level 1 Level 2 Level 3 Total 
Available-for-Sale Securities       
   Domestic equities$1,165  $-  $-  $1,165 
   International equities 614   -   -   614 
   Fixed income bonds -   778   -   778 
Asset Derivatives1 
               
   Interest rate swaps -   170   -   170 
   Cross-currency swaps -   1,280   -   1,280 
Liability Derivatives1 
               
   Cross-currency swaps -   (2,568)  -   (2,568)
                
 December 31, 2014 
 Level 1 Level 2 Level 3 Total 
Available-for-Sale Securities               
   Domestic equities$1,160  $-  $-  $1,160 
   International equities 553   -   -   553 
   Fixed income bonds -   836   -   836 
Asset Derivatives1 
               
   Interest rate swaps -   157   -   157 
   Cross-currency swaps -   1,243   -   1,243 
   Interest rate locks -   5   -   5 
Liability Derivatives1 
               
   Cross-currency swaps -   (1,506)  -   (1,506)
   Interest rate locks -   (133)  -   (133)
 1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
 
AT&T INC.
MARCH 31, 2015

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

Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $91$93 have maturities of less than one year, $409$392 within one to three years, $66$63 within three to five years, and $227$230 for five or more years.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments are recorded in "Other current assets" and our investment securities are recorded in "Other Assets"assets" on the consolidated balance sheets.
15
AT&T INC.
JUNE 30, 2015

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

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

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

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the threesix months ended March 31,June 30, 2015 and March 31,June 30, 2014, 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, Canadian dollar and Swiss Franc 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 or floating foreign-denominated rate to a fixed U.S. denominated interest rate.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities, both for the period they are outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the threesix months ended March 31,June 30, 2015 and March 31,June 30, 2014, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
15
AT&T INC.
MARCH 31, 2015

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

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $35$61 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks. Our unutilized interest rate locks carry mandatory early terminations, the latest occurring in the first half of 2015.

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.nondesignated. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) –net"– net" in the consolidated statements of income. In the threesix months ended March 31,June 30, 2015 and March 31,June 30, 2014, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
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AT&T INC.
JUNE 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31,June 30, 2015, we had posted collateral of $2,566$1,544 (a deposit asset) and held collateral of $62$396 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March,June, we would have been required to post additional collateral of $147.$69. At December 31, 2014, we had posted collateral of $530 (a deposit asset) and held collateral of $599 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), against the fair value of the derivative instruments.

Following is the notional amount of our outstanding derivative positions:

  March 31,  December 31, 
  2015  2014 
Interest rate swaps $6,550  $6,550 
Cross-currency swaps  29,350   26,505 
Interest rate locks  7,000   6,750 
Total $42,900  $39,805 

Following is the related hedged items affecting our financial position and performance: 
    
Effect of Derivatives on the Consolidated Statements of Income   
Fair Value Hedging RelationshipsThree months ended 
March 31, March 31, 
2015  2014 
Interest rate swaps (Interest expense):   
   Gain (Loss) on interest rate swaps$41  $(11)
   Gain (Loss) on long-term debt (41)  11 

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AT&T INC.
MARCH 31, 2015
  June 30,  December 31, 
  2015  2014 
Interest rate swaps $8,050  $6,550 
Cross-currency swaps  27,375   26,505 
Interest rate locks  -   6,750 
Total $35,425  $39,805 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Following are the related hedged items affecting our financial position and performance: 
        
Effect of Derivatives on the Consolidated Statements of Income       
Fair Value Hedging RelationshipsThree months ended Six months ended 
June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 
Interest rate swaps (Interest expense):       
     Gain (Loss) on interest rate swaps$(30) $22  $11  $11 
     Gain (Loss) on long-term debt 30   (22)  (11)  (11)
Dollars in millions except per share amounts
In addition, the net swap settlements that accrued and settled in the quarter ended March 31June 30 were offset againstincluded in interest expense.

Three months ended 
March 31,  March 31,   Three months ended  Six months ended 
Cash Flow Hedging Relationships2015  2014  June 30, 2015  June 30, 2014  June 30, 2015  June 30, 2014 
Cross-currency swaps:           
Gain (Loss) recognized in accumulated OCI$(228) $11  $(102) $(160) $(330) $(149)
                
Interest rate locks:                       
Gain (Loss) recognized in accumulated OCI (316)  -   (45)  -   (361)  - 
Interest income (expense) reclassified from accumulated OCI into income (11)  (11)  (15)  (11)  (26)  (22)
                
Foreign exchange contracts:                       
Gain (Loss) recognized in accumulated OCI -   (2)  -   -   -   (2)
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AT&T INC.
JUNE 30, 2015

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

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions
Nextel Mexico  On April 30, 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, less approximately $427 of net debt and other adjustments. The subsidiaries offer service under the name Nextel Mexico.

The preliminary values of assets acquired were:  $338 in licenses, $1,206 in property, plant and equipment, $157 in customer lists and $363 of goodwill.

GSF Telecom  On January 16, 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, less net debt of approximately $700. GSF Telecom offers service under both the Iusacell and Unefon brand names in Mexico.

The preliminary values of assets acquired were:  $865 in licenses, $952 in property, plant and equipment, $308 in customer lists, $26 in trade names and $919 of goodwill.

AWS-3 AuctionIn January 2015, we submitted winning bids for 251 Advanced Wireless Service (AWS) spectrum licenses in the AWS-3 Auction (FCC Auction 97) for $18,189. We provided the Federal Communications Commission (FCC) an initial down payment of $921 in October 2014 and paid the remaining $17,268 in the first quarter of 2015. The interest associated with this acquisition will be excluded from interest expense and capitalized until this spectrum is ready for its intended use.

GSF Telecom  On January 16, 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, less net debt of approximately $700. GSF Telecom offers service under both the Iusacell and Unefon brand names in Mexico.

The preliminary values of assets acquired were: $1,078 in licenses, $943 in property, plant and equipment, $365 in customer lists, $51 in trade names and $690 of goodwill.

Subsequent and Pending AcquisitionsAcquisition
Nextel MexicoDIRECTV  On April 30,July 24, 2015, we completed our acquisition of the subsidiariesDIRECTV, a leading provider of NII Holdings Inc., operating its wireless businessdigital television entertainment services in Mexico, for $1,875, less approximately $427 of net debt and other adjustments. The subsidiaries offer service under the name Nextel Mexico.
DIRECTV  In May 2014, we announced a merger agreement to acquire DIRECTV in a stock-and-cash transaction for $95.00 per share of DIRECTV's common stock, or approximately $48,500 at the date of announcement. As of March 31, 2015, DIRECTV had approximately $15,129 in net debt. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our stock subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our average stock price is below $34.90 per share at closing and 1.724 AT&T shares if our average 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 inboth the United States and Latin America, withAmerica. The acquisition represents an opportunity for us to acquire a high-quality customer base,unique and complementary set of assets and achieve substantial cost synergies over time, as well as increasing revenue from pay television in Latin America. Our distribution scale will enable us to offer consumers bundles including video, high-speed broadband and mobile services, using all the best selectionsales channels of programming,both companies. We believe the best technology for deliveringcombined company will be a content distribution leader across mobile, video and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers.broadband platforms.

TheUnder the merger agreement, each share of DIRECTV stock was adopted by DIRECTV's stockholders on September 25, 2014 and the transaction remains subjectexchanged for $28.50 cash plus 1.892 shares of our common stock. We issued a final total of 954,518,588 shares 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 foreign governmental entities have been obtained and are in full force and effect. The transaction is still expected to closeDIRECTV shareholders, giving them an approximate 16% stake in the second quartercombined company, based on common shares outstanding. Based on our $34.29 per share closing stock price on July 24, 2015, total consideration paid to DIRECTV shareholders was $47,110, including $32,731 of 2015. The merger agreement provides certain mutual termination rightsAT&T stock and $14,379 in cash. DIRECTV had approximately $15,891 in net debt at acquisition.
Our third-quarter 2015 operating results will include the results from DIRECTV following the date of acquisition. Our consolidated balance sheet will include the assets and liabilities of DIRECTV, which are being appraised by a third-party and include various assumptions in determining fair value. Issues that are more unique in this acquisition include the valuation of satellite orbital slots and foreign exchange rates in valuing foreign operations, including those in Venezuela. With this acquisition, we also expect to change our accounting for uscustomer set-up and DIRECTV, includinginstallation costs, having already discussed this change with the rightSecurities and Exchange Commission. AT&T's historical results will be revised to reflect the retrospective application of either party to terminatethis accounting change. We are also considering 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 an order permanently restraining, enjoining, or otherwise prohibiting consummationimplications of the merger becomes finalour new management structure and nonappealable. In October 2014, DIRECTV and the National Football League renewed their agreement for the "NFL Sunday Ticket" service substantiallyorganizational responsibilities on the terms discussed between AT&T and DIRECTV, satisfying one of the conditions to closing the 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.our operating segments.
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AT&T INC.
MARCH 31,JUNE 30, 2015

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

Subsequent Debt Issuance
In May 2015, we issued $17,500 in debt to be used for general corporate purposes, including funding previously announced acquisitions.

NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months, with the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of March 31,June 30, 2015 and December 31, 2014, gross equipment installment receivables of $3,786$3,929 and $4,265 were included on our consolidated balance sheets, of which $2,240$2,348 and $2,514 are notes receivable that are included in "Accounts receivable, net."

On June 27, 2014, we entered into the first of a series of 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). Under these agreements, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables. Under the terms of the arrangements, we continue to bill and collect on behalf of our customers for the receivables sold. To date, we have collected and remitted approximately $1,298$2,263 (net of fees), of which $130$254 was returned as deferred purchase price.

The following table sets forth a summary of equipment installment receivables sold during the three months and six months ended March 31, 2015:June 30, 2015 and 2014:

Three months ended Three months ended Six months ended 
March 31, June 30, June 30, 
2015 2015 2014 2015 2014 
Gross receivables sold $1,728  $1,637  $4,363  $1,637 
Net receivables sold1
$2,381   1,555   1,391   3,936   1,391 
Cash proceeds received 1,524   1,049   819   2,573   819 
Deferred purchase price recorded 858   505   565   1,363   565 
1 Gross receivables sold were $2,635, before deducting the allowance, imputed interest and trade-in right guarantees.
 
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
 

The deferred purchase price 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 device trade-ins, and is subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).

At March 31,June 30, 2015, our deferred purchase price receivable was $2,410,$2,857, of which $1,148$1,677 is included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." At December 31, 2014, our deferred purchase price receivable was $1,606, which is included in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.

The sales of equipment installment receivables did not have a material impact in our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.
18
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AT&T INC.
MARCH 31,JUNE 30, 2015

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

For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry both in the United States and internationally, providing wireless and wireline telecommunicationstelecommunication services and equipment. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

Consolidated Results  Our financial results in the second quarter and for the first quartersix months of 2015 and 2014 are summarized as follows:

 First Quarter  Second Quarter  Six-Month Period 
 2015  2014  
Percent
Change
  2015  2014  
Percent
Change
  2015  2014  
Percent
Change
 
Operating Revenues                  
Service $28,962  $29,776   (2.7) % $29,541  $29,556   (0.1)% $58,503  $59,332   (1.4)%
Equipment  3,614   2,700   33.9   3,474   3,019   15.1    7,088   5,719   23.9  
Total Operating Revenues  32,576   32,476   0.3   33,015   32,575   1.4    65,591   65,051   0.8  
                        
Operating expenses                                    
Cost of services and sales  14,581   13,321   9.5   15,140   14,212   6.5    29,721   27,533   7.9  
Selling, general and administrative  7,961   8,260   (3.6)  7,467   8,197   (8.9)   15,428   16,457   (6.3) 
Depreciation and amortization  4,578   4,617   (0.8)  4,696   4,550   3.2    9,274   9,167   1.2  
Total Operating Expenses  27,120   26,198   3.5   27,303   26,959   1.3    54,423   53,157   2.4  
Operating Income  5,456   6,278   (13.1)  5,712   5,616   1.7    11,168   11,894   (6.1) 
Income Before Income Taxes  4,627   5,651   (18.1)  4,861   6,106   (20.4)   9,488   11,757   (19.3) 
Net Income  3,276   3,734   (12.3)  3,146   3,621   (13.1)   6,422   7,355   (12.7) 
Net Income Attributable to AT&T $3,200  $3,652   (12.4) % $3,044  $3,547   (14.2)% $6,244  $7,199   (13.3)%

Overview
Operating revenuesincreased $100,$440, or 0.3%1.4%, in the second quarter and $540, or 0.8%, for the first quartersix months of 2015.

Service revenues decreased $814,$15, or 2.7%0.1%, in the second quarter and $829, or 1.4%, for the first quartersix months of 2015. The decrease was primarily due to increased adoption of our wireless Mobile Share Value plans, continued declines in our legacy wireline voice and data products and the October 2014 sale of our Connecticut wireline operations, partially offset by strong revenues from AT&T U-verse®U-verse® (U-verse), and our strategic business services, our new Mexican wireless operations and revenues from our prepaid wireless offering, Cricket®2014 acquisition of Leap Wireless International, Inc. (Leap).

Equipment revenues increased $914,$455, or 33.9%15.1%, in the second quarter and $1,369, or 23.9%, for the first quartersix months of 2015. Growth in equipment revenues reflected the continuing trend by our postpaid wireless subscribers to choose devices on installment purchase rather than the device subsidy model. Revenues alsomodel, which resulted in increased as subscribers are purchasing higher-priced smartphones.equipment revenue recognized for device sales.
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AT&T INC.
JUNE 30, 2015

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

Operating expenses increased $922,$344, or 3.5%1.3%, in the second quarter and $1,266, or 2.4%, for the first quartersix months of 2015.

Cost of services and sales expenses increased $1,260,$928, or 9.5%6.5%, in the second quarter and $2,188, or 7.9%, for the first quartersix months of 2015. The increase wasincreases were primarily due to higher wireless equipment costs resulting from customers choosing higher-priced devices,and increased wireless network expenses, which included $364 of network rationalization charges related to Leap. Also contributing to the increases were expenses from our newly acquired wireless operations in Mexico as well as higher content costs higher expenses attributable toassociated with our U-verse subscriber growth, voluntary employee separation charges and an increase in noncash benefit expenses in our Wireline segment.services. These increases were slightly offset by lower noncash financing-related costs associated with our pension and postretirement benefits and lower traffic compensation costs.
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AT&T INC.
MARCH 31, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Selling, general and administrative expenses decreased $299,$730, or 3.6%8.9%, in the second quarter and $1,029, or 6.3%, for the first quartersix months of 2015. The decrease was primarily due to lower advertising, employeewireless commission and customer service and retention costs, as well as lower administrative and other non-employee related and wireless commissions costs, which were partially offset by increases inexpenses, reflecting our sales expenses resulting from increased competition.ongoing focus on cost efficiencies.

Depreciation and amortization expense decreased $39,increased $146, or 0.8%3.2%, in the second quarter and $107, or 1.2%, for the first quartersix months of 2015. The decrease isincrease was primarily due to extending the estimated useful lifeacquisitions of softwareGSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) and abandonment of certain network assets, both in 2014. These decreases were partially offset by increases due tothe Nextel Mexico properties, ongoing capital spending for network upgrades and additional expenses associated with the assets acquired from Leap Wireless International, Inc. (Leap)Leap. These increases were partially offset by decreases as a result of extending the estimated useful life of software and GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom).abandonment of certain wireline network assets, both of which occurred in 2014.

Operating income decreased $822,increased $96, or 13.1%1.7%, in the second quarter and decreased $726, or 6.1%, for the first quartersix months of 2015. Our operating income margin in the firstsecond quarter decreasedincreased from 19.3%17.2% in 2014 to 16.7%17.3% in 2015, but decreased from 18.3% in 2014 to 17.0% in 2015 for the first six months of 2015.

Interest expense increased $39,$51, or 4.5%5.8%, in the second quarter and $90, or 5.2%, for the first quartersix months of 2015. The increase wasincreases were primarily due to higher average debt balances.balances, including debt issued in connection with the July DIRECTV acquisition. The increase wasincreases were partially offset by lower average interest rates and an increase in capitalized interest resulting from spectrum acquired in the AWS-3Advanced Wireless Service (AWS)-3 Auction (see Notenote 7).

Equity in net income of affiliates decreased $88$69, or 67.6%, in the second quarter and $157, or 82.6%, for the first quartersix months of 2015. This decreaseThe decreases primarily resulted from the sale of América Móvil, S.A. de C.V. (América Móvil) in June 2014 and lower earnings from YP Holdings LLC.2014.

Other income (expense) – net We had other income of $70$48 in the second quarter and $118 for the first quartersix months of 2015, compared to other income of $145$1,269 in the second quarter and $1,414 for the first quartersix months of 2014. Results in the second quarter and for the first quartersix months of 2015 included a net gaingains on the sale of investments of $33$17 and $50 and interest and dividend income of $19. Results$26 and $45, respectively.

Other income in the second quarter and for the first quartersix months of 2014 included a net gaingains on the sale of América Móvil shares and other investments of $122$1,245 and $1,367 and interest and dividend income of $13.
$23 and $36.

