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

At July 31, 2015, there were 6,151 million common shares outstanding.

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PART I - FINANCIAL INFORMATION

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
		Three months ended								Six months ended
		June 30,								June 30,
		2015				2014				2015				2014
Operating Revenues
Service		$	29,541			$	29,556			$	58,503			$	59,332
Equipment			3,474				3,019				7,088				5,719
Total operating revenues			33,015				32,575				65,591				65,051
Operating Expenses
Cost of services and sales (exclusive of depreciation
and amortization shown separately below)			15,140				14,212				29,721				27,533
Selling, general and administrative			7,467				8,197				15,428				16,457
Depreciation and amortization			4,696				4,550				9,274				9,167
Total operating expenses			27,303				26,959				54,423				53,157
Operating Income			5,712				5,616				11,168				11,894
Other Income (Expense)
Interest expense			(932	)			(881	)			(1,831	)			(1,741	)
Equity in net income of affiliates			33				102				33				190
Other income (expense) – net			48				1,269				118				1,414
Total other income (expense)			(851	)			490				(1,680	)			(137	)
Income Before Income Taxes			4,861				6,106				9,488				11,757
Income tax expense			1,715				2,485				3,066				4,402
Net Income			3,146				3,621				6,422				7,355
Less: Net Income Attributable to Noncontrolling Interest			(102	)			(74	)			(178	)			(156	)
Net Income Attributable to AT&T		$	3,044			$	3,547			$	6,244			$	7,199
Basic Earnings Per Share Attributable to AT&T		$	0.58			$	0.68			$	1.20			$	1.38
Diluted Earnings Per Share Attributable to AT&T		$	0.58			$	0.68			$	1.20			$	1.38
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			$	0.94			$	0.92
See Notes to Consolidated Financial Statements.

2

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AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
		Three months ended								Six months ended
		June 30,								June 30,
		2015				2014				2015				2014
Net income		$	3,146			$	3,621			$	6,422			$	7,355
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 $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 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), $(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)			(302	)			186				(1,021	)			(28	)
Total comprehensive income			2,844				3,807				5,401				7,327
Less: Total comprehensive income attributable to      noncontrolling interest			(102	)			(75	)			(178	)			(157	)
Total Comprehensive Income Attributable to AT&T		$	2,742			$	3,732			$	5,223			$	7,170
See Notes to Consolidated Financial Statements.

3

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AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
		June 30,				December 31,
		2015				2014
Assets		(Unaudited)
Current Assets
Cash and cash equivalents		$	20,956			$	8,603
Accounts receivable - net of allowances for doubtful accounts of $492 and $454			13,821				14,527
Prepaid expenses			834				831
Deferred income taxes			1,131				1,142
Other current assets			6,421				6,925
Total current assets			43,163				32,028
Property, plant and equipment			289,856				282,295
Less: accumulated depreciation and amortization			(175,508	)			(169,397	)
Property, Plant and Equipment – Net			114,348				112,898
Goodwill			70,920				69,692
Licenses			80,922				60,824
Other Intangible Assets – Net			6,385				6,139
Investments in Equity Affiliates			288				250
Other Assets			10,463				10,998
Total Assets		$	326,489			$	292,829
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year		$	8,603			$	6,056
Accounts payable and accrued liabilities			21,560				23,592
Advanced billing and customer deposits			4,075				4,105
Accrued taxes			3,848				1,091
Dividends payable			2,441				2,438
Total current liabilities			40,527				37,282
Long-Term Debt			105,067				76,011
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes			38,516				37,544
Postemployment benefit obligation			36,638				37,079
Other noncurrent liabilities			18,240				17,989
Total deferred credits and other noncurrent liabilities			93,394				92,612
Stockholders' Equity
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			91,032				91,108
Retained earnings			29,086				27,736
Treasury stock (1,301,916,280 at June 30, 2015 and 1,308,318,131
at December 31, 2014, at cost)			(46,793	)			(47,029	)
Accumulated other comprehensive income			7,039				8,060
Noncontrolling interest			642				554
Total stockholders' equity			87,501				86,924
Total Liabilities and Stockholders' Equity		$	326,489			$	292,829
See Notes to Consolidated Financial Statements.

