Edgar Filing: AT&T INC.

q3_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2013

		or

	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware

I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202

Telephone Number: (210) 821-4105

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

At October 31, 2013 there were 5,268 million common shares outstanding.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	September 30,		December 31,
	2013		2012
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	1,371	$	4,868
Accounts receivable - net of allowances for doubtful accounts of $491 and $547		12,444		12,657
Prepaid expenses		1,022		1,035
Deferred income taxes		682		1,036
Other current assets		2,916		3,110
Total current assets		18,435		22,706
Property, plant and equipment		282,445		270,907
Less: accumulated depreciation and amortization		(170,021)		(161,140)
Property, Plant and Equipment – Net		112,424		109,767
Goodwill		70,014		69,773
Licenses		56,304		52,352
Customer Lists and Relationships – Net		876		1,391
Other Intangible Assets – Net		5,020		5,032
Investments in and Advances to Equity Affiliates		3,949		4,581
Other Assets		7,577		6,713
Total Assets	$	274,599	$	272,315

Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	7,873	$	3,486
Accounts payable and accrued liabilities		20,433		20,494
Advanced billing and customer deposits		4,013		4,225
Accrued taxes		1,488		1,026
Dividends payable		2,376		2,556
Total current liabilities		36,183		31,787
Long-Term Debt		68,350		66,358
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		30,666		28,491
Postemployment benefit obligation		42,036		41,392
Other noncurrent liabilities		11,234		11,592
Total deferred credits and other noncurrent liabilities		83,936		81,475

Stockholders’ Equity
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2013 and
December 31, 2012: issued 6,495,231,088 at September 30, 2013 and December 31, 2012)		6,495		6,495
Additional paid-in capital		91,021		91,038
Retained earnings		26,648		22,481
Treasury stock (1,214,987,626 at September 30, 2013 and 913,836,325
at December 31, 2012, at cost)		(43,731)		(32,888)
Accumulated other comprehensive income		5,282		5,236
Noncontrolling interest		415		333
Total stockholders’ equity		86,130		92,695
Total Liabilities and Stockholders’ Equity	$	274,599	$	272,315
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
	Nine months ended
	September 30,
	2013		2012
Operating Activities
Net income	$	11,558	$	11,318
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,715		13,571
Undistributed earnings from investments in equity affiliates		(232)		(483)
Provision for uncollectible accounts		653		835
Deferred income tax expense and noncurrent unrecognized tax benefits		2,389		3,441
Net (gain) loss from sale of investments, net of impairments		(272)		(27)
Changes in operating assets and liabilities:
Accounts receivable		(440)		(571)
Other current assets		520		1,581
Accounts payable and accrued liabilities		(420)		(156)
Retirement benefit funding		(175)		-
Other - net		(417)		(853)
Total adjustments		15,321		17,338
Net Cash Provided by Operating Activities		26,879		28,656

Investing Activities
Construction and capital expenditures:
Capital expenditures		(15,565)		(13,619)
Interest during construction		(213)		(197)
Acquisitions, net of cash acquired		(4,025)		(551)
Dispositions		846		807
Sales (purchases) of securities, net		-		311
Return of advances to and investments in equity affiliates		301		-
Other		(4)		(2)
Net Cash Used in Investing Activities		(18,660)		(13,251)

Financing Activities
Net change in short-term borrowings with original maturities of three months or less		1,851		-
Issuance of other short-term borrowings		1,476		-
Repayment of other short-term borrowings		(1,476)		-
Issuance of long-term debt		6,416		6,935
Repayment of long-term debt		(2,131)		(8,042)
Purchase of treasury stock		(11,134)		(8,374)
Issuance of treasury stock		108		460
Dividends paid		(7,325)		(7,738)
Other		499		98
Net Cash Used in Financing Activities		(11,716)		(16,661)
Net decrease in cash and cash equivalents		(3,497)		(1,256)
Cash and cash equivalents beginning of year		4,868		3,045
Cash and Cash Equivalents End of Period	$	1,371	$	1,789
Cash paid during the nine months ended September 30 for:
Interest	$	2,980	$	3,214
Income taxes, net of refunds	$	1,573	$	390
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
	September 30, 2013
	Shares	Amount
Common Stock
Balance at beginning of year	6,495	$	6,495
Issuance of stock	-		-
Balance at end of period	6,495	$	6,495

