10-Q 1 q2_10q.htm AT&T 2013 FORM 10-Q q2_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 June 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 July 31, 2013 there were 5,311 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,
 
   
2013
   
2012
   
2013
   
2012
 
Operating Revenues
  $ 32,075     $ 31,575     $ 63,431     $ 63,397  
Operating Expenses
                               
Cost of services and sales (exclusive of depreciation
                               
   and amortization shown separately below)
    13,270       12,254       25,824       25,071  
Selling, general and administrative
    8,121       8,005       16,454       16,349  
Depreciation and amortization
    4,571       4,499       9,100       9,059  
Total operating expenses
    25,962       24,758       51,378       50,479  
Operating Income
    6,113       6,817       12,053       12,918  
Other Income (Expense)
                               
Interest expense
    (825 )     (941 )     (1,652 )     (1,800 )
Equity in net income of affiliates
    218       132       403       355  
Other income (expense) – net
    288       23       320       75  
Total other income (expense)
    (319 )     (786 )     (929 )     (1,370 )
Income Before Income Taxes
    5,794       6,031       11,124       11,548  
Income tax expense
    1,914       2,066       3,471       3,931  
Net Income
    3,880       3,965       7,653       7,617  
Less: Net Income Attributable to Noncontrolling Interest
    (58 )     (63 )     (131 )     (131 )
Net Income Attributable to AT&T
  $ 3,822     $ 3,902     $ 7,522     $ 7,486  
Basic Earnings Per Share Attributable to AT&T
  $ 0.71     $ 0.67     $ 1.38     $ 1.27  
Diluted Earnings Per Share Attributable to AT&T
  $ 0.71     $ 0.66     $ 1.38     $ 1.27  
Weighted Average Number of Common Shares
                               
   Outstanding – Basic (in millions)
    5,381       5,855       5,446       5,886  
Weighted Average Number of Common Shares
                               
   Outstanding with Dilution (in millions)
    5,397       5,876       5,463       5,907  
Dividends Declared Per Common Share
  $ 0.45     $ 0.44     $ 0.90     $ 0.88  
See Notes to Consolidated Financial Statements.
                               

 

 

AT&T INC.
                       
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                   
Dollars in millions
                       
(Unaudited)
                       
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Net income
  $ 3,880     $ 3,965     $ 7,653     $ 7,617  
Other comprehensive income, net of tax:
                               
    Foreign Currency:
                               
        Translation adjustments (includes $(1), $(1), $(1)
           and $0 attributable to noncontrolling interest), net of taxes of
           $(127), $(55), $(65) and $76
    (239 )     (101 )     (118 )     142  
        Reclassification adjustment included in net income,
            net of taxes of $19, $0, $19 and $0
    34       -       34       -  
    Available-for-sale securities:
                               
        Net unrealized gains (losses), net of taxes of $6, $(27), $46
           and $27
    11       (52 )     86       49  
        Reclassification adjustment realized in net income, net of
           taxes of $(1), $(3), $(5) and $(6)
    (3 )     (6 )     (10 )     (12 )
     Cash flow hedges:
                               
        Net unrealized gains (losses), net of taxes of $66, $(58),
           $115 and $(58)
    120       (107 )     210       (107 )
        Reclassification adjustment included in net income,
           net of taxes of $4, $4, $8 and $7
    8       7       15       13  
     Defined benefit postretirement plans:
                               
        Net actuarial gain (loss) from equity method investees arising
           during period, net of taxes of $0, $(29), $0 and $(29)
    -       (53 )     -       (53 )
        Reclassification adjustment included in net income, net of
           taxes $5, $0, $5, and $0
    8       -       8       -  
        Amortization of net prior service credit included in
           net income, net of taxes of $(109), $(87), $(218)
           and $(171)
    (177 )     (137 )     (355 )     (274 )
     Other
    -       1       -       1  
Other comprehensive loss
    (238 )     (448 )     (130 )     (241 )
Total comprehensive income
    3,642       3,517       7,523       7,376  
Less: Total comprehensive income attributable to
     noncontrolling interest
    (57 )     (62 )     (130 )     (131 )
Total Comprehensive Income Attributable to AT&T
  $ 3,585     $ 3,455     $ 7,393     $ 7,245  
See Notes to Consolidated Financial Statements.
                               