Income taxesdecreased $566,$770, or 29.5%31.0%, in the second quarter and $1,336, or 30.3%, for the first quartersix months of 2015. Our effective tax rate was 29.2%35.3% for the second quarter and 32.3% for the first quartersix months of 2015, as compared to 33.9%40.7% for firstthe second quarter 2014. The decrease in effective tax rateand 37.4% for the first quartersix months of 2015 was2014. The lower effective tax rates were primarily due to the sale of América Móvil shares in 2014, and the recognition of tax benefits related to the restructuring of a portion of our enterprise business.business in 2015.
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AT&T INC.
JUNE 30, 2015

Selected Financial and Operating Data    
  March 31, 
Subscribers and connections in (000s) 2015  2014 
Domestic wireless subscribers  121,772   116,014 
Network access lines in service  18,949   23,582 
U-verse VoIP connections  5,200   4,134 
Total wireline broadband connections  16,097   16,503 
Debt ratio1 
  52.5%  46.6%
Net debt ratio2
  50.1%  44.5%
Ratio of earnings to fixed charges3 
  4.22   5.50 
Number of AT&T employees4 
  250,790   246,730 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts

Selected Financial and Operating Data           
  June 30, 
Subscribers and connections in (000s) 2015  2014 
Wireless subscribers  123,902   116,634 
Network access lines in service  18,116   22,547 
U-Verse VoIP connections  5,381   4,411 
Total wireline broadband connections  15,961   16,448 
Debt ratio1 
  56.5%  47.6%
Net Debt Ratio2 
  46.1%  41.2%
Ratio of earnings to fixed charges3 
  4.12   5.53 
Number of AT&T employees4 
  250,730   248,170 
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.
2Net debt ratios are calculated by dividingderiving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).
3 See Exhibitexhibit 12.
4 Reflects recent acquisition activity.

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AT&T INC.
MARCH 31, 2015

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

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our 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 to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each segment's reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have three reportable segments: (1) Wireless, (2) Wireline and (3) International.

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless data and voice communications services. This segment included our portion of the results from our equity investment in Softcard.

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.

The International segment uses the Iusacell, Unefon, and UnefonNextel Mexico regional and national networks to provide consumer and business customers with wireless data and voice communication services in Mexico. Beginning April 30, 2015,Results from the International segment also utilizesequity method investment in América Móvil S.A. de C.V. (prior to the regional and national networksJune 2014 disposal of Nextel Mexico to provide similar services.our investment) are included in this segment.

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

Wireless      
Segment Results      
  First Quarter 
  2015  2014  
Percent
Change
 
 
Segment operating revenues      
      Service $14,812  $15,387   (3.7) %
      Equipment  3,374   2,479   36.1 
Total Segment Operating Revenues  18,186   17,866   1.8 
             
Segment operating expenses            
      Operations and support  11,681   10,882   7.3 
      Depreciation and amortization  2,058   1,931   6.6 
Total Segment Operating Expenses  13,739   12,813   7.2 
Segment Operating Income  4,447   5,053   (12.0)
Equity in Net Income (Loss) of Affiliates  (4)  (20)  80.0 
Segment Income $4,443  $5,033   (11.7) %

21
22
AT&T INC.
MARCH 31,JUNE 30, 2015

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

The following table highlights other key measures of performance for the Wireless segment: 
       
  First Quarter 
  2015  2014  
Percent
Change
 
(in 000s)
Wireless Subscribers 1 
  121,772   116,014   5.0%
   Postpaid smartphones  57,157   53,020   7.8 
   Postpaid feature phones and data-centric devices  19,018   20,271   (6.2)
Postpaid  76,175   73,291   3.9 
Prepaid  10,037   10,411   (3.6)
Reseller  13,595   13,886   (2.1)
Connected devices 2 
  21,965   18,426   19.2 
Total Wireless Subscribers  121,772   116,014   5.0 
             
Net Additions 3 
            
   Postpaid  441   625   (29.4)
   Prepaid  98   88   11.4 
   Reseller  (266)  (206)  (29.1)
   Connected devices2 
  945   555   70.3 
Net Subscriber Additions  1,218   1,062   14.7 
             
Mobile Share connections  55,581   32,585   70.6 
Smartphones under our installment program at end of period  18,540   4,132   - 
Smartphones sold under our installment program during period  4,065   2,868   41.7%
             
Total Churn4 
  1.40%  1.39% 1 BP 
Postpaid Churn4 
  1.02%  1.07% (5) BP 
1 Represents 100% of AT&T Mobility wireless subscribers.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
3 Excludes merger and acquisition-related additions during the period.
 
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. 
Wireless            
Segment Results            
  Second Quarter  Six-Month Period 
  2015  2014  
Percent
Change
  2015  2014  
Percent
Change
 
 
Segment operating revenues            
   Service $15,115  $15,148    (0.2)% $29,927  $30,535    (2.0)%
   Equipment  3,189   2,782    14.6    6,563   5,261    24.7  
Total Segment Operating Revenues  18,304   17,930    2.1    36,490   35,796    1.9  
                         
Segment operating expenses                        
   Operations and support  11,551   11,568    (0.1)   23,232   22,450    3.5  
   Depreciation and amortization  2,073   2,035    1.9    4,131   3,966    4.2  
Total Segment Operating Expenses  13,624   13,603    0.2    27,363   26,416    3.6  
Segment Operating Income  4,680   4,327    8.2    9,127   9,380    (2.7) 
Equity in Net Income (Loss) of                        
   Affiliates  -   (29)   -    (4)  (49)   91.8  
Segment Income $4,680  $4,298    8.9 % $9,123  $9,331    (2.2)%
23
AT&T INC.
JUNE 30, 2015

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

The following table highlights other key measures of performance for the Wireless segment: 
         
  Second Quarter  Six-Month Period 
  2015  2014  
Percent
Change
  2015  2014  
Percent
Change
 
(in 000s)
Wireless Subscribers 1 
            
   Postpaid smartphones        57,536   54,629    5.3%
   Postpaid feature phones and data-centric devices                 19,005   19,703    (3.5)
Postpaid        76,541   74,332    3.0 
Prepaid        10,438   10,082    3.5 
Reseller        13,506   13,756    (1.8)
Connected devices 2 
             23,417   18,464    26.8 
Total Wireless Subscribers            123,902   116,634    6.2 
                   
Net Additions 3 
                  
   Postpaid  410   1,026    (60.0) %  851   1,651    (48.5)
   Prepaid  331   (286)   -   429   (198)   - 
   Reseller  (95)  (162)   41.4   (361)  (368)   1.9 
   Connected devices2 
  1,448   56    -   2,393   611    - 
Net Subscriber Additions  2,094   634    -   3,312   1,696    95.3 
                      ��  
Mobile Share connections              57,813   41,291    40.0 
Smartphones under our installment program at end of period              21,106   7,198    - 
Smartphones sold under our installment program during period  3,859   3,142    22.8%  7,924   6,010    31.8%
                         
Total Churn4 
  1.31%  1.47 % (16) BP   1.36%  1.43 % (7) BP 
Postpaid Churn4 
  1.01%  0.86 % 15 BP   1.01%  0.96 % 5 BP 
 1 Represents 100% of AT&T Mobility wireless subscribers.
 
 2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
 3 Excludes merger and acquisition-related additions during the period.
 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 (collectively referred to as Mobile Share) and AT&T NextSM (AT&T Next).

At March 31,June 30, 2015, we served 121.8123.9 million subscribers, an increase of 5.0%6.2% from the prior year. Our subscriber base consists primarily of postpaid accounts and connected devices. Our prepaid services, which include results from services sold under the Cricket brand, are monthly prepaid services.
24
AT&T INC.
JUNE 30, 2015

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

ARPU
Postpaid phone-only ARPU (average revenue per average wireless subscriber) decreased 9.6%1.6% compared to the second quarter of 2014 and 5.7% compared to the first quartersix months of 2014 reflecting subscribers' continued adoption of AT&T Next and Mobile Share Value plans. Postpaid phone-only ARPU plus Next subscriber installment billings (postpaid phone-only ARPU plus AT&T Next) decreased 1.9%increased 6.1% and 2.0% compared to the same periods last year, as expected due to the continuing growth of the AT&T Next program. Compared to the first quarter of 20142015, postpaid phone-only ARPU increased 2.1% and increased 0.4% sequentially. As AT&T Next continues to grow, postpaid phone-only ARPU plus AT&T Next is expected to increase.
22
AT&T INC.
MARCH 31, 2015increased 3.3%.

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

Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was slightlylower for the second quarter and first six months of 2015. Postpaid churn was higher infor both the second quarter and the first quarter of 2015,six months, compared to the historically low postpaid churn experienced in the second quarter and first quartersix months of 2014. Postpaid churn, however, was lower for the first quarter of 2015. A significant portion of our postpaid subscribers are on plans that historically have experienced lower churn.

Postpaid
Postpaid subscribers increased 3.9%0.5% during the second quarter when compared to March 31, 2015 and 3.0% when compared to June 30, 2014. At March 31,June 30, 2015, 84%85% of our postpaid phone subscriber base used smartphones, compared to 78%80% at March 31,June 30, 2014. About 97%98% 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 49.049.8 million subscribers on these plans as compared to 42.744.3 million subscribers in the prior year. About half of our Mobile Share accounts have chosen data plans with 10 gigabytes or higher. Device connections on our Mobile Share plans now represent over 70%75% 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 March 31, 2015, approximately 92% of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our LTE or HSPA+ network), and about 80% of our postpaid smartphone subscribers use an LTE device.

