10-Q 1 q2_10q.htm AT&T 2014 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, 2014
 
       
   
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, 2014, there were 5,186 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,
 
 
 
2014
   
2013
   
2014
   
2013
 
Operating Revenues
  $ 32,575     $ 32,075     $ 65,051     $ 63,431  
Operating Expenses
                               
Cost of services and sales (exclusive of depreciation
                               
   and amortization shown separately below)
    14,212       13,270       27,533       25,824  
Selling, general and administrative
    8,197       8,121       16,457       16,454  
Depreciation and amortization
    4,550       4,571       9,167       9,100  
Total operating expenses
    26,959       25,962       53,157       51,378  
Operating Income
    5,616       6,113       11,894       12,053  
Other Income (Expense)
                               
Interest expense
    (881 )     (825 )     (1,741 )     (1,652 )
Equity in net income of affiliates
    102       218       190       403  
Other income (expense) – net
    1,269       288       1,414       320  
Total other income (expense)
    490       (319 )     (137 )     (929 )
Income Before Income Taxes
    6,106       5,794       11,757       11,124  
Income tax expense
    2,485       1,914       4,402       3,471  
Net Income
    3,621       3,880       7,355       7,653  
Less: Net Income Attributable to Noncontrolling Interest
    (74 )     (58 )     (156 )     (131 )
Net Income Attributable to AT&T
  $ 3,547     $ 3,822     $ 7,199     $ 7,522  
Basic Earnings Per Share Attributable to AT&T
  $ 0.68     $ 0.71     $ 1.38     $ 1.38  
Diluted Earnings Per Share Attributable to AT&T
  $ 0.68     $ 0.71     $ 1.38     $ 1.38  
Weighted Average Number of Common Shares
                               
   Outstanding – Basic (in millions)
    5,204       5,381       5,213       5,446  
Weighted Average Number of Common Shares
                               
   Outstanding with Dilution (in millions)
    5,220       5,397       5,229       5,463  
Dividends Declared Per Common Share
  $ 0.46     $ 0.45     $ 0.92     $ 0.90  
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,
 
 
 
2014
   
2013
   
2014
   
2013
 
Net income
  $ 3,621     $ 3,880     $ 7,355     $ 7,653  
Other comprehensive income, net of tax:
                               
    Foreign Currency:
                               
        Translation adjustments (includes $1, $(1), $1
           and $(1) attributable to noncontrolling interest), net of taxes
           of $15, $(127), $5 and $(65)
    26       (239 )     6       (118 )
        Reclassification adjustment included in net income,
            net of taxes of $210, $19, $224 and $19
    391       34       416       34  
    Available-for-sale securities:
                               
        Net unrealized gains, net of taxes of $24, $6, $34
           and $46
    43       11       59       86  
        Reclassification adjustment realized in net income, net of
           taxes of $(1), $(1), $(8) and $(5)
    (3     (3 )     (14 )     (10 )
     Cash flow hedges:
                               
        Net unrealized gains (losses), net of taxes of $(56), $66,
           $(53) and $115
    (104 )     120       (98 )     210  
        Reclassification adjustment included in net income,
           net of taxes of $7, $4, $11 and $8
    14       8       21       15  
     Defined benefit postretirement plans:
                               
        Reclassification adjustment included in net income, net of
           taxes $31, $5, $33 and $5
    58       8       61       8  
        Amortization of net prior service credit included in
           net income, net of taxes of $(142), $(109), $(289)
           and $(218)
    (239 )     (177 )     (479 )     (355 )
Other comprehensive income (loss)
    186       (238 )     (28 )     (130 )
Total comprehensive income
    3,807       3,642       7,327       7,523  
Less: Total comprehensive income attributable to
     noncontrolling interest
    (75 )     (57 )     (157 )     (130 )
Total Comprehensive Income Attributable to AT&T
  $ 3,732     $ 3,585     $ 7,170     $ 7,393  
See Notes to Consolidated Financial Statements.
                               