 

 

AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
Assets
 
(Unaudited)
       
Current Assets
           
Cash and cash equivalents
  $ 4,548     $ 4,868  
Accounts receivable - net of allowances for doubtful accounts of $520 and $547
    12,508       12,657  
Prepaid expenses
    1,038       1,035  
Deferred income taxes
    953       1,036  
Other current assets
    2,381       3,110  
Total current assets
    21,428       22,706  
Property, plant and equipment
    276,833       270,907  
   Less: accumulated depreciation and amortization
    (166,099 )     (161,140 )
Property, Plant and Equipment – Net
    110,734       109,767  
Goodwill
    69,770       69,773  
Licenses
    53,665       52,352  
Customer Lists and Relationships – Net
    1,015       1,391  
Other Intangible Assets – Net
    5,018       5,032  
Investments in and Advances to Equity Affiliates
    3,888       4,581  
Other Assets
    6,575       6,713  
Total Assets
  $ 272,093     $ 272,315  
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Debt maturing within one year
  $ 3,256     $ 3,486  
Accounts payable and accrued liabilities
    19,438       20,494  
Advanced billing and customer deposits
    4,029       4,225  
Accrued taxes
    2,065       1,026  
Dividends payable
    2,401       2,556  
Total current liabilities
    31,189       31,787  
Long-Term Debt
    71,917       66,358  
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
    29,400       28,491  
Postemployment benefit obligation
    41,994       41,392  
Other noncurrent liabilities
    11,278       11,592  
Total deferred credits and other noncurrent liabilities
    82,672       81,475  
                 
Stockholders’ Equity
               
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2013 and
               
   December 31, 2012: issued 6,495,231,088 at June 30, 2013 and December 31, 2012)
    6,495       6,495  
Additional paid-in capital
    90,985       91,038  
Retained earnings
    25,212       22,481  
Treasury stock (1,159,998,643 at June 30, 2013 and 913,836,325
               
   at December 31, 2012, at cost)
    (41,819 )     (32,888 )
Accumulated other comprehensive income
    5,107       5,236  
Noncontrolling interest
    335       333  
Total stockholders’ equity
    86,315       92,695  
Total Liabilities and Stockholders’ Equity
  $ 272,093     $ 272,315  
See Notes to Consolidated Financial Statements.
               

 

 

AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions
 
(Unaudited)
 
   
Six months ended
 
   
June 30,
 
   
2013
   
2012
 
Operating Activities
           
Net income
  $ 7,653     $ 7,617  
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
    9,100       9,059  
   Undistributed earnings from investments in equity affiliates
    (198 )     (355 )
   Provision for uncollectible accounts
    439       572  
   Deferred income tax expense and noncurrent unrecognized tax benefits
    926       (639 )
   Net (gain) loss from sale of investments, net of impairments
    (260 )     2  
Changes in operating assets and liabilities:
               
      Accounts receivable
    (290 )     (460 )
      Other current assets
    784       1,468  
      Accounts payable and accrued liabilities
    (340 )     592  
Other - net
    (103 )     (531 )
Total adjustments
    10,058       9,708  
Net Cash Provided by Operating Activities
    17,711       17,325  
                 
Investing Activities
               
Construction and capital expenditures:
               
   Capital expenditures
    (9,665 )     (8,742 )
   Interest during construction
    (140 )     (130 )
Acquisitions, net of cash acquired
    (1,182 )     (477 )
Dispositions
    825       800  
Sales (purchases) of securities, net
    -       124  
Return of advances to and investments in equity affiliates
    301       -  
Other
    (4 )     -  
Net Cash Used in Investing Activities
    (9,865 )     (8,425 )
                 