Historically, our postpaid customers have signed two-year service contracts when they purchase subsidized handsets. However, through our Mobile Share plans, we offer postpaid services at lower prices for those customers who either bring their own devices (BYOD) or participate in our AT&T Next program. Approximately 65%68% of all postpaid smartphone gross adds and upgrades during the firstsecond quarter of 2015 chose AT&T Next. We also experienced an 18% increase in the number of BYOD gross adds year over year. While BYOD customers do not generate equipment revenue or incur additional expenses for device subsidy, the service revenue helps improve our margins.

Our AT&T Next program allows for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, they also have the right to trade in the original device for a new device and have the remaining unpaid balance satisfied. For customers that elect these trade-in programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers on the AT&T Next program pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers.

Prepaid
Beginning withIn the first quarter of 2015, we have updated our definition of prepaid subscribers to exclude session-based tablets, which are now included with connected devices. Prepaid subscribers now consist primarily of phone users. On this revised basis, prepaidPrepaid subscribers decreased 3.6%increased 4.0% during the second quarter when compared to the first quarter ofMarch 31, 2015 and 3.5% when compared to June 30, 2014.

Operating Results
Service revenues decreased $575,$33, or 3.7%0.2%, in the second quarter and $608, or 2.0%, for the first quartersix months of 2015. ThisThe decrease in the second quarter was largely due to customers continuing to shift to no-device-subsidy plans, which allow for discounted monthly service charges under our 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. The decline in service revenue for the first six months was partially offset by increased revenues from Cricket and higher handset insurance revenue.

Equipmentrevenues increased $895,$407, or 36.1%14.6%, in the second quarter and $1,302, or 24.7%, for the first quartersix months of 2015. The increase was primarily related to the increase in devices sold under our AT&T Next program and the increase in sales of higher-priced smartphones, including thosesales to Cricket customers.
23
25
AT&T INC.
MARCH 31,JUNE 30, 2015

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

Operations and support expenses decreased $17, or 0.1%, in the second quarter and increased $799,$782, or 7.3%3.5%, in the first quarter of 2015. The first quarter increase was primarily due to the following:
·Equipment costs increased $690, reflecting the sales of more expensive smartphones. Equipment costs also include subscriber integration charges. We expect Cricket integration charges will continue during 2015 as we complete the migration of those subscribers to our network.
·Handset insurance cost increased $111 due to an increase in the cost and volume of replacement phones.
·Network costs, which include incremental costs associated with the acquisition of Leap, increased $100 due to increased lease fees, higher maintenance and energy costs resulting from the increase in the number of cell sites and expenses related to our network enhancement efforts. These increases were partially offset by lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

Partially offsetting these increases were the following:
·Selling (other than commissions) and administrative expenses decreased $75, primarily due to: decreases of $113 in advertising and promotions and $50 in information technology and development, partially offset by increases of $55 in sales and marketing and $41 in bad debt expense.
·Commission expenses decreased $53, primarily due to lower average commission rates paid under the AT&T Next program as well as decreases due to national equipment activation credits. These decreases are partially offset by an increase due to Cricket sales, postpaid gross activations and upgrades.

Depreciation and amortization expense increased $127, or 6.6%, in the first quarter of 2015. The expense increase was primarily due to ongoing capital spending for network upgrades and expansion and additional expenses associated with the assets acquired from Leap, partially offset by fully depreciated assets.

Operating income decreased $606, or 12.0%, in the first quarter of 2015. Our Wireless segment operating income margin in the first quarter decreased from 28.3% in 2014 to 24.5% in 2015.

Wireline      
Segment Results      
  First Quarter 
  2015  2014  
Percent
Change
 
 
Segment operating revenues      
   Service $13,935  $14,389   (3.2) %
   Equipment  213   212   0.5 
Total Segment Operating Revenues  14,148   14,601   (3.1)
Segment operating expenses            
   Operations and support  10,263   10,457   (1.9)
   Depreciation and amortization  2,476   2,684   (7.7)
Total Segment Operating Expenses  12,739   13,141   (3.1)
Segment Operating Income  1,409   1,460   (3.5)
Equity in Net Income (Loss) of Affiliates  (7)  1   - 
Segment Income $1,402  $1,461   (4.0) %
24
AT&T INC.
MARCH 31, 2015

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

Our broadband, switched access lines and other services provided by our local exchange telephone subsidiaries at March 31, 2015 and 2014 are shown below and trends are addressed throughout this segment discussion.

  March 31,  March 31,  Percent 
(in 000s) 
 
20151
  
20141
  Change 
U-verse high speed Internet  12,644   11,009   14.9%
DSL and Other Broadband Connections  3,453   5,494   (37.1)
Total Wireline Broadband Connections2 
  16,097   16,503   (2.5)
             
Total U-verse Video Connections  5,993   5,661   5.9 
             
Retail consumer Switched Access Lines  8,660   11,655   (25.7)
U-verse consumer VoIP connections  5,009   4,120   21.6 
Total Retail Consumer Voice Connections  13,669   15,775   (13.4)
             
Switched Access Lines            
Retail consumer  8,660   11,655   (25.7)
Retail business  8,610   10,084   (14.6)
Retail Subtotal  17,270   21,739   (20.6)
             
Wholesale  1,490   1,611   (7.5)
             
Total Switched Access Lines3 
  18,949   23,582   (19.6) %
1 Connections reflect the sale of our Connecticut wireline operation in 2014.
2 Total wireline broadband connections include DSL, U-verse high speed Internet and satellite broadband.
3 Total switched access lines include access lines provided to national mass markets and private payphone service providers of 189 at March 31, 2015 and 232 at March 31, 2014.

Operating Results
Service revenues decreased $454, or 3.2%, in the first quarter of 2015, reflecting the sale of our Connecticut wireline operations in 2014. The decline was also driven by lower service revenues from business customers (which include integration, government-related and outsourcing services), and the continued decline in revenues from our legacy services that we no longer actively market.

Business
Service revenues from business customers decreased $387, or 4.6%, in the first quarter of 2015 and were negatively impacted by the sale of our Connecticut operations in 2014, our exit from low-margin wholesale businesses and foreign exchange rates. The revenue decrease was also due to a $317 decrease in long-distance and local voice revenues and a $270 decrease in traditional data revenues, which include circuit-based and packet-switched data services. These decreases were primarily due to lower demand as customers continue to shift to our most advanced IP-based offerings, including VPNs, Ethernet, and U-verse services (Strategic business services). Strategic business services grew $339, or 14.8%, in the first quarter. Revenue from Ethernet increased $101, VPN increased $62, U-verse services increased $57 and EaMIS increased $46.

Consumer
Service revenues from residential customers decreased $50, or 0.9%, in the first quarter of 2015 and reflects the sale of our Connecticut operations in the fourth quarter of 2014. The decrease was also driven by a $377 decrease in traditional voice revenues and a decrease of $180 in DSL revenue as customers continue to shift to our strategic high-speed Internet access offerings or choose competitors' offerings. These decreases were partially offset by higher IP data revenue reflecting increased U-verse penetration, customer additions, and migration from our legacy voice and DSL services. In the first quarter, U-verse revenue from consumers increased $229 for high-speed Internet access, $209 for video and $71 for voice.
25
AT&T INC.
MARCH 31, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Equipment revenues increased $1, or 0.5%, in the first quarter of 2015. Our equipment revenues are mainly attributable to our business customers.

Operations and support expenses decreased $194, or 1.9%, in the first quartersix months of 2015. 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 second quarter decrease was primarily due to the following:
·Selling (other than commissions) and administrative expenses decreased $270, primarily due to decreases of $162 in customer service and retention cost and $111 in professional, administrative and legal costs.
·Commission expenses decreased $234, primarily due to lower average commission rates, including those paid under the AT&T Next program. These decreases are partially offset by an increase in rates associated with Cricket sales.
·Incollect roaming fees decreased $75 primarily due to rate declines, which were partially offset by increased data volume.

Partially offsetting the decreases in the quarter were the following:
·Network costs increased $355 due to ongoing network rationalization charges of $364 associated with the acquisition of Leap. These increases were partially offset by lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.
·Handset insurance cost increased $161 due to an increase in the cost and volume of replacement phones.
·Equipment costs increased $151, reflecting the sales of more expensive smartphones. Equipment costs also include subscriber integration charges.

The increase for the first six months of 2015 was primarily due to the following:
·Equipment costs increased $841, reflecting the sales of more expensive smartphones. Equipment costs also include subscriber integration charges.
·Network costs increased $455 due to ongoing network rationalization charges of $364 associated with the acquisition of Leap and increased lease fees. These increases were partially offset by lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.
·Handset insurance cost increased $272 due to an increase in the cost and volume of replacement phones.

Partially offsetting the increases for the first six months were the following:
·Selling (other than commissions) and administrative expenses decreased $345, primarily due to: decreases of $183 in customer service and retention cost; $110 in advertising and promotions; and $93 in professional, administrative and legal costs, partially offset by an increase of $86 in bad debt expense.
·Commission expenses decreased $287, primarily due to lower average commission rates, including those paid under the AT&T Next program. These decreases are partially offset by an increase in rates associated with Cricket sales and increased upgrade transactions.
·Incollect roaming fees decreased $60 primarily due to rate declines, which were partially offset by increased data volume.