 
 

 

AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
 
 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
Assets
 
(Unaudited)
   
 
 
Current Assets
 
 
   
 
 
Cash and cash equivalents
  $ 11,305     $ 3,339  
Accounts receivable - net of allowances for doubtful accounts of $461 and $483
    13,001       12,918  
Prepaid expenses
    928       960  
Deferred income taxes
    1,180       1,199  
Other current assets
    6,698       4,780  
Total current assets
    33,112       23,196  
Property, plant and equipment
    283,252       274,798  
   Less: accumulated depreciation and amortization
    (168,892 )     (163,830 )
Property, Plant and Equipment – Net
    114,360       110,968  
Goodwill
    70,094       69,273  
Licenses
    59,655       56,433  
Other Intangible Assets – Net
    6,380       5,779  
Investments in Equity Affiliates
    159       3,860  
Other Assets
    9,706       8,278  
Total Assets
  $ 293,466     $ 277,787  
 
               
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Debt maturing within one year
  $ 10,482     $ 5,498  
Accounts payable and accrued liabilities
    22,966       21,107  
Advanced billing and customer deposits
    3,990       4,212  
Accrued taxes
    3,962       1,774  
Dividends payable
    2,388       2,404  
Total current liabilities
    43,788       34,995  
Long-Term Debt
    73,570       69,290  
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
    36,835       36,308  
Postemployment benefit obligation
    30,070       29,946  
Other noncurrent liabilities
    16,578       15,766  
Total deferred credits and other noncurrent liabilities
    83,483       82,020  
 
               
Stockholders’ Equity
               
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2014 and
               
   December 31, 2013: issued 6,495,231,088 at June 30, 2014 and December 31, 2013)
    6,495       6,495  
Additional paid-in capital
    91,057       91,091  
Retained earnings
    33,554       31,141  
Treasury stock (1,304,409,511 at June 30, 2014 and 1,268,914,913
               
   at December 31, 2013, at cost)
    (46,825 )     (45,619 )
Accumulated other comprehensive income
    7,851       7,880  
Noncontrolling interest
    493       494  
Total stockholders’ equity
    92,625       91,482  
Total Liabilities and Stockholders’ Equity
  $ 293,466     $ 277,787  
See Notes to Consolidated Financial Statements.
               

  4
 

 

AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions
 
(Unaudited)
 
 
 
Six months ended
 
 
 
June 30,
 
 
 
2014
   
2013
 
Operating Activities
 
 
   
 
 
Net income
  $ 7,355     $ 7,653  
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
    9,167       9,100  
   Undistributed earnings from investments in equity affiliates
    (58 )     (198 )
   Provision for uncollectible accounts
    444       439  
   Deferred income tax expense
    546       1,081  
   Net gain from sale of investments, net of impairments
    (1,365 )     (260 )
   Changes in operating assets and liabilities:
               
      Accounts receivable
    (566 )     (290 )
      Other current assets
    (771 )     784  
      Accounts payable and accrued liabilities
    2,894       (340 )
   Retirement benefit funding
    (280 )     -  
   Other - net
    (497 )     (258 )
Total adjustments
    9,514       10,058  
Net Cash Provided by Operating Activities
    16,869       17,711  
 
               
Investing Activities
               
Construction and capital expenditures:
               
   Capital expenditures
    (11,649 )     (9,665 )
   Interest during construction
    (118 )     (140 )
Acquisitions, net of cash acquired
    (857 )     (1,182 )
Dispositions
    4,921       825  
Return of advances to and investments in equity affiliates
    2       301  
Other
    -       (4 )
Net Cash Used in Investing Activities
    (7,701 )     (9,865 )
 
               
Financing Activities
               
Net change in short-term borrowings with original maturities of three months or less
    134       -  
Issuance of other short-term borrowings
    -       1,476  
Repayment of other short-term borrowings
    -       (233 )
Issuance of long-term debt
    8,564       6,416  
Repayment of long-term debt
    (3,508 )     (1,823 )
Purchase of treasury stock
    (1,396 )     (9,217 )
Issuance of treasury stock
    27       104  
Dividends paid
    (4,784 )     (4,930 )
Other
    (239 )     41  
Net Cash Used in Financing Activities
    (1,202 )     (8,166 )
Net increase (decrease) in cash and cash equivalents
    7,966       (320 )
Cash and cash equivalents beginning of year
    3,339       4,868  
Cash and Cash Equivalents End of Period
  $ 11,305     $ 4,548  
Cash paid during the six months ended June 30 for:
               
   Interest
  $ 2,292     $ 2,002  
   Income taxes, net of refunds
  $ 987     $ 591  
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, 2014
 
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
 
 
$
91,091 
Issuance of treasury stock
 
 
 
Share-based payments
 
 
 
(34)
Change related to acquisition of interests held by noncontrolling owners
 
 
 