Financing Activities
               
Issuance of other short-term borrowings
    1,476       -  
Repayment of other short-term borrowings
    (233 )     -  
Issuance of long-term debt
    6,416       6,935  
Repayment of long-term debt
    (1,823 )     (7,035 )
Purchase of treasury stock
    (9,217 )     (4,623 )
Issuance of treasury stock
    104       376  
Dividends paid
    (4,930 )     (5,187 )
Other
    41       (534 )
Net Cash Used in Financing Activities
    (8,166 )     (10,068 )
Net decrease in cash and cash equivalents
    (320 )     (1,168 )
Cash and cash equivalents beginning of year
    4,868       3,045  
Cash and Cash Equivalents End of Period
  $ 4,548     $ 1,877  
Cash paid during the six months ended June 30 for:
               
   Interest
  $ 2,002     $ 2,133  
   Income taxes, net of refunds
  $ 591     $ 127  
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)
 
 
June 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
       
(45
Balance at end of period
     
$
90,985
 
             
Retained Earnings
           
Balance at beginning of year
     
$
22,481
 
Net income attributable to AT&T ($1.38 per diluted share)
       
7,522
 
Dividends to stockholders ($0.90 per share)
       
(4,791
Balance at end of period
     
$
25,212
 
             
Treasury Stock
           
Balance at beginning of year
 (914
)  
$
(32,888
Repurchase of common stock
 (257
)    
(9,217
Issuance of treasury stock
11
     
286
 
Balance at end of period
 (1,160
)  
$
(41,819
             
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
           
Balance at beginning of year
     
$
5,236
 
Other comprehensive loss attributable to AT&T
       
(129
Balance at end of period
     
$
5,107
 
             
Noncontrolling Interest
           
Balance at beginning of year
     
$
333
 
Net income attributable to noncontrolling interest
       
131
 
Distributions
       
(128
Translation adjustments attributable to noncontrolling interest, net of taxes
       
(1
Balance at end of period
     
$
335
 
             
Total Stockholders’ Equity at beginning of year
     
$
92,695
 
Total Stockholders’ Equity at end of period
     
$
86,315
 
See Notes to Consolidated Financial Statements.
   

 

 
AT&T INC.
JUNE 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 six months of 2013, we repurchased 257 million shares for $9,217 under these authorizations. At June 30, 2013, we had 272 million shares remaining under the March 2013 authorization. The authorization has no expiration date.

 

 
AT&T INC.
JUNE 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 six months ended June 30, 2013 and 2012, are shown in the table below:

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Numerators
                     
Numerator for basic earnings per share:
                     
   Net Income
$
3,880
 
$
3,965
 
$
7,653
 
$
7,617
   Net income attributable to noncontrolling interest
 
(58)
   
(63)
   
(131)
   
(131)
   Net Income attributable to AT&T
 
3,822
   
3,902
   
7,522
   
7,486
   Dilutive potential common shares:
                     
      Share-based payment
 
2
   
2
   
6
   
6
Numerator for diluted earnings per share
$
3,824
 
$
3,904
 
$
7,528
 
$
7,492
Denominators (000,000)
                     
Denominator for basic earnings per share:
                     
   Weighted average number of common shares outstanding
 
5,381
   
5,855
   
5,446
   
5,886
   Dilutive potential common shares:
                     
      Share-based payment
 
16
   
21
   
17
   
21
Denominator for diluted earnings per share
 
5,397
   
5,876
   
5,463
   
5,907
Basic earnings per share attributable to AT&T
$
0.71
 
$
0.67
 
$
1.38
 
$
1.27
Diluted earnings per share attributable to AT&T
$
0.71
 
$
0.66
 
$
1.38
 
$
1.27

At June 30, 2013 and 2012, we had issued and outstanding options to purchase approximately 13 million and 22 million shares of AT&T common stock. For the quarter ended June 30, 2013 and 2012, the exercise prices of 2 million and 4 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 June 30, 2013 and 2012, the exercise prices of 11 million and 17 million vested stock options were below market price.
 