Additional Paid-In Capital
Balance at beginning of year		$	91,038
Issuance of treasury stock			(8)
Share-based payments			(9)
Balance at end of period		$	91,021

Retained Earnings
Balance at beginning of year		$	22,481
Net income attributable to AT&T ($2.09 per diluted share)			11,336
Dividends to stockholders ($1.35 per share)			(7,169)
Balance at end of period		$	26,648

Treasury Stock
Balance at beginning of year	(914)	$	(32,888)
Repurchase of common stock	(312)		(11,134)
Issuance of treasury stock	11		291
Balance at end of period	(1,215)	$	(43,731)

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year		$	5,236
Other comprehensive income attributable to AT&T			46
Balance at end of period		$	5,282

Noncontrolling Interest
Balance at beginning of year		$	333
Net income attributable to noncontrolling interest			222
Distributions			(161)
Acquisitions of noncontrolling interests			23
Translation adjustments attributable to noncontrolling interest, net of taxes			(2)
Balance at end of period		$	415

Total Stockholders’ Equity at beginning of year		$	92,695
Total Stockholders’ Equity at end of period		$	86,130
See Notes to Consolidated Financial Statements.

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

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

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

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

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

Stock Repurchase Program In May 2013, we completed a repurchase authorization that was approved by our Board of Directors in July 2012. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. During the first nine months of 2013, we repurchased 312 million shares for $11,134 under these authorizations. At September 30, 2013, we had 216 million shares remaining under the March 2013 authorization. The authorization has no expiration date.

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 2. EARNINGS PER SHARE

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

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

At September 30, 2013 and 2012, we had issued and outstanding options to purchase approximately 12 million and 18 million shares of AT&T common stock. For the quarter ended September 30, 2013 and 2012, the exercise prices of 3 million and 2 million shares were above the market price of AT&T stock for the respective periods. Accordingly, we did not include these amounts in determining the dilutive potential common shares. At September 30, 2013 and 2012, the exercise prices of 9 million and 16 million vested stock options were below market price.

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated OCI for the nine months ended September 30, 2013, are presented below. All amounts are net of tax and exclude noncontrolling interest.

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

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on the strategic needs of the business, needs of the network (wireless or wireline) provided services, and demands to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in each reportable segment’s results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have three reportable segments: (1) Wireless, (2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included our Advertising Solutions segment, which was subsequently sold.

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

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

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

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

For the three months ended September 30, 2013						Advertising						Consolidated Results
		Wireless		Wireline		Solutions		Other		Consolidations		Consolidated Results
Data	$	5,509	$	8,457	$	-	$	-	$	-	$	13,966
Voice, text and other		9,951		5,023		-		-		-		14,974
Equipment and other		2,020		1,190		-		8		-		3,218
Total segment operating revenues		17,480		14,670		-		8		-		32,158
Operations and support expenses		10,982		10,385		-		(12)		-		21,355
Depreciation and amortization expenses		1,875		2,736		-		4		-		4,615
Total segment operating expenses		12,857		13,121		-		(8)		-		25,970
Segment operating income (loss)		4,623		1,549		-		16		-		6,188
Interest expense		-		-		-		-		829		829
Equity in net income (loss) of affiliates		(18)		-		-		109		-		91
Other income (expense) – net		-		-		-		-		50		50
Segment income (loss) before income taxes	$	4,605	$	1,549	$	-	$	125	$	(779)	$	5,500