(4)
Balance at end of period
 
 
$
91,057 
 
 
 
 
 
Retained Earnings
 
 
 
 
Balance at beginning of year
 
 
$
31,141 
Net income attributable to AT&T ($1.38 per diluted share)
 
 
 
7,199 
Dividends to stockholders ($0.92 per share)
 
 
 
(4,786)
Balance at end of period
 
 
$
33,554 
 
 
 
 
 
Treasury Stock
 
 
 
 
Balance at beginning of year
 (1,269)
 
$
(45,619)
Repurchase of common stock
 (42)
 
 
(1,396)
Issuance of treasury stock
 
 
190 
Balance at end of period
 (1,304)
 
$
(46,825)
 
 
 
 
 
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
 
 
 
 
Balance at beginning of year
 
 
$
7,880 
Other comprehensive loss attributable to AT&T
 
 
 
(29)
Balance at end of period
 
 
$
7,851 
 
 
 
 
 
Noncontrolling Interest
 
 
 
 
Balance at beginning of year
 
 
$
494 
Net income attributable to noncontrolling interest
 
 
 
156 
Distributions
 
 
 
(158)
Translation adjustments attributable to noncontrolling interest, net of taxes
 
 
 
Balance at end of period
 
 
$
493 
 
 
 
 
 
Total Stockholders’ Equity at beginning of year
 
 
$
91,482 
Total Stockholders’ Equity at end of period
 
 
$
92,625 
See Notes to Consolidated Financial Statements.
 

 

 
AT&T INC.
JUNE 30, 2014

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, 2013. On March 13, 2014, we closed our acquisition of Leap Wireless International, Inc. (Leap) (see Note 7), and we incorporated Leap into our wireless operations following the date of acquisition.

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 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. On June 30, 2014, we completed the sale of our investment in América Móvil, S.A.B. de C.V. (América Móvil) to an unrelated third party (see Note 7).

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  During the first six months of 2014, we repurchased approximately 42 million shares for $1,396 under a repurchase authorization that was approved by our Board of Directors in March 2013. In March 2014, our Board of Directors approved another authorization to repurchase 300 million shares of our common stock. At June 30, 2014, we had 421 million shares remaining under these authorizations. The repurchase authorizations have no expiration date, and we expect to make future repurchases opportunistically.
 
Software Costs  During 2014, we completed a study evaluating the periods that we were utilizing our non-network software assets. As of April 1, 2014, we modified our amortization period for capitalized non-network software to five years to better reflect the estimated periods during which these assets will remain in service and to align with amortization periods used in the industry. Had we not revised the amortization period, our depreciation and amortization expense would have been $4,763 in the second quarter and $9,380 for the first six months.
 
New Accounting Standards  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. Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues between service and equipment, and the timing in which those revenues are recognized. ASU 2014-09 also specifies that incremental costs of obtaining or fulfilling our contracts with customers should be deferred. ASU 2014-09 becomes effective for annual reporting periods beginning after December 15, 2016.

The FASB will allow two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of January 1, 2017, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and provide additional disclosures comparing results to previous rules. We continue to evaluate the impact of the new standard and available adoption methods.

 

 
AT&T INC.
JUNE 30, 2014

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 for the three and six months ended June 30, 2014 and 2013, is shown in the table below:

 
 
Three months ended
   
Six months ended
 
 
 
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
Numerators
 
 
   
 
   
 
   
 
 
Numerator for basic earnings per share:
 
 
   
 
   
 
   
 
 
   Net Income
  $ 3,621     $ 3,880     $ 7,355     $ 7,653  
   Less:  Net income attributable to noncontrolling interest
    (74 )     (58 )     (156 )     (131 )
   Net Income attributable to AT&T
    3,547       3,822       7,199       7,522  
   Dilutive potential common shares:
                               
      Share-based payment
    3       2       7       6  
Numerator for diluted earnings per share
  $ 3,550     $ 3,824     $ 7,206     $ 7,528  
Denominators (000,000)
                               
Denominator for basic earnings per share:
                               
   Weighted average number of common shares outstanding
    5,204       5,381       5,213       5,446  
   Dilutive potential common shares:
                               
      Share-based payment (in shares)
    16       16       16       17  
Denominator for diluted earnings per share
    5,220       5,397       5,229       5,463  
Basic earnings per share attributable to AT&T
  $ 0.68     $ 0.71     $ 1.38     $ 1.38  
Diluted earnings per share attributable to AT&T
  $ 0.68     $ 0.71     $ 1.38     $ 1.38  

At June 30, 2014 and 2013, we had issued and outstanding options to purchase approximately 11 million and 13 million shares of AT&T common stock. For the quarter ended June 30, 2014 and 2013, the exercise prices of 3 million and 2 million shares were above the market price of AT&T stock for the respective periods. Accordingly, we did not include these amounts in determining the dilutive potential common shares.