 

 
AT&T INC.
JUNE 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 of other comprehensive income (OCI) included in accumulated OCI for the six months ended June 30, 2013, are presented below. All amounts are net of tax and exclude noncontrolling interest.

At June 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
 
 (117)
   
 86
   
 210
   
 -
   
 179
Amounts reclassified
   from accumulated OCI
 
 34
1
 
 (10)
2
 
 15
3
 
 (347)
4
 
 (308)
Net other comprehensive
   income (loss)
 
 (83)
   
 76
   
 225
   
 (347)
   
 (129)
Balance as of June 30, 2013
$
 (367)
 
$
 348
 
$
 115
 
$
 5,011
 
$
 5,107
 1
 Pre-tax translation loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
 2
 Pre-tax gains are included in Other income (expense) - net in the consolidated statements of income.
 3
 (Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
 4
 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, we receive commissions on sales of satellite television services offered through our agency arrangements.
 
 

 
AT&T INC.
JUNE 30, 2013

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


The Other segment includes our portion of the results from our international equity investments, 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.

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

For the three months ended June 30, 2013
         
 Advertising
Solutions
               
 Consolidated
Results
   
 Wireless
   
 Wireline
       
 Other
   
 Consolidations
   
Data
$
 5,356
 
$
 8,400
 
$
 -
 
$
 -
 
$
 -
 
$
 13,756
Voice, text and other
 
 10,014
   
 5,141
   
 -
   
 -
   
 -
   
 15,155
Equipment and other
 
 1,921
   
 1,232
   
 -
   
 11
   
 -
   
 3,164
Total segment operating revenues
 
 17,291
   
 14,773
   
 -
   
 11
   
 -
   
 32,075
Operations and support expenses
 
 10,770
   
 10,417
   
 -
   
 204
   
 -
   
 21,391
Depreciation and amortization expenses
 
 1,843
   
 2,722
   
 -
   
 6
   
 -
   
 4,571
Total segment operating expenses
 
 12,613
   
 13,139
   
 -
   
 210
   
 -
   
 25,962
Segment operating income (loss)
 
 4,678
   
 1,634
   
 -
   
 (199)
   
 -
   
 6,113
Interest expense
 
 -
   
 -
   
 -
   
 -
   
 825
   
 825
Equity in net income (loss) of affiliates
 
 (19)
   
 -
   
 -
   
 237
   
 -
   
 218
Other income (expense) – net
 
 -
   
 -
   
 -
   
 -
   
 288
   
 288
Segment income (loss) before
   income taxes
$
 4,659
 
$
 1,634
 
$
 -
 
$
 38
 
$
 (537)
 
$
 5,794
                                   
For the six months ended June 30, 2013
         
 Advertising Solutions
               
 Consolidated Results
   
 Wireless
   
 Wireline
       
 Other
   
 Consolidations
   
Data
$
 10,481
 
$
 16,562
 
$
 -
 
$
 -
 
$
 -
 
$
 27,043
Voice, text and other
 
 19,951
   
 10,447
   
 -
   
 -
   
 -
   
 30,398
Equipment and other
 
 3,550
   
 2,419
   
 -
   
 21
   
 -
   
 5,990
Total segment operating revenues
 
 33,982
   
 29,428
   
 -
   
 21
   
 -
   
 63,431
Operations and support expenses
 
 20,950
   
 20,752
   
 -
   
 576
   
 -
   
 42,278
Depreciation and amortization expenses
 
 3,678
   
 5,410
   
 -
   
 12
   
 -
   
 9,100
Total segment operating expenses
 
 24,628
   
 26,162
   
 -
   
 588
   
 -
   
 51,378
Segment operating income (loss)
 
 9,354
   
 3,266
   
 -
   
 (567)
   
 -
   
 12,053
Interest expense
 
 -
   
 -
   
 -
   
 -
   
 1,652
   
 1,652
Equity in net income (loss) of affiliates
 
 (37)
   
 1
   
 -
   
 439
   
 -
   
 403
Other income (expense) – net
 
 -
   
 -
   
 -
   
 -
   
 320
   
 320
Segment income (loss) before
   income taxes
$
 9,317
 
$
 3,267
 
$
 -
 
$
 (128)
 