4

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AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
		Six months ended
		June 30,
		2015				2014
Operating Activities
Net income		$	6,422			$	7,355
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			9,274				9,167
Undistributed earnings from investments in equity affiliates			(23	)			(58	)
Provision for uncollectible accounts			535				444
Deferred income tax expense			1,183				546
Net gain from sale of investments, net of impairments			(50	)			(1,365	)
Changes in operating assets and liabilities:
Accounts receivable			434				(566	)
Other current assets			743				(771	)
Accounts payable and accrued liabilities			(1,125	)			2,894
Retirement benefit funding			(455	)			(280	)
Other - net			(1,040	)			(497	)
Total adjustments			9,476				9,514
Net Cash Provided by Operating Activities			15,898				16,869
Investing Activities
Construction and capital expenditures:
Capital expenditures			(8,328	)			(11,649	)
Interest during construction			(339	)			(118	)
Acquisitions, net of cash acquired			(20,954	)			(857	)
Dispositions			72				4,921
Sale of securities			1,890				-
Return of advances to and investments in equity affiliates			-				2
Other			(1	)			-
Net Cash Used in Investing Activities			(27,660	)			(7,701	)
Financing Activities
Net change in short-term borrowings with original maturities of three months or less			-				134
Issuance of long-term debt			33,958				8,564
Repayment of long-term debt			(2,919	)			(3,508	)
Purchase of treasury stock			-				(1,396	)
Issuance of treasury stock			20				27
Dividends paid			(4,873	)			(4,784	)
Other			(2,071	)			(239	)
Net Cash Provided by (Used in) Financing Activities			24,115				(1,202	)
Net increase in cash and cash equivalents			12,353				7,966
Cash and cash equivalents beginning of year			8,603				3,339
Cash and Cash Equivalents End of Period		$	20,956			$	11,305
Cash paid (received) during the six months ended June 30 for:
Interest		$	2,178			$	2,292
Income taxes, net of refunds		$	(71	)		$	987
See Notes to Consolidated Financial Statements.

5

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AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
		June 30, 2015
		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						$	91,108
Issuance of treasury stock							8
Share-based payments							(84	)
Balance at end of period						$	91,032
Retained Earnings
Balance at beginning of year						$	27,736
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						$	29,086
Treasury Stock
Balance at beginning of year			(1,308	)		$	(47,029	)
Repurchase of common stock			(1	)			(10	)
Issuance of treasury stock			7				246
Balance at end of period			(1,302	)		$	(46,793	)
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year						$	8,060
Other comprehensive loss attributable to AT&T							(1,021	)
Balance at end of period						$	7,039
Noncontrolling Interest
Balance at beginning of year						$	554
Net income attributable to noncontrolling interest							178
Distributions							(119	)
Acquisition of noncontrolling interests							29
Balance at end of period						$	642
Total Stockholders' Equity at beginning of year						$	86,924
Total Stockholders' Equity at end of period						$	87,501
See Notes to Consolidated Financial Statements.

6

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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, 2017, following the July 2015 approval of a one-year deferral of the effective date by 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 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.

 

NOTE 2. EARNINGS PER SHARE

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

		Three months ended								Six months ended
		June 30,								June 30,
		2015				2014				2015				2014
Numerators
Numerator for basic earnings per share:
Net Income		$	3,146			$	3,621			$	6,422			$	7,355
Less:  Net income attributable to noncontrolling interest			(102	)			(74	)			(178	)			(156	)
Net Income attributable to AT&T			3,044				3,547				6,244				7,199
Dilutive potential common shares:
Share-based payment			2				3				6				7
Numerator for diluted earnings per share		$	3,046			$	3,550			$	6,250			$	7,206
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding			5,204				5,204				5,204				5,213
Dilutive potential common shares:
Share-based payment (in shares)			16				16				16				16
Denominator for diluted earnings per share			5,220				5,220				5,220				5,229
Basic earnings per share attributable to AT&T		$	0.58			$	0.68			$	1.20			$	1.38
Diluted earnings per share attributable to AT&T		$	0.58			$	0.68			$	1.20			$	1.38

 