 

 
AT&T INC.
JUNE 30, 2014

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) for the six months ended June 30, 2014 and 2013, are presented below. For the period ended June 30, 2014, the amounts reclassified from accumulated OCI include the adjustments resulting from our change in accounting for América Móvil (see Note 7). All amounts are net of tax and exclude noncontrolling interest.

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)
 
 
Net other comprehensive
   income (loss)
 
 421 
 
 
 45 
 
 
 (77)
 
 
 (418)
 
 
 (29)
Balance as of June 30, 2014
$
 54 
 
$
 495 
 
$
 368 
 
$
 6,934 
 
$
 7,851 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2013 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, 2012
$
 (284)
 
$
 272 
 
$
 (110)
 
$
 5,358 
 
$
 5,236 
Other comprehensive income
   (loss) before reclassifications
 
 (117)
 
 
 86 
 
 
 210 
 
 
 - 
 
 
 179 
Amounts reclassified
   from accumulated OCI
 
 34 
 
 
 (10)
 
 
 15 
 
 
 (347)
 
 
 (308)
Net other comprehensive
   income (loss)
 
 (83)
 
 
 76 
 
 
 225 
 
 
 (347)
 
 
 (129)
Balance as of June 30, 2013
$
 (367)
 
$
 348 
 
$
 115 
 
$
 5,011 
 
$
 5,107 
 
 Pre-tax translation loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
 
 Pre-tax gains 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.
 
 

 
AT&T INC.
JUNE 30, 2014

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 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 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 segment’s reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States. We have two reportable segments: (1) Wireless and (2) Wireline.

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 wallet joint venture which is accounted for as an equity 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 Internet, video and VoIP services and managed networking to business customers.

The Corporate and Other column includes unallocated corporate expenses, which includes costs to support corporate-driven activities and operations, impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans as well as our actuarial gains and losses on our pension and postretirement plan valuations. Results from equity method investments in América Móvil (prior to our May 2014 announcement of our intention to dispose of our investment), YP Holdings LLC, and Otter Media (our joint venture with The Chernin Group), are also excluded from our segment results as those results are nonoperational and 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, 2014

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

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

For the three months ended June 30, 2014
                   
   
Wireless
   
Wireline
   
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 )     -       131       102  
Other income (expense) – net
    -       -       1,269       1,269  
Segment income before income taxes
  $ 4,298     $ 1,423     $ 385     $ 6,106  
                                 
For the six months ended June 30, 2014
                   
Consolidated
Results
 
   
Wireless
   
Wireline
   
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       238       190  
Other income (expense) – net
    -       -       1,414       1,414  
Segment income (loss) before income taxes
  $ 9,331     $ 2,884     $ (458 )   $ 11,757  

11 
 

 
AT&T INC.
JUNE 30, 2014

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

 
For the three months ended June 30, 2013
                   
   
Wireless
   
Wireline
   
Corporate
and Other
   
Consolidated
Results
 
Service
  $ 15,370     $ 14,482     $ -     $ 29,852  
Equipment
    1,921       291       11       2,223  
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     $ (499 )   $ 5,794  
                                 
For the six months ended June 30, 2013
                   
Consolidated
Results
 
   
Wireless
   
Wireline
   
Corporate
and Other
 
Service
  $ 30,432     $ 28,863     $ -     $ 59,295  
Equipment
    3,550       565       21       4,136  
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     $ (1,460 )   $ 11,124  

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.

In July 2014, the U.S. Department of Labor (DOL) published in the Federal Register their final retroactive approval of our September 9, 2013 voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $9,187 at June 30, 2014. The trust is entitled to receive cumulative cash distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as contributions. We distributed $280 to the trust during the six months ended June 30, 2014. So long as we make the distributions, the terms of the preferred interest will impose 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.
 