$
 (1,332)
 
$
 11,124

 
10 

 
AT&T INC.
JUNE 30, 2013

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


For the three months ended June 30, 2012
         
 Advertising
Solutions
               
 Consolidated
Results
   
 Wireless
   
 Wireline
       
 Other
   
 Consolidations
   
Data
$
 4,471
 
$
 7,935
 
$
 -
 
$
 -
 
$
 -
 
$
 12,406
Voice, text and other
 
 10,294
   
 5,696
   
 -
   
 -
   
 -
   
 15,990
Equipment and other
 
 1,588
   
 1,276
   
 305
   
 10
   
 -
   
 3,179
Total segment operating revenues
 
 16,353
   
 14,907
   
 305
   
 10
   
 -
   
 31,575
Operations and support expenses
 
 9,590
   
 10,201
   
 226
   
 242
   
 -
   
 20,259
Depreciation and amortization expenses
 
 1,696
   
 2,766
   
 29
   
 8
   
 -
   
 4,499
Total segment operating expenses
 
 11,286
   
 12,967
   
 255
   
 250
   
 -
   
 24,758
Segment operating income (loss)
 
 5,067
   
 1,940
   
 50
   
 (240)
   
 -
   
 6,817
Interest expense
 
 -
   
 -
   
 -
   
 -
   
 941
   
 941
Equity in net income (loss) of affiliates
 
 (15)
   
 (1)
   
 -
   
 148
   
 -
   
 132
Other income (expense) – net
 
 -
   
 -
   
 -
   
 -
   
 23
   
 23
Segment income (loss) before
   income taxes
$
 5,052
 
$
 1,939
 
$
 50
 
$
 (92)
 
$
 (918)
 
$
 6,031
                                   
For the six months ended June 30, 2012
         
 Advertising Solutions
               
 Consolidated Results
   
 Wireless
   
 Wireline
       
 Other
   
 Consolidations
   
Data
$
 8,706
 
$
 15,735
 
$
 -
 
$
 -
 
$
 -
 
$
 24,441
Voice, text and other
 
 20,625
   
 11,588
   
 -
   
 -
   
 -
   
 32,213
Equipment and other
 
 3,158
   
 2,513
   
 1,049
   
 23
   
 -
   
 6,743
Total segment operating revenues
 
 32,489
   
 29,836
   
 1,049
   
 23
   
 -
   
 63,397
Operations and support expenses
 
 19,568
   
 20,603
   
 773
   
 476
   
 -
   
 41,420
Depreciation and amortization expenses
 
 3,362
   
 5,574
   
 106
   
 17
   
 -
   
 9,059
Total segment operating expenses
 
 22,930
   
 26,177
   
 879
   
 493
   
 -
   
 50,479
Segment operating income (loss)
 
 9,559
   
 3,659
   
 170
   
 (470)
   
 -
   
 12,918
Interest expense
 
 -
   
 -
   
 -
   
 -
   
 1,800
   
 1,800
Equity in net income (loss) of affiliates
 
 (28)
   
 (1)
   
 -
   
 384
   
 -
   
 355
Other income (expense) – net
 
 -
   
 -
   
 -
   
 -
   
 75
   
 75
Segment income (loss) before
   income taxes
$
 9,531
 
$
 3,658
 
$
 170
 
$
 (86)
 
$
 (1,725)
 
$
 11,548

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. During 2013, we have a required contribution to our pension plans of approximately $175.

In October 2012, we filed an application with the U.S. Department of Labor for approval to make a voluntary contribution of a preferred equity interest in our Mobility business to the trust used to pay qualified pension benefits under plans sponsored by AT&T. At the time we filed the application, the interest had a fair market value of $9,500. We anticipate approval in 2013, and expect to make the contribution at that time. As currently proposed, the preferred equity interest will constitute a qualified plan asset for ERISA funding purposes, but may not be included in plan assets in our consolidated financial statements upon contribution. Final determination of whether it will qualify as a plan asset for financial reporting purposes is subject to the final terms of the preferred equity interest.