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 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
Balance as of December 31, 2014		$	(26)		$	498		$	741		$	6,847		$	8,060
Other comprehensive income    (loss) before reclassifications			(185)			34			(449)			-			(600)
Amounts reclassified    from accumulated OCI			-	1		(9)	2		17	3		(429)	4		(421)
Net other comprehensive    income (loss)			(185)			25			(432)			(429)			(1,021)
Balance as of June 30, 2015		$	(211)		$	523		$	309		$	6,418		$	7,039
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
Balance as of December 31, 2013		$	(367)		$	450		$	445		$	7,352		$	7,880
Other comprehensive income    (loss) before reclassifications			5			59			(98)			-			(34)
Amounts reclassified    from accumulated OCI			416	1		(14)	2		21	3		(418)	4		5
Net other comprehensive    income (loss)			421			45			(77)			(418)			(29)
Balance 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.
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.

 

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.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with data and voice communications services, AT&T U-verse^® high speed Internet, video and VoIP services and managed networking to business customers.

The International segment uses the Iusacell, Unefon, and Nextel Mexico regional and national networks to provide consumer and business customers with wireless data and voice communication services in Mexico. Results from the equity method investment in América Móvil S.A. de C.V. (prior to the June 2014 disposal of 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 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.

 

For 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, 2015																		Consolidated Results
		Wireless				Wireline				International				Corporate and Other
Service		$	29,927			$	27,916			$	660			$	-			$	58,503
Equipment			6,563				446				67				12				7,088
Total segment operating revenues			36,490				28,362				727				12				65,591
Operations and support expenses			23,232				20,625				748				544				45,149
Depreciation and amortization expenses			4,131				4,964				169				10				9,274
Total segment operating expenses			27,363				25,589				917				554				54,423
Segment operating income (loss)			9,127				2,773				(190	)			(542	)			11,168
Interest expense			-				-				-				1,831				1,831
Equity in net income (loss) of affiliates			(4	)			(6	)			-				43				33
Other income (expense) – net			-				-				-				118				118
Segment income (loss) before income taxes		$	9,123			$	2,767			$	(190	)		$	(2,212	)		$	9,488

 

11

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 $8,896 at June 30, 2015. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts and accounted for as contributions. We distributed $280 to the trust during the six months ended 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 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.

 

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

		Three months ended								Six months ended
		June 30,								June 30,
		2015				2014				2015				2014
Pension cost:
Service cost – benefits earned during the period		$	300			$	282			$	599			$	564
Interest cost on projected benefit obligation			473				662				947				1,323
Expected return on assets			(826	)			(851	)			(1,652	)			(1,700	)
Amortization of prior service credit			(26	)			(23	)			(52	)			(47	)
Net pension (credit) cost		$	(79	)		$	70			$	(158	)		$	140
Postretirement cost:
Service cost – benefits earned during the period		$	56			$	58			$	111			$	116
Interest cost on accumulated postretirement benefit obligation			241				364				483				729
Expected return on assets			(105	)			(162	)			(210	)			(326	)
Amortization of prior service credit			(319	)			(362	)			(639	)			(724	)
Net postretirement (credit) cost		$	(127	)		$	(102	)		$	(255	)		$	(205	)
Combined net pension and postretirement (credit) cost		$	(206	)		$	(32	)		$	(413	)		$	(65	)

Our combined net pension and postretirement cost decreased $174 in the second quarter and $348 for the first six 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 $21 in the second quarter of 2015, of which $18 was interest cost, and $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 which $28 was interest cost, and $58 for the first six months, of which $55 was interest cost.

 

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, 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:

	June 30, 2015							December 31, 2014
	Carrying			Fair				Carrying				Fair
	Amount			Value				Amount				Value
Notes and debentures	$	113,167			$	116,669			$	81,632			$	90,367
Bank borrowings		5				5				5				5
Investment securities		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.

 

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

	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.

 

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 $93 have maturities of less than one year, $392 within one to three years, $63 within three to five years, and $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" on the consolidated balance sheets.

 

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 six months ended June 30, 2015 and 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 six months ended June 30, 2015 and June 30, 2014, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

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

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Some of these instruments are designated as cash flow hedges while others remain nondesignated. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. In the six months ended June 30, 2015 and June 30, 2014, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

 

 

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 June 30, 2015, we had posted collateral of $1,544 (a deposit asset) and held collateral of $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 June, we would have been required to post additional collateral of $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:

		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

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

Effect of Derivatives on the Consolidated Statements of Income