For the nine months ended September 30, 2013						Advertising						Consolidated Results
		Wireless		Wireline		Solutions		Other		Consolidations		Consolidated Results
Data	$	15,990	$	25,019	$	-	$	-	$	-	$	41,009
Voice, text and other		29,902		15,470		-		-		-		45,372
Equipment and other		5,570		3,609		-		29		-		9,208
Total segment operating revenues		51,462		44,098		-		29		-		95,589
Operations and support expenses		31,932		31,137		-		564		-		63,633
Depreciation and amortization expenses		5,553		8,146		-		16		-		13,715
Total segment operating expenses		37,485		39,283		-		580		-		77,348
Segment operating income (loss)		13,977		4,815		-		(551)		-		18,241
Interest expense		-		-		-		-		2,481		2,481
Equity in net income (loss) of affiliates		(55)		1		-		548		-		494
Other income (expense) – net		-		-		-		-		370		370
Segment income (loss) before income taxes	$	13,922	$	4,816	$	-	$	(3)	$	(2,111)	$	16,624

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2012						Advertising						Consolidated Results
		Wireless		Wireline		Solutions		Other		Consolidations		Consolidated Results
Data	$	4,686	$	7,987	$	-	$	-	$	-	$	12,673
Voice, text and other		10,220		5,563		-		-		-		15,783
Equipment and other		1,726		1,264		-		13		-		3,003
Total segment operating revenues		16,632		14,814		-		13		-		31,459
Operations and support expenses		10,432		10,246		-		232		-		20,910
Depreciation and amortization expenses		1,730		2,774		-		8		-		4,512
Total segment operating expenses		12,162		13,020		-		240		-		25,422
Segment operating income (loss)		4,470		1,794		-		(227)		-		6,037
Interest expense		-		-		-		-		824		824
Equity in net income (loss) of affiliates		(17)		-		-		199		-		182
Other income (expense) – net		-		-		-		-		47		47
Segment income (loss) before income taxes	$	4,453	$	1,794	$	-	$	(28)	$	(777)	$	5,442

For the nine months ended September 30, 2012						Advertising						Consolidated Results
		Wireless		Wireline		Solutions		Other		Consolidations		Consolidated Results
Data	$	13,392	$	23,722	$	-	$	-	$	-	$	37,114
Voice, text and other		30,845		17,151		-		-		-		47,996
Equipment and other		4,884		3,777		1,049		36		-		9,746
Total segment operating revenues		49,121		44,650		1,049		36		-		94,856
Operations and support expenses		30,000		30,849		773		708		-		62,330
Depreciation and amortization expenses		5,092		8,348		106		25		-		13,571
Total segment operating expenses		35,092		39,197		879		733		-		75,901
Segment operating income (loss)		14,029		5,453		170		(697)		-		18,955
Interest expense		-		-		-		-		2,624		2,624
Equity in net income (loss) of affiliates		(45)		(1)		-		583		-		537
Other income (expense) – net		-		-		-		-		122		122
Segment income (loss) before income taxes	$	13,984	$	5,452	$	170	$	(114)	$	(2,502)	$	16,990

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

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

On September 9, 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 $9,104 on the contribution date. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as contributions. This preferred equity is a plan asset under ERISA and is recognized as such in the plan’s separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not included in plan assets in our consolidated financial statements. At the time of the contribution of the preferred equity interest, we made an additional cash contribution of $175 and have agreed to annual cash contributions of $175 no later than the due date for our federal income tax return for each of 2014, 2015 and 2016. These contributions combined with our existing pension assets, are essentially equivalent to the expected pension obligation at year-end.