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.
 
 
11 

 
AT&T INC.
JUNE 30, 2013

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


In the following table, 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,
 
2013
 
2012
 
2013
 
2012
Pension cost:
                     
   Service cost – benefits earned during the period
$
330
 
$
304
 
$
660
 
$
614
   Interest cost on projected benefit obligation
 
607
   
700
   
1,214
   
1,400
   Expected return on assets
 
(828)
   
(880)
   
(1,656)
   
(1,760)
   Amortization of prior service (credit)
 
(23)
   
(4)
   
(46)
   
(8)
   Net pension cost
$
86
 
$
120
 
$
172
 
$
246
                       
Postretirement cost:
                     
   Service cost – benefits earned during the period
$
96
 
$
82
 
$
191
 
$
166
   Interest cost on accumulated postretirement benefit obligation
 
389
   
447
   
779
   
894
   Expected return on assets
 
(178)
   
(201)
   
(356)
   
(401)
   Amortization of prior service (credit)
 
(262)
   
(215)
   
(525)
   
(432)
   Net postretirement cost
$
45
 
$
113
 
$
89
 
$
227
                       
   Combined net pension and postretirement cost
$
131
 
$
233
 
$
261
 
$
473

Our combined net pension and postretirement cost decreased $102 in the second quarter and $212 for the first six months of 2013. The decrease reflects lower interest costs, which are driven by the prior year’s declining bond rates and reflects 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 $28 in the second quarter of 2013, of which $26 was interest cost, and $55 for the first six months, of which $51 was interest cost. In 2012, net supplemental retirement pension benefits cost was $32 in the second quarter, of which $29 was interest cost, and $63 for the first six months, of which $58 was interest cost.
 
 
12 

 
AT&T INC.
JUNE 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:

 
June 30, 2013
 
December 31, 2012
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
Notes and debentures
$
 73,664
 
$
 79,581
 
$
 69,578
 
$
 81,310
Commercial paper
 
 1,243
   
 1,243
   
 -
   
 -
Bank borrowings
 
 1
   
 1
   
 1
   
 1
Investment securities
 
 2,407
   
 2,407
   
 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.
 
 
13 

 
AT&T INC.
JUNE 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 were 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 other comprehensive income (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 $113 have maturities of less than one year, $278 within one to three years, $184 within three to five years, and $256 for five or more years, which approximate fair value.

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 June 30, 2013 and December 31, 2012:

   
June 30, 2013
   
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-Sale Securities
                     
   Domestic equities
$
 1,015
 
$
 -
 
$
 -
 
$
 1,015
   International equities
 
 498
   
 -
   
 -
   
 498
   Fixed income bonds
 
 -
   
 831
   
 -
   
 831
Asset Derivatives1
                     
   Interest rate swaps
 
 -
   
 210
   
 -
   
 210
   Cross-currency swaps
 
 -
   
 668
   
 -
   
 668
Liability Derivatives1
                     
   Interest rate swaps
 
 -
   
 (9)
   
 -
   
 (9)
   Cross-currency swaps
 
 -
   
 (750)
   
 -
   
 (750)
                         
   
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.

 
14 

 
AT&T INC.
JUNE 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 six months ended June 30, 2013 and June 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 six months ended June 30, 2013 and June 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 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, 2013 and June 30, 2012, no ineffectiveness was measured.
 