Depreciation and amortization expenses increased $38, or 1.9%, in the second quarter reflectsand $165, or 4.2%, for the first six months of 2015. Depreciation expense increased $57, or 2.9%, in the second quarter and $159, or 4.1%, for the first six months primarily due to ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets. Amortization expense decreased $19, or 31.1%, in the second quarter and increased $6, or 6.7%, for the first six months primarily due to the amortization of customer lists related to our acquisition of Leap.

Operating income increased $353, or 8.2%, in the second quarter and decreased $253, or 2.7%, for the first six months of 2015. Our Wireless segment operating income margin in the second quarter was 25.6% in 2015 and 24.1% in 2014, and for the first six months was 25.0% in 2015 and 26.2% in 2014.
26
AT&T INC.
JUNE 30, 2015

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

Wireline            
Segment Results            
  Second Quarter  Six-Month Period 
  2015  2014  
Percent
Change
  2015  2014  
Percent
Change
 
 
Segment operating revenues            
   Service $13,981  $14,408   (3.0) % $27,916  $28,797   (3.1) %
   Equipment  233   229   1.7   446   441   1.1 
Total Segment Operating Revenues  14,214   14,637   (2.9)  28,362   29,238   (3.0)
Segment operating expenses                        
   Operations and support  10,362   10,700   (3.2)  20,625   21,157   (2.5)
   Depreciation and amortization  2,488   2,514   (1.0)  4,964   5,198   (4.5)
Total Segment Operating Expenses  12,850   13,214   (2.8)  25,589   26,355   (2.9)
Segment Operating Income  1,364   1,423   (4.1)  2,773   2,883   (3.8)
Equity in Net Income (Loss) of Affiliates  1   -   -   (6)  1   - 
Segment Income $1,365  $1,423   (4.1) % $2,767  $2,884   (4.1) %
27
AT&T INC.
JUNE 30, 2015

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

Supplemental Information

Wireline Broadband, Telephone and Video Connections Summary
Our broadband, switched access lines and other services provided at June 30, 2015 and 2014 are shown below and trends are addressed throughout this segment discussion.

  June 30,  June 30,  Percent 
(in 000s) 
 
2015 1
  
2014 1
  Change 
U-verse high speed Internet  12,884   11,497   12.1 %
DSL and Other Broadband Connections  3,077   4,951   (37.9)
Total Wireline Broadband Connections2 
  15,961   16,448   (3.0)
             
Total U-verse Video Connections  5,971   5,851   2.1 
             
Retail Consumer Switched Access Lines  8,142   10,935   (25.5)
U-verse Consumer VoIP Connections  5,170   4,379   18.1 
Total Retail Consumer Voice Connections  13,312   15,314   (13.1)
             
Switched Access Lines            
Retail Consumer  8,142   10,935   (25.5)
Retail Business  8,331   9,806   (15.0)
Retail Subtotal  16,473   20,741   (20.6)
             
Wholesale  1,467   1,586   (7.5)
             
Total Switched Access Lines3 
  18,116   22,547   (19.7) %
1Connections reflect the sale of our Connecticut wireline operation in 2014.
2 Total wireline broadband connections include DSL, U-verse high speed Internet and satellite broadband.
3 Total switched access lines includes access lines provided to national mass markets and private payphone service providers of 176 at June 30, 2015 and 220 at June 30, 2014.

Operating Results
Service revenues decreased $427, or 3.0%, in the second quarter and $881, or 3.1%, for the first six months of 2015. The sale of our Connecticut wireline operations lowered revenues $274 in the second quarter and $549 for the first six months of 2015. The decline was also driven by lower service revenues from business customers and the continued decline in revenues from our legacy services that we no longer actively market.

Business
Service revenues from business customers decreased $439, or 5.2%, in the second quarter and $826, or 4.9%, for the first six months of 2015 and were negatively impacted by the sale of our Connecticut operations in 2014, our exit from low-margin wholesale businesses and foreign exchange rates. The revenue decreases were also due to a $372 and $689 decrease in long-distance and local voice revenues and a $224 and $494 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, including VPNs, Ethernet, and U-verse services (strategic business services). Strategic business service revenues grew $310, or 13.0%, in the second quarter and $649, or 13.9%, for the first six months of 2015. In the second quarter and for the first six months, revenue from VPN increased $35 and $97, Ethernet increased $95 and $196, U-verse services increased $62 and $119 and Ethernet access to Managed Internet Services increased $46 and $92.

Consumer
Service revenues from residential customers increased $40, or 0.7%, in the second quarter and decreased $10, or 0.1%, for the first six months of 2015 and reflected the sale of our Connecticut operations in the fourth quarter of 2014. In the second quarter and for the first six months, U-verse revenue from consumers increased $245 and $474 for high-speed Internet access, $235 and $444 for video and $78 and $149 for voice. The changes were also driven by a decrease of $357 and $734 in traditional voice revenues and a decrease of $164 and $344 in DSL revenue as customers continue to shift to our strategic high-speed Internet access offerings or choose competitors' offerings.
28
AT&T INC.
JUNE 30, 2015

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

Equipment revenues increased $4, or 1.7%, in the second quarter of 2015, and $5, or 1.1%, for the first six months of 2015. Our equipment revenues are mainly attributable to our business customers.

Operations and support expenses decreased $338, or 3.2%, in the second quarter and $532, or 2.5%, for the first six months of 2015. 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 decreases in expenses in the second quarter and first six months of 2015 reflect the sale of our Connecticut operations in the fourth quarter of 2014. Lower expenses were also due to lower netnonemployee expenses of $186 and $289 primarily driven by the substantial completion of Project Velocity IP (VIP) investments in 2014; lower traffic compensation costs of $123;$181 and $304 partially due to our exit from low-margin wholesale businesses; and lower contract services costs of $60; lower advertising costs of $47;$60 and lower materials and energy costs of $16.$120 due to cost reduction initiatives. These decreases were partially offset by increased cost of sales of $98,$90 and $188, related to U-verse related content fees, and higher employee-relatedemployer-related expenses driven by an increase in noncash benefit expenses.

Depreciation and amortization expenseexpenses decreased $208,$26, or 7.7%1.0%, in the second quarter and $234, or 4.5%, for the first quartersix months of 2015. Amortization expense decreased $29, or 38.2%, and $61, or 37.9%, for the first six months of 2015 primarily due to lower amortization of intangibles for the customer lists associated with acquisitions. Depreciation expense increased $3, or 0.1%, in the second quarter and decreased $176,$173, or 6.8%3.4%, for the first six months of 2015. The second-quarter increase was primarily due to the increase in ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets. The decrease for the first six months was primarily due to extending the estimated useful life of software and abandonment of certain network assets, both of which occurred in 2014. These decreases were partially offset by increases due to ongoing capital spending for network upgrades and expansion. Amortization decreased $32, or 37.6%, primarily due to lower amortization of intangibles for the customer lists associated with acquisitions.

Operating incomedecreased $51,$59, or 3.5%4.1%, in the second quarter and $110, or 3.8%, for the first quartersix months of 2015. Our Wireline segment operating income margin in the firstsecond quarter was 10.0% for9.6% in 2015 and 2014. We expect margin improvement9.7% in 2014, and for the remaining quarters offirst six months was 9.8% in 2015 dueand 9.9% in part to additional cost savings, including the impact of our voluntary retirement plan offer.2014.

International                 
Segment Results                 
First Quarter   Second Quarter  Six-Month Period 
2015 2014  
Percent
Change
  2015  2014  
Percent
Change
  2015  2014  
Percent
Change
 
Total Segment Operating Revenues$236  $-   -% $491  $-   - % $727  $-   -%
Segment operating expenses                                   
Operations and support 219   -   -   529   -   -    748   -   - 
Depreciation and amortization 44   -   -   125   -   -    169   -   - 
Total Segment Operating Expenses 263   -   -   654   -   -    917   -   - 
Segment Operating Income (Loss)  (163)  -   -    (190)  -   - 
Equity in Net Income of Affiliates  -   99   -    -   153   - 
Segment Income (Loss)$(27) $-   -% $(163) $99   - % $(190) $153   -%

Operating Results
OnIn January 16, 2015, we acquired GSF Telecom, which offers service under both the Iusacell and Unefon brand names in Mexico, and in April 2015, we acquired Nextel Mexico (see Note 7). Our International segment operating income margin was (11.4)(33.2)% in the second quarter and (26.1)% for the first quartersix months of 2015.

We are a wireless provider in Mexico, with approximately 6 million subscribers at March 31, 2015. Our subscriber base predominantly consists of prepaid customers. Operating revenues were $236 and operating expenses were $263 in the first quarter of 2015.

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MARCH 31,JUNE 30, 2015

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

We are a wireless provider in Mexico, with approximately 9 million subscribers at June 30, 2015. Our subscriber base predominantly consists of postpaid and prepaid customers. Operating revenues were $491 in the second quarter and $727 for the first six months of 2015. Operating expenses were $654 in the second quarter and $917 for the first six months of 2015.