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
Pension cost:
Service cost – benefits earned during the period	$	331	$	301	$	991	$	915
Interest cost on projected benefit obligation		608		700		1,822		2,100
Expected return on assets		(828)		(880)		(2,484)		(2,640)
Amortization of prior service (credit)		(25)		(3)		(71)		(11)
Net pension cost	$	86	$	118	$	258	$	364

Postretirement cost:
Service cost – benefits earned during the period	$	95	$	81	$	286	$	247
Interest cost on accumulated postretirement benefit obligation		389		446		1,168		1,340
Expected return on assets		(177)		(200)		(533)		(601)
Amortization of prior service (credit)		(263)		(215)		(788)		(647)
Net postretirement cost	$	44	$	112	$	133	$	339

Combined net pension and postretirement cost	$	130	$	230	$	391	$	703

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

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

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

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

Level 1

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

Level 2

Inputs 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 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

·	Fair value is often based on developed models in which there are few, if any, external observations.

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

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

Long-Term Debt and Other Financial Instruments

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

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

The carrying value of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2.

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Investment Securities

Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities 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 $109 have maturities of less than one year, $279 within one to three years, $175 within three to five years, and $252 for five or more years.

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

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

		September 30, 2013
		Level 1		Level 2		Level 3		Total
Available-for-Sale Securities
Domestic equities		$	1,065	$	-	$	-	$	1,065
International equities			583		-		-		583
Fixed income bonds			-		815		-		815
Asset Derivatives1
Interest rate swaps			-		216		-		216
Cross-currency swaps			-		1,657		-		1,657
Liability Derivatives1
Interest rate swaps			-		(4)		-		(4)
Cross-currency swaps			-		(557)		-		(557)

		December 31, 2012
		Level 1		Level 2		Level 3		Total
Available-for-Sale Securities
Domestic equities		$	873	$	-	$	-	$	873
International equities			469		-		-		469
Fixed income bonds			-		837		-		837
Asset Derivatives1
Interest rate swaps			-		287		-		287
Cross-currency swaps			-		752		-		752
Foreign exchange contracts			-		1		-		1
Liability Derivatives1
Cross-currency swaps			-		(672)		-		(672)
1	Derivatives designated as hedging instruments are reflected as Other assets, Other noncurrent liabilities and, for a portion of interest rate swaps, Other current assets.

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Derivative Financial Instruments

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

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

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense on the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed-rate notes payable they hedge due to changes in the designated benchmark interest rate and are recognized in interest expense. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the nine months ended September 30, 2013 and September 30, 2012, no ineffectiveness was measured.

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

We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro and British pound sterling denominated debt. These agreements include initial and final exchanges of principal from fixed foreign denominations to fixed U.S. denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed foreign-denominated rate to a fixed U.S. denominated interest rate. We evaluate the effectiveness of our cross-currency swaps each quarter. In the nine months ended September 30, 2013 and September 30, 2012, no ineffectiveness was measured.

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

We may hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Some of these instruments are designated as cash flow hedges while others remain nondesignated, largely based on size and duration. Gains and losses are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. In the nine months ended September 30, 2013 and September 30, 2012, no ineffectiveness was measured.

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2013, we had posted collateral of $17 (a deposit asset) and held collateral of $1,190 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Moody’s Investors Service and Standards & Poor’s and two rating levels by Fitch, Inc., before the final collateral exchange in September, we would have been required to post additional collateral of $55. At December 31, 2012, we had posted collateral of $22 (a deposit asset) and held collateral of $543 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), against the fair value of the derivative instruments.

Following is the notional amount of our outstanding derivative positions:

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

Following is the related hedged items affecting our financial position and performance:

Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships	Three months ended								Nine months ended
Fair Value Hedging Relationships	September 30, 2013				September 30, 2012				September 30, 2013				September 30, 2012
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps		$	9			$	(21	)		$	(78	)		$	(158	)
Gain (Loss) on long-term debt			(9	)			21				78				158

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

	Three months ended						Nine months ended
Cash Flow Hedging Relationships	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	482		$	355		$	807		$	190

Interest rate locks:
Interest income (expense) reclassified from accumulated OCI into income		(11	)		(12	)		(34	)		(32	)

Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI		5			3			5			3

AT&T INC.