 
15 

 
AT&T INC.
JUNE 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 June 30, 2013, we had posted collateral of $35 (a deposit asset) and held collateral of $708 (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 June, we would have been required to post additional collateral of $169. 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:

   
June 30,
   
December 31,
 
   
2013
   
2012
 
Interest rate swaps
  $ 4,250     $ 3,000  
Cross-currency swaps
    14,136       12,071  
Foreign exchange contracts
    4       51  
Total
  $ 18,390     $ 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
 
Six months ended
 
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
 
Interest rate swaps (Interest expense):
                       
Gain (Loss) on interest rate swaps
  $ (63 )   $ (76 )   $ (87 )   $ (137 )
Gain (Loss) on long-term debt
    63       76       87       137  

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

   
Three months ended
   
Six months ended
 
Cash Flow Hedging Relationships
 
June 30, 2013
   
June 30, 2012
   
June 30, 2013
   
June 30, 2012
 
Cross-currency swaps:
                       
Gain (Loss) recognized in accumulated OCI
  $ 184     $ (160 )   $ 325     $ (165 )
                                 
Interest rate locks:
                               
Interest income (expense) reclassified from
   accumulated OCI into income
    (12 )     (11 )     (23 )     (20 )
                                 
Foreign exchange contracts:
                               
Gain (Loss) recognized in accumulated OCI
    2       (5 )     -       -  

 
16 

 
AT&T INC.
JUNE 30, 2013

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


NOTE 7. SUBSEQUENT EVENTS

On July 12, 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 right that entitles each Leap stockholder to a share of the net proceeds of the future sale of the Chicago 700 MHz A-band 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. The agreement must be approved by Leap’s stockholders. The transaction also is subject to review by the FCC and the Department of Justice and to other customary closing conditions and is expected to close in approximately six to nine months from the announcement. The agreement also provides both parties with certain termination rights if the transaction does not close by July 11, 2014, extendable by either party to January 11, 2015 if required regulatory approvals have not been obtained. Under certain circumstances, Leap may be required to pay a termination fee or AT&T may be required to provide a three-year roaming agreement to Leap for LTE data coverage if the transaction does not close. If Leap enters into the roaming agreement, AT&T may purchase, or may be required by Leap to purchase, specified Leap spectrum assets.
 
 
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AT&T INC.
JUNE 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 second quarter and for the first six months of 2013 and 2012 are summarized as follows:

   
Second Quarter
   
Six-Month Period
 
   
2013
   
2012
   
Percent
Change
   
2013
   
2012
   
Percent
Change
 
 
Operating Revenues
  $ 32,075     $ 31,575       1.6 %   $ 63,431     $ 63,397       0.1 %
Operating expenses
                                               
   Cost of services and sales
    13,270       12,254       8.3       25,824       25,071       3.0  
   Selling, general and administrative
    8,121       8,005       1.4       16,454       16,349       0.6  
   Depreciation and amortization
    4,571       4,499       1.6       9,100       9,059       0.5  
Total Operating Expenses
    25,962       24,758       4.9       51,378       50,479       1.8  
Operating Income
    6,113       6,817       (10.3)       12,053       12,918       (6.7)  
Income Before Income Taxes
    5,794       6,031       (3.9)       11,124       11,548       (3.7)  
Net Income
    3,880       3,965       (2.1)       7,653       7,617       0.5  
Net Income Attributable to AT&T
  $ 3,822     $ 3,902       (2.1) %   $ 7,522     $ 7,486       0.5 %

Overview
Operating income decreased $704, or 10.3%, in the second quarter and $865, or 6.7%, for the first six months of 2013. Both operating revenues and expenses in 2012 include results for our sold Advertising Solutions segment, which had a negative impact on comparisons to 2013 operating income. The decline in operating income also reflected increased handset upgrades, which contributed to higher wireless equipment and commission costs, increased expenses supporting AT&T U-verse® (U-verse) subscriber growth and declines in wireline voice and wireless voice and text revenues. Wireless data and equipment revenues and wireline data revenues helped to offset these impacts. Our operating income margin in the second quarter decreased from 21.6% in 2012 to 19.1% in 2013 and for the first six months decreased from 20.4% in 2012 to 19.0% in 2013.

Operating revenues increased $500, or 1.6%, in the second quarter and $34, or 0.1%, for the first six 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 business services also contributed to higher operating revenues. The revenue increases were partially offset by the sale of the Advertising Solutions segment and continued declines in wireline voice and wireless voice and text revenues.

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.
 