Supplemental Operating Information

As a supplemental discussion of our operating results, we are providing a view of our AT&T Business Solutions (ABS) business revenues which includes both wireless and wireline. This combined view of ABS presents a complete revenue profile of the entire business customer relationship, and underscores the growing importance of mobile solutions to serving our business customers.

AT&T Business Solutions                
Operating Revenues                
First Quarter Second Quarter Six-Month Period 
2015 2014  
Percent
Change
 2015 2014  
Percent
Change
 2015 2014  
Percent
Change
 
ABS operating revenues                
Wireless$9,445  $9,032   4.6%$9,584  $8,739   9.7% $19,029  $17,771   7.1%
Wireline 8,288   8,670   (4.4) 8,239   8,672   (5.0)  16,527   17,342   (4.7)
Total ABS Operating Revenues$17,733  $17,702   0.2%$17,823  $17,411   2.4% $35,556  $35,113   1.3%

ABS Operating Revenues
Our ABS operating revenues increased $31,$412, or 0.2%2.4%, in the second quarter of 2015 and $443, or 1.3%, for the first quartersix months of 2015. At March 31,June 30, 2015, mobile solutions represented 53%almost 54% of total ABS revenues, compared to 51%50% at March 31,June 30, 2014.

Wireless revenues increased $413,$845, or 4.6%9.7%, in the second quarter of 2015 and $1,258, or 7.1%, for the first quartersix months of 2015. Growth in ABS postpaid subscribers of 9.8%8.6% contributed to total revenue growth in the firstsecond quarter of 2015. ABS wireless revenues consist of services provided to businesses as well as revenue from wireless customers who pay lower negotiated rates through their employers. Revenue increases reflect the impact of equipment installment plans, which resulted in equipment revenue growth of 44.9%32.6%, and a 2.4% declineservice revenue growth of 5.4% in the second quarter and equipment revenue growth of 38.6%, and service revenue.revenue growth of 1.4% for the first six months of 2015.

Wireline revenues decreased $382,$433, or 4.4%5.0%, in the firstsecond quarter of 2015. Revenues in2015 and $815, or 4.7%, for the first quartersix months of 20152015. Revenues were negatively impacted by the sale of our Connecticut operations in 2014, our exit from low-margin wholesale businesses and foreign exchange rates. The decline in revenues continues to be driven by migrations to alternative technologies, increasing price competition and sustained economic pressure. These declines were partially offset by growth in our strategic business services, including the continued success of our VPN and Cloud services.

While our wholesale revenues continue to be negatively impacted by increasing competition and our strategic decisions to change offerings, we are experiencing lower revenue declines than in prior quarters for services provided to small and medium-sized businesses.

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AT&T INC.
MARCH 31,JUNE 30, 2015

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

OTHER BUSINESS MATTERS

DIRECTV  Acquisition  In May 2014,On July 24, 2015, we announcedcompleted our acquisition of DIRECTV, a merger agreement to acquire DIRECTVleading provider of digital television entertainment services in a stock-and-cash transaction for ninety-five dollars per share of DIRECTV's common stock, or approximately $48,500 at the date of announcement. As of March 31, 2015, DIRECTV had approximately $15,129 in net debt. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our stock subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our average stock price is below $34.90 per share at closing and 1.724 AT&T shares if our average 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 inboth the United States and Latin America, withAmerica. The acquisition represents an opportunity for us to acquire a high-quality customer base,unique and complementary set of assets and achieve substantial cost synergies over time, as well as increasing revenue from pay television in Latin America. Our distribution scale will enable us to offer consumers bundles including video, high-speed broadband and mobile services, using all the best selectionsales channels of programming,both companies. We believe the best technologycombined company will be a content distribution leader across mobile, video and broadband platforms.

Under the merger agreement, each share of DIRECTV stock was exchanged for delivering$28.50 cash plus 1.892 shares of our common stock. We issued a final total of 954,518,588 shares to DIRECTV shareholders, giving them an approximate 16% stake in the combined company, based on common shares outstanding. Based on our $34.29 per share closing stock price on July 24, 2015, the closing date of the merger, total consideration paid to DIRECTV shareholders was $47,110, including $32,731 of AT&T stock and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers.$14,379 in cash.

The merger agreement was adopted by DIRECTV's stockholders on September 25, 2014 and the transaction remains subject to review by the Federal Communications Commission (FCC) andapproved the Department of Justice andtransaction subject to other closing conditions. It is alsothe following conditions:
·Fiber to the Premises Deployment – Within four years, we will offer our all-fiber Internet access service to at least 12.5 million customer locations such as residences, home offices and very small businesses. Combined with our existing high-speed broadband network, at least 25.7 million customer locations will have access to broadband speeds of 45Mbps or higher by the end of the four-year build. While the addition of medium and large businesses do not count towards the commitments, we will have the opportunity to provide services to those customers as part of this expansion. In addition, we will offer 1 Gbps fiber Internet access service pursuant to applicable E-rate rules to any eligible school or library requesting that service within or contiguous to our all-fiber footprint.
·Discounted Broadband Services Program – Within our 21-state area, we will offer a discounted fixed broadband service to low-income households that qualify for the government's Supplemental Nutrition Assistance Program. In locations where it is available, service with speeds of at least 10Mbps will be offered for ten dollars per month. Elsewhere, 5Mbps service will be offered for ten dollars per month or, in some locations, 3Mbps service will be offered for five dollars per month.
·Non-Discriminatory Usage-Based Practices – We are required to refrain from using usage-based allowances or other retail terms and conditions on our fixed broadband Internet access service, as defined in the order, to discriminate in favor of our own online video services. We can and will continue to offer discounts on integrated bundles of our video and fixed broadband services.
·Internet Interconnection Disclosure Requirements – We will submit to the FCC new interconnection agreements we enter into with peering networks and with "on-net" customers that purchase Managed Internet Service to exchange Internet traffic with other AT&T customers. We will develop, together with an independent expert, a methodology for measuring the performance of our Internet traffic exchange and regularly report these metrics to the FCC.
·Compliance Program and Reporting – We will appoint a Company Compliance Officer to develop and implement a plan to ensure compliance with these merger conditions. We will engage an independent, third-party compliance officer to evaluate the plan and our implementation. Both AT&T and the independent compliance officer will submit periodic reports to the FCC.
The conditions will remain in effect for four years from July 24, 2015. A condition may be extended once for two years if the FCC makes a formal finding that we have violated the condition that all necessary consents by certain foreign governmental entities have been obtained and are in full force and effect. The transaction is still expected to closewhole or in part.

Litigation Challenging DIRECTV's NFL Sunday Ticket  Three putative class actions were filed in the second quarterU.S. District Court for the Central District of 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 an order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and nonappealable. In October 2014,California against DIRECTV and the National Football League renewed their agreement for(NFL) alleging that the "NFL Sunday Ticket" service substantially on the terms discussed between AT&TNFL and DIRECTV satisfying one of the conditions to closing the merger. Under certain circumstances relating to a competing transaction, DIRECTV may be required to pay a termination fee to usviolated federal antitrust law in connection with or followingthe NFL Sunday Ticket package. Among other things, the complaints allege that plaintiffs have been overcharged for the televised presentation of out-of-market NFL games due to DIRECTV's exclusive agreement with the NFL to broadcast out-of-market games through the Sunday Ticket package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The complaint in Abrahamian v. National Football League, Inc., et al. was served in June 2015, the complaint in Ninth Inning Inc. v. National Football League, Inc., et al. was served in July 2015 and the complaint in Rookie Sports Café, L.L.C., et al., was served in August 2015. We vigorously dispute these allegations.
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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
Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a terminationcivil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the agreement.Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We dispute these allegations and will defend the lawsuit vigorously.

Based on synergies we expectWaste Disposal Inquiry Involving DIRECTV  In August 2012, a government investigation unit organized by the California Attorney General and the District Attorney for Alameda County, California notified DIRECTV that the unit was investigating allegations that DIRECTV had failed to realizeproperly manage, store, transport and dispose of Hazardous and Universal Waste in accordance with the acquisition,California Health & Safety Code. No litigation has been filed. DIRECTV is cooperating with the investigators and is seeking to resolve all claims. At this time, it is possible that we have also committed to the following upon closingcould face civil penalties in excess of the transaction: (1) expanding or enhancing our deployment of both wireline and fixed wireless broadband to at least 15 million customer locations across 48 states, with most of the locationsone hundred thousand dollars but not in underserved rural areas, (2) adhering to the FCC'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'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 pricesan amount that do not differ between customers in AT&T's wireline footprint and customers outside our current 21-state wireline footprint.would be material.

Nextel Mexico Acquisition  OnIn April 30, 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, less approximately $427 of net debt and other adjustments. The subsidiaries offer service under the name Nextel Mexico.
GSF Telecom Acquisition  On January 16, 2015, we completed our acquisition of 100 percent of the stock of Mexican wireless company GSF Telecom for $2,500, less net debt at closing, which was approximately $700. 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.

