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EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - AT&T INC.ex31_1.htm
EX-12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - AT&T INC.ex12.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - AT&T INC.ex31_2.htm
EX-32 - SECTION 1350 CERTIFICATIONS - AT&T INC.ex32.htm
EX-10 - DIRECTV DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS - AT&T INC.ex10.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 June 30, 2015
 
or
 
 
 
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
       
For the transition period from          to

Commission File Number 1-8610

AT&T INC.

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

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


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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                                                                                                                                            Yes [   ]   No [X]
 
At July 31, 2015, there were 6,151 million common shares outstanding.

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
Dollars in millions except per share amounts
 
(Unaudited)
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
    
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

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

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

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

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

AT&T INC.
JUNE 30, 2015

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

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

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

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

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

New Accounting Standards

Revenue Recognition  In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09), which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09 becomes effective for annual reporting periods beginning after December 15, 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.
 
7

AT&T INC.
JUNE 30, 2015

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 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
 
 
8

AT&T INC.
JUNE 30, 2015

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

NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) 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
 
 -   
 
 
 (9)
 
 
 17 
 
 
 (429)
 
 
 (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 
 
 
 (14)
 
 
 21 
 
 
 (418)
 
 
 5 
Net other comprehensive
   income (loss)
 
 421 
 
 
 45 
 
 
 (77)
 
 
 (418)
 
 
 (29)
Balance as of June 30, 2014
$
 54 
 
$
 495 
 
$
 368 
 
$
 6,934 
 
$
 7,851 
 Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
 (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5). Actuarial loss
    reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.
 
9

AT&T INC.
JUNE 30, 2015

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

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and/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.
 
10

AT&T INC.
JUNE 30, 2015

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

For the three months ended June 30, 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

AT&T INC.
JUNE 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
For the three months ended June 30, 2014
                                      
   
Wireless
   
Wireline
   
International
   
Corporate
and Other
   
Consolidated
Results
 
Service
 
$
15,148
   
$
14,408
   
$
-
   
$
-
   
 $
29,556
 
Equipment
   
2,782
     
229
     
-
     
8
     
3,019
 
Total segment operating revenues
   
17,930
     
14,637
     
-
     
8
     
32,575
 
Operations and support expenses
   
11,568
     
10,700
     
-
     
141
     
22,409
 
Depreciation and amortization expenses
   
2,035
     
2,514
     
-
     
1
     
4,550
 
Total segment operating expenses
   
13,603
     
13,214
     
-
     
142
     
26,959
 
Segment operating income (loss)
   
4,327
     
1,423
     
-
     
(134
)
   
5,616
 
Interest expense
   
-
     
-
     
-
     
881
     
881
 
Equity in net income (loss) of affiliates
   
(29
)
   
-
     
99
     
32
     
102
 
Other income (expense) – net
   
-
     
-
     
-
     
1,269
     
1,269
 
Segment income before income taxes
 
$
4,298
   
$
1,423
   
$
99
   
$
286
   
 $
6,106
 
                                         
For the six months ended June 30, 2014
                           
Consolidated
Results
 
   
Wireless
   
Wireline
   
International
   
Corporate
and Other
 
Service
 
$
30,535
   
$
28,797
   
$
-
   
$
-
   
 $
59,332
 
Equipment
   
5,261
     
441
     
-
     
17
     
5,719
 
Total segment operating revenues
   
35,796
     
29,238
     
-
     
17
     
65,051
 
Operations and support expenses
   
22,450
     
21,157
     
-
     
383
     
43,990
 
Depreciation and amortization expenses
   
3,966
     
5,198
     
-
     
3
     
9,167
 
Total segment operating expenses
   
26,416
     
26,355
     
-
     
386
     
53,157
 
Segment operating income (loss)
   
9,380
     
2,883
     
-
     
(369
)
   
11,894
 
Interest expense
   
-
     
-
     
-
     
1,741
     
1,741
 
Equity in net income (loss) of affiliates
   
(49
)
   
1
     
153
     
85
     
190
 
Other income (expense) – net
   
-
     
-
     
-
     
1,414
     
1,414
 
Segment income (loss) before income taxes
 
$
9,331
   
$
2,884
   
$
153
   
$
(611
)
 
 $
11,757
 

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

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

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

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,896 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.
 
12

AT&T INC.
JUNE 30, 2015

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

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

   
Three months ended
   
Six months ended
 
   
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.
 
13

AT&T INC.
JUNE 30, 2015

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, 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.
 
14

AT&T INC.
JUNE 30, 2015

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

Following is the fair value leveling for available-for-sale securities and derivatives as of 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 Derivatives
                             
   Interest rate swaps
 
-
     
170
     
-
     
170
 
   Cross-currency swaps
 
-
     
1,280
     
-
     
1,280
 
Liability Derivatives
                             
   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 Derivatives
                             
   Interest rate swaps
 
-
     
157
     
-
     
157
 
   Cross-currency swaps
 
-
     
1,243
     
-
     
1,243
 
   Interest rate locks
 
-
     
5
     
-
     
5
 
Liability Derivatives
                             
   Cross-currency swaps
 
-
     
(1,506
)
   
-
 </