 
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AT&T INC.
JUNE 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 $1,016, or 8.3%, in the second quarter and $753, or 3.0%, for the first six months of 2013. The increases were primarily due to increased wireless equipment costs related to handset upgrades, increased wireline costs attributable to U-verse subscriber growth and wireless network costs. The increases were partially offset by the sale of the Advertising Solutions segment, decreased wireless interconnect and long-distance costs and lower costs associated with Universal Service Fund (USF) fees.

Selling, general and administrative expenses increased $116, or 1.4%, in the second quarter and $105, or 0.6%, for the first six months of 2013. The increases were primarily due to increased commissions related to smartphone upgrades and higher advertising expenses, partially offset by the sale of the Advertising Solutions segment, decreased employee related expenses and lower financing-related costs associated with our pension and postretirement benefits (referred to as Pension/OPEB expenses).

Depreciation and amortization expense increased $72, or 1.6%, in the second quarter and $41, or 0.5%, for the first six 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.

Interest expense decreased $116, or 12.3%, in the second quarter and $148, or 8.2%, for the first six months of 2013. Interest expense in 2012 was higher due to charges associated with the early redemption of debt. The decrease in 2013 also reflects lower average interest rates, partially offset by higher average debt balances.

Equity in net income of affiliates increased $86, or 65.2%, in the second quarter and $48, or 13.5%, for the first six months of 2013. Increased equity in net income of affiliates in the second quarter was due to increased earnings at América Móvil, S.A. de C.V. (América Móvil) and YP Holdings LLC (YP Holdings). Increased equity in net income of affiliates for the first six months was primarily due to increased earnings from YP Holdings, partially offset by foreign exchange impacts at América Móvil.

Other income (expense) – net We had other income of $288 in the second quarter and $320 for the first six months of 2013, compared to other income of $23 in the second quarter and $75 for the first six months of 2012. Results in the second quarter and for the first six months of 2013 included a net gain on the sale of América Móvil shares and other investments of $249 and $260, interest and dividend income of $23 and $40 and leveraged lease income of $10 and $15, respectively.

Other income in the second quarter and for the first six months of 2012 included interest and dividend income of $19 and $34 and leveraged lease income of $8 and $41 and a net loss on the sale of investments of $11 and $1, respectively.

Income taxes decreased $152, or 7.4%, in the second quarter and $460, or 11.7%, for the first six months of 2013. Our effective tax rate was 33.0% for the second quarter and 31.2% for the first six months of 2013, as compared to 34.3% for the second quarter and 34.0% for the first six months of 2012. The decrease in effective tax rate for both the second quarter and the first six months was primarily due to recognition of benefits related to tax audit settlements.

 
19 

 
AT&T INC.
JUNE 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
     
 
June 30,
 
2013
 
2012
Wireless subscribers (000)
107,884
 
105,206
Network access lines in service (000)
26,849
 
31,604
Total wireline broadband connections (000)
16,453
 
16,434
Debt ratio1
46.6%
 
38.4%
Ratio of earnings to fixed charges2
5.45
 
5.36
Number of AT&T employees
245,350
 
242,380
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, we receive commissions on sales of satellite television services offered through our agency arrangements.

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 investments, 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.”

 
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AT&T INC.
JUNE 30, 2013

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


Wireless
                                   
Segment Results
                                   
   
Second Quarter
   
Six-Month Period
 
   
2013
   
2012
   
Percent
Change
   
2013
   
2012
   
Percent
Change
 
 
Segment operating revenues
                                   
   Data
  $ 5,356     $ 4,471       19.8 %   $ 10,481     $ 8,706       20.4 %
   Voice, text and other service
    10,014       10,294       (2.7)       19,951       20,625       (3.3)  
   Equipment
    1,921       1,588       21.0       3,550       3,158       12.4  
Total Segment Operating Revenues
    17,291       16,353       5.7       33,982       32,489       4.6  
Segment operating expenses
                                               
   Operations and support
    10,770       9,590       12.3       20,950       19,568       7.1  
   Depreciation and amortization
    1,843       1,696       8.7       3,678