Spectrum Acquisitions  In January 2015, we submitted winning bids for 251 Advanced Wireless Service (AWS) spectrum licenses, comprised of 42 G Block licenses, 37 H Block licenses, 58 I Block licenses, and 114 J Block licenses, in the AWS-3 Auction (FCC Auction 97) for $18,189 (see "Liquidity and Capital Resources"). We will cover approximately 96 percent of the U.S. population with high-value contiguous AWS-3 spectrum. In 2016, we also intend to bid at least $9,000 in connection with the 600 MHz auction (see "Competitive and Regulatory Environment"), provided there is sufficient spectrum available in the auction without undue impairments to give us a viable path to at least a 2x10 MHz nationwide spectrum footprint.
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AT&T INC.
MARCH 31, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Federal Trade Commission LitigationUnlimited Data Plan Claims  In October 2014, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern AT&T's Maximum Bit Rate (MBR) program, which temporarily reduces the download speeds of a small portion of our legacy 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. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. We have askedIn May 2015, the Court granted our motion to certify its decision for permission toimmediate appeal, the denial of the motion immediately. If the Court grants the motion,and we will then askhave petitioned the Ninth Circuit Court of Appeals to accept the appeal so that the threshold question of jurisdiction may be fully litigated before the parties incur the expense of discovery.

On June 17, 2015, the FCC issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers. The NAL alleges that we violated the FCC's Open Internet Transparency Rule by using the term "unlimited" in connection with these offering subject to the MBR policy and by failing adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. On July 17, 2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter is currently pending before the FCC.

Labor Contracts  ContractsNew three-year agreements covering approximately 17,000 traditional wireline employees, which expired in April, 2015 and employees are currently working under the terms of the expired agreements.have been ratified. The contract covering approximately 24,000 traditional wireline employees in our nine-state Southeast region will expire in August 2015.August. Upon contract expiration, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.
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AT&T INC.
JUNE 30, 2015

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

COMPETITIVE AND REGULATORY ENVIRONMENT

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

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

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

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

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AT&T INC.
MARCH 31, 2015

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

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"), and also authorized the FCC to conduct an "incentive auction," to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction"). We participated in the AWS-3 Auction, which began in October 2014 and closed in January 2015 (see "Other Business Matters").2015. The FCC announced that the 600 MHz Auction has been postponed until 2016.

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" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. 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' needs, but because AT&T uses more "low band" spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions might affect AT&T's ability to expand capacity in these bands ("low band" spectrum has better propagation characteristics than "high band" spectrum). Also, a competitor has filed a petition asking the FCC to increase the percentage of spectrum for which we would be prohibited from bidding in the incentive auction. That petition is pending. 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.
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AT&T INC.
JUNE 30, 2015

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

As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We are facing significant spectrum and capacity constraints on our wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the FCC make additional 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.

Net Neutrality  In February 2015, the FCC released an order in response to the D.C. Circuit's January 2014 decision adopting new rules, and reclassifying both fixed and mobile consumer broadband Internet access services as telecommunications services, subject to comprehensive regulation under the Act. The FCC's decision significantly expands the FCC's existing authority to regulate the provision of fixed and mobile broadband Internet access services. The FCC also asserted jurisdiction over Internet interconnection arrangements, which until now have been unregulated. These actions could have an adverse impact on our fixed and mobile broadband services and operating results. AT&T and several other parties, including US Telecom and CTIA trade groups, have appealed the FCC's order. On May 1, 2015, AT&T and several other parties filed a request for a stay of the order with the FCC.FCC; while our request was denied, the Court granted our request for an expedited hearing schedule with all written arguments to conclude in September. On July 30, petitioners filed their opening brief on the merits challenging the FCC's new rules. 

Intercarrier Compensation/Universal Service  In October 2011, the FCC adopted an order fundamentally overhauling its high-cost universal service program and its existing intercarrier compensation (ICC) rules, which govern payments between carriers for the exchange of traffic. The order also established 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 May 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. In May 2015, the U.S. Supreme Court denied all petitions to review this decision.

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AT&T INC.
MARCH 31,JUNE 30, 2015

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

LIQUIDITY AND CAPITAL RESOURCES

We had $4,444$20,956 in cash and cash equivalents available at March 31,June 30, 2015. Cash and cash equivalents included cash of $533$2,351 and money market funds and other cash equivalents of $3,911.$18,605. Cash and cash equivalents decreased $4,159increased $12,353 since December 31, 2014. In the first threesix months of 2015, cash inflows were primarily provided by long-term debt issuances and cash receipts from operations, including cash from our sale and transfer of certain equipment installment receivables to third parties. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, the acquisition of wireless spectrum, and GSF Telecom and Nextel Mexico, funding capital expenditures, dividends to stockholders, debt repayments and collateral posting (see Note 6), and dividends to stockholders.. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities
During the first threesix months of 2015, cash provided by operating activities was $6,738,$15,898, compared to $8,799$16,869 for the first threesix months of 2014. Lower operating cash flows in 2015 were primarily due to the timing of working capital payments.payments, as well as a required annual contribution to the pension trust. Proceeds from the sale of equipment installment receivables and a net cash refund of income taxes in 2015 partially offset the decline in operating cash flows.

Cash Used in or Provided by Investing Activities
For the first threesix months of 2015, cash used in investing activities totaled $21,587$27,660 and consisted primarily of:
·$17,67817,700 for acquisitions of spectrum licenses, most notably the remaining payment for AWS spectrum licenses from the FCC in the AWS-3 Auction.
·$1,836 for the acquisition of GSF Telecom and other operations.
·$3,8488,328 for capital expenditures, excluding interest during construction.
·$3,254 for the acquisition of GSF Telecom, Nextel Mexico and other operations.

During the first threesix months, we also received $1,890 upon the maturity of certain short-term investments.

On April 30, 2015, we completed our acquisition of Nextel Mexico, for $1,875, less approximately $427 of net debt and other adjustments.

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, decreased $1,868$3,321 in the first threesix months. Our Wireless segment represented 45%44% of our total spending and decreased 42%43% in the first threesix months. Wireless expenditures were primarily used for the ongoing deploymentsupport of our LTE equipment.services. The Wireline segment, which includes U-verse services, represented 54%55% of the total capital expenditures and decreased 22%12% in the first threesix months. Our declines in Wireless and Wireline segment capital expenditures reflected our completion of various Project VIP initiatives in 2014. Capital expenditures for our new International segment include spending for GSF Telecom and Nextel Mexico after the acquisition date.dates.

We continue to expect our 2015 capital expenditures to be in the $18,000 range, excluding expenditures for newly acquired businesses.DIRECTV. The amount of capital investment is influenced by demand for services and products, capacity needs and network enhancements. We are also focused on ensuring merger commitments are met and our expenditures may also be influenced by regulatory considerations.met. We expect to support our business and spectrum acquisitions with a combination of debt issuances, cash from operations, and asset sales.

On July 24, 2015, we completed the acquisition of DIRECTV, a leading provider of digital television entertainment services in both the United States and Latin America. Under the merger agreement, each share of DIRECTV stock was exchanged for $28.50 cash plus 1.892 shares of our common stock. We issued a final total of 954,518,588 shares to DIRECTV shareholders, giving them an approximate 16% stake in the combined company, based on common shares outstanding. Based on our $34.29 per share closing stock price on July 24, 2015, the closing date of the merger, total consideration paid to DIRECTV shareholders was $47,110, including $32,731 of AT&T stock and $14,379 in cash. DIRECTV had approximately $15,891 in net debt at acquisition.
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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
Cash Provided by or Used in Financing Activities
For the first threesix months of 2015, cash provided by financing activities totaled $10,690$24,115 and included net proceeds of $16,572$33,958 from the following long-term debt issuances:
·February 2015 issuance of $2,619 of 4.600% global notes due 2045.
·March 2015 borrowings under a variable rate term loan facility due 2018, variable rate term loan facility due 2020 and variable rate 18-month credit agreement due 2016, together totaling $11,155.
·March 2015 issuance of €1,250 of 1.300% global notes due 2023 and €1,250 of 2.450% global notes due 2035 (together, equivalent to $2,844, when issued).

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AT&T INC.
MARCH 31, 2015

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

In May 2015, we issued $17,500 in debt to be used for general corporate purposes, including funding previously announced acquisitions. Details of the notes are as follows:
·$3,000May 2015 issuance of $3,000 of 2.450% global notes due 2020, subject to mandatory redemption.
·$2,7502020; $2,750 of 3.000% global notes due 2022, subject to mandatory redemption.
·$5,0002022; $5,000 of 3.400% global notes due 2025.
·$2,5002025; $2,500 of 4.500% global notes due 2035.
·$3,5002035; $3,500 of 4.750% global notes due 2046, subject to mandatory redemption.
·$7502046; and $750 floating rate global notes due 2020. The floating rate for the note is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 93 basis points.

If we do not consummate the DIRECTV acquisition pursuant to the merger agreement, on or prior to November 30, 2015 or, if prior to such date, the merger agreement is terminated, then in either case we must redeem certain of the notes at a redemption price equal to 101% of the principal amount of the notes, plus accrued but unpaid interest.