SEPTEMBER 30, 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

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

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

Pending Acquisitions

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

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

NOTE 8. SUBSEQUENT EVENTS

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

AT&T INC.

SEPTEMBER 30, 2013

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry both in the United States and internationally, providing wireless and wireline telecommunication services and equipment. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012. A reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period’s presentation.

Consolidated Results Our financial results in the third quarter and for the first nine months of 2013 and 2012 are summarized as follows:

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

Overview

Operating income increased $151, or 2.5%, in the third quarter and decreased $714, or 3.8%, for the first nine months of 2013. Both operating revenues and expenses in the first nine months of 2012 include results for our sold Advertising Solutions segment, which had a negative impact on comparisons to operating income for the first nine months of 2013. Operating income increased in the third quarter reflecting continued growth in wireless data and equipment revenues, increased revenues from AT&T U-verse® (U-verse) and strategic services, and gains realized on spectrum transactions. These increases were partially offset by continued declines in our traditional voice and data services, higher wireless equipment costs, increased expenses for new product development as well as increased expenses supporting U-verse subscriber growth. Operating income for the first nine months was driven by the same factors as for the quarter; however it was also impacted by higher wireless commission expenses and the sale of our Advertising Solutions segment. Our operating income margin in the third quarter was 19.2% in both 2012 and 2013 and for the first nine months decreased from 20.0% in 2012 to 19.1% in 2013.

Operating revenues increased $699, or 2.2%, in the third quarter and $733, or 0.8%, for the first nine months of 2013. Wireless data and equipment revenues increased, reflecting the increasing percentage of wireless subscribers choosing smartphones. Continued growth in U-verse services from residential customers and strategic services also contributed to higher operating revenues. The revenue increases were partially offset by continued declines in wireline voice and wireless voice and text revenues. The sale of our Advertising Solutions segment also contributed to lower revenues for the first nine months.

As the telecommunications industry continues to evolve from voice-oriented services into an industry driven by data-based services, technology, and efficiencies, our products, services and plans have also changed as we transition from traditional voice and basic data services to sophisticated, high-speed, IP-based alternatives. This transition of our offerings will result in continued growth in our wireless and wireline IP-based data revenues as we bundle and price plans with greater focus on the data services that our customers desire, provide new products and services, and transition customers from their current traditional services. We expect continued declines in voice revenues and our basic wireline data services as customers choose these next-generation services.

AT&T INC.

SEPTEMBER 30, 2013

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

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

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

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

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

Equity in net income of affiliates decreased $91, or 50.0%, in the third quarter and $43, or 8.0% for the first nine months of 2013. Decreased equity in net income of affiliates in the third quarter was primarily due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil) and YP Holdings LLC (YP Holdings). Decreased equity in net income of affiliates for the first nine months was primarily due to foreign exchange impacts at América Móvil, partially offset by earnings from YP Holdings.

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

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

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

AT&T INC.

SEPTEMBER 30, 2013

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts

Selected Financial and Operating Data
	September 30,
	2013	2012
Wireless subscribers (000)	109,460	105,871
Network access lines in service (000)	25,680	30,443
Total wireline broadband connections (000)	16,427	16,392
Debt ratio1	46.9%	38.6%
Ratio of earnings to fixed charges2	5.43	5.36
Number of AT&T employees	246,740	241,130

1 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and do not consider cash available to pay down debt. See our “Liquidity and Capital Resources” section for discussion.

2 See exhibit 12.

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on segment income before income taxes. We make our capital allocation decisions based on the strategic needs of the business, needs of the network (wireless or wireline) provided services, and demands to provide emerging services to our customers. Actuarial gains and losses from pension and other postemployment benefits, interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have three reportable segments: (1) Wireless, (2) Wireline and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions, which was previously a reportable segment.

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

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

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

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

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

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

AT&T INC.

SEPTEMBER 30, 2013

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share amounts