We do not currently anticipate the issuance of additional U.S. dollar denominated senior notes for the remainder of 2015.

During the first threesix months of 2015, we redeemed $596$2,919 of debt, primarily consisting of $587 of various senior notes in connection with the following:
·Redemption of $894 of various senior notes in connection with the January 2015 GSF Telecom acquisition and April 2015 Nextel Mexico acquisition.
·April 2015 redemption of €1,250 (approximately $1,975 at maturity) of AT&T 6.125% notes due 2015.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 3.9%3.8% as of March 31,June 30, 2015, and 4.2% as of December 31, 2014. We had $96,026$113,167 of total notes and debentures outstanding at March 31,June 30, 2015, which included Euro, British pound sterling, Swiss Franc and Canadian dollar denominated debt of approximately $25,169.$24,889.

As of March 31,June 30, 2015, we had approximately 415 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. Upon completing ourWith the completion of the DIRECTV acquisition of DIRECTV,, our priority will be to use free cash flow (operating cash flows less construction and capital expenditures) after dividends to pay down debt.

We paid dividends of $2,434$4,873 during the first threesix months of 2015, compared with $2,398$4,784 for the first threesix months of 2014, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in December 2014, partially offset by the impact of the decline in shares outstanding due to repurchases in 2014. Dividends declared by our Board of Directors totaled $0.47 per share in the second quarter and $0.94 per share for the first quartersix months of 2015 and $0.46 per share in the second quarter and $0.92 per share for the first threesix months of 2014. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

At March 31,June 30, 2015, we had $8,181$8,603 of debt maturing within one year, $8,130$8,545 of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
·$1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021. No such put was exercised during April 2015.
·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.

Credit Facilities
We have a $5,000 revolving credit agreement with a syndicate of banks that expires in December 2018 (the "December 2018 Facility") and a $3,000 revolving credit agreement with a syndicate of banks that expires in December 2017 (the "December 2017 Facility"). There were no advances outstanding under the December 2018 Facility or the December 2017 Facility at March 31,June 30, 2015.

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AT&T INC.
MARCH 31,JUNE 30, 2015

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


On January 21, 2015, we entered into a $9,155 credit agreement (the "Syndicated Credit Agreement") containing (i) a $6,286 term loan facility (the "Tranche A Facility") and (ii) a $2,869 term loan facility (the "Tranche B Facility"), with certain investment and commercial banks and Mizuho Bank, Ltd. ("Mizuho"), as administrative agent. On that date, we also entered into a $2,000 18-month credit agreement (the "18-Month Credit Agreement") with Mizuho as initial lender and agent.

On March 2, 2015, we borrowed $9,155 under the Syndicated Credit Agreement and $2,000 under the 18-Month Credit Agreement at floating interest rates. We used these advances for general corporate purposes, including acquisition related payments. Amounts borrowed under the Tranche A Facility will be due and payable on March 2, 2018. The Tranche A Facility interest rate equals three-month LIBOR, reset quarterly, plus the Applicable Margin (or 100 basis points when issued). Amounts borrowed under the Tranche B Facility will be subject to amortization from March 2, 2018, with twenty-five percent of the aggregate principal amount thereof being payable prior to March 2, 2020, and all remaining principal amount due and payable on March 2, 2020. The Tranche B Facility interest rate equals three-month LIBOR, reset quarterly, plus the Applicable Margin (or 112.5 basis points when issued). Amounts borrowed under the 18-Month Credit Agreement will be due and payable on September 2, 2016. The 18-Month Credit Agreement interest rate equals three-month LIBOR, reset quarterly, plus the Applicable Margin (or 80 basis points when issued).

At March 31,June 30, 2015, we had advances outstanding of $9,155 under the Syndicated Credit Agreement and were in compliance with all covenants. At March 31,June 30, 2015, we had advances outstanding of $2,000 under the 18-Month Credit Agreement and were in compliance with all covenants. Additional details regarding the Syndicated Credit Agreement and 18-Month Credit Agreement are available in our Annual Report on Form 10-K for the year ended December 31, 2014.

During the first quartersix months of 2015, we posted $2,572$1,217 of additional cash collateral, on a net basis, to banks and other participants in our derivative arrangements. Subsequent to the end of the quarter, approximately $911 of the collateral has been returned to AT&T. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 6.)6)

Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. At March 31,June 30, 2015, our debt ratio, which includes the debt raised in anticipation of our recently closed DIRECTV acquisition, was 52.5%56.5%, compared to 46.6%52.5% at March 31, 2014,2015, and 48.6% at December 31, 2014. Our net debt ratio was 46.1% at June 30, 2015, compared to 50.1% at March 31, 2015. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances.

During 2015, we received $1,532$2,655 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities induring the remainder of 2015.

In 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. The preferred equity interest had a value of $8,970$8,896 as of March 31,June 30, 2015, and $9,021 as of December 31, 2014, 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 beare distributed quarterly in equal amounts. We distributed $140$280 to the trust during the first quartersix months of 2015. 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. At the time of the contribution of the preferred equity interest, we agreed to annual cash contributions to the trust of $175 no later than the due date for our federal income tax return for each of 2014, 2015 and 2016. The 2014 contribution of $175 was made to the trust during the second quarter of 2015.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
 
At March 31,June 30, 2015, we had interest rate swaps with a notional value of $6,550$8,050 and a fair value of $194.$170.

We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $29,350$27,375 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 $(2,822)$(1,288) at March 31, 2015. We have rate locks with a notional value of $7,000 and a fair value of $(444) at March 31,June 30, 2015.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of March 31,June 30, 2015. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of March 31,June 30, 2015.

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AT&T INC.
MARCH 31,JUNE 30, 2015

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

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:

·Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms.
·Changes in available technology and the effects of such changes, including product substitutions and deployment costs.
·Increases in our benefit plans' costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends, and unfavorable or delayed implementation 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, pending Notices of Apparent Liability, the transition from legacy technologies to IP-based infrastructure, universal service, broadband deployment, E911 services, competition policy, net neutrality, including the FCC's order reclassifying broadband as Title II services subject to much more fulsome regulation, 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 or delivery methods (e.g., cable, wireless, VoIP and Over The Top Video service) 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 and delivery of attractive and profitable U-verse service offerings;video offerings through satellite and U-verse; the extent to which regulatory franchise fees and build-out requirements apply to this initiative;our offerings; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
·Our continued ability to attract and offer a diverse portfolio of wireless service and device financing plans, devices 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, including satellites operated by DIRECTV, 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, and in the case of satellites launched, 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 pendingability to integrate our acquisition of DIRECTV.
·Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.
·Our increased exposure to video competition and foreign economies due to our recent acquisitions of DIRECTV and pending acquisitions,Mexican wireless properties, including foreign exchange fluctuations.
·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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PART II – OTHER INFORMATION
Dollars in millions except per share amounts

Item 1. Legal Proceedings

In February 2014, prior to our merger with Leap Wireless International, Inc., the San Diego, California, County Air Pollution Control District and Department of Environmental Health initiated investigation into the potential supervision and control by Cricket Wireless, L.L.C. over construction work by an independent third-party dealer's contractors at a dealer store location, which allegedly resulted in disturbance of asbestos-containing materials in violation of applicable regulations. It is our position that Cricket Wireless, L.L.C. did not exercise supervision or control over the activity at issue and is not liable for violations which occurred at the dealer store location, if any. We are cooperating with the County in its investigation. No enforcement action has been initiated against AT&T, but on April 22, 2015 we were placed on notice the County may seek civil penalties from AT&T in an amount exceeding one hundred thousand dollars, but which in no event are expected to be material.

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the first quarter 2015, there were no such material developments.

Our ability to successfully integrate our July 2015 acquisition of DIRECTV, including 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'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.

We completed our acquisition of DIRECTV in July 2015. We believe that the acquisition will give us the scale, resources and ability to deploy video services 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. We must comply with various regulatory conditions and integrate a large number of video network and other operational systems and administrative systems. 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 has increased the amount of debt on our balance sheet (both from DIRECTV'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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PART II – OTHER INFORMATION - Continued
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 firstsecond quarter of 2015 is as follows:
          
Period
(a)
 
 
 
 
Total Number of
Shares (or Units)
Purchased1,21, 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
          
JanuaryApril 1, 2015 -
January 31,April 30, 2015
  591,255279  $-  -     414,550,000 
FebruaryMay 1, 2015 -
February 28,May 31, 2015
  4495,985   -  -     414,550,000 
MarchJune 1, 2015 -
March 31,June 30, 2015
  6,236340,873   -  -     414,550,000 
Total  597,940347,137  $-  -     
1In March 2014, our Board of Directors approved a fourth authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock.
   The authorizations have no expiration date.
2 AllOf the shares repurchased, 8,396 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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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.

10DIRECTV Deferred Compensation Plan for Non-Employee Directors
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.

 
 
 
 
May 5,August 7, 2015  
  
AT&T Inc.
 
 
 
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
    and Chief Financial Officer
 
   


 
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