12 
 

 
AT&T INC.
JUNE 30, 2014

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,
 
 
 
2014
   
2013
   
2014
   
2013
 
Pension cost:
 
 
   
 
   
 
   
 
 
   Service cost – benefits earned during the period
  $ 282     $ 330     $ 564     $ 660  
   Interest cost on projected benefit obligation
    662       607       1,323       1,214  
   Expected return on assets
    (851 )     (828 )     (1,700 )     (1,656 )
   Amortization of prior service credit
    (23 )     (23 )     (47 )     (46 )
   Net pension cost
  $ 70     $ 86     $ 140     $ 172  
 
                               
Postretirement cost:
                               
   Service cost – benefits earned during the period
  $ 58     $ 96     $ 116     $ 191  
   Interest cost on accumulated postretirement benefit obligation
    364       389       729       779  
   Expected return on assets
    (162 )     (178 )     (326 )     (356 )
   Amortization of prior service credit
    (362 )     (262 )     (724 )     (525 )
   Net postretirement (credit) cost
  $ (102 )   $ 45     $ (205 )   $ 89  
 
                               
   Combined net pension and postretirement (credit) cost
  $ (32 )   $ 131     $ (65 )   $ 261  

Our combined net pension and postretirement cost decreased $163 in the second quarter and $326 for the first six months of 2014. The decrease reflects higher amortization of prior service credits due to plan changes, including changes to future costs for continued retiree healthcare coverage. The decrease also reflects increasing corporate bond rates, which contributed to lower service cost and higher interest costs.

Due in part to our 2013 enhanced retirement offer and projected distribution levels, we expect that lump sum distributions from the plan during 2014 could exceed service and interest costs, resulting in settlement accounting for a portion of our pension plan. This would result in remeasurement of the plans assets and obligations, with remeasurement for each interim period thereafter.

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 $29 in the second quarter of 2014, of which $28 was interest cost, and $58 for the first six months, of which $55 was interest cost. In 2013, net supplemental retirement pension benefits cost was $28 in the second quarter, of which $26 was interest cost, and $55 for the first six months, of which $51 was interest cost.
 
13 
 

 
AT&T INC.
JUNE 30, 2014

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, 2013.

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, 2014
 
December 31, 2013
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Notes and debentures
 $ 83,548     $ 91,833     $ 74,484     $ 79,309  
Commercial paper
    150       150       20       20  
Bank borrowings
    5       5       1       1  
Investment securities
    2,708       2,708       2,450       2,450  

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, 2014

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, 2014 and December 31, 2013:

    June 30, 2014
    Level 1     Level 2     Level 3     Total  
Available-for-Sale Securities
 
 
   
 
   
 
   
 
 
   Domestic equities
  $ 1,113     $ -     $ -     $ 1,113  
   International equities
    566       -       -       566  
   Fixed income bonds
    -       949       -       949  
Asset Derivatives
                               
   Interest rate swaps
    -       203       -       203  
   Cross-currency swaps
    -       2,011       -       2,011  
Liability Derivatives
                               
   Cross-currency swaps
    -       (503 )     -       (503 )
 
                               
    December 31, 2013
     
Level 1
     
Level 2
     
Level 3
     
Total
 
Available-for-Sale Securities
                               
   Domestic equities
  $ 1,049     $ -     $ -     $ 1,049  
   International equities
    563       -       -       563  
   Fixed income bonds
    -       759       -       759  
Asset Derivatives
                               
   Interest rate swaps
    -       191       -       191  
   Cross-currency swaps
    -       1,951       -       1,951  
Liability Derivatives
                               
   Interest rate swaps
    -       (7 )     -       (7 )
   Cross-currency swaps
    -       (519 )     -       (519 )
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.

Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in “Other income (expense) – net” in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in “Other income (expense) – net” with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $90 have maturities of less than one year, $285 within one to three years, $300 within three to five years, and $274 for five or more years.

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

15 
 

 
AT&T INC.
JUNE 30, 2014

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

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

The majority of our derivatives are designated either as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).
 
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the six months ended June 30, 2014 and June 30, 2013, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
 
Cash Flow Hedging  We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling and Canadian dollar 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.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities, both for the period they are outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as “Other income (expense) – net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the six months ended June 30, 2014 and June 30, 2013, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $43 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Some of these instruments are designated as cash flow hedges while others remain nondesignated, 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, 2014 and June 30, 2013, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
 
16 
 

 
AT&T INC.
JUNE 30, 2014
 
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, 2014, we had posted collateral of $3 (a deposit asset) and held collateral of $1,755 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Moody’s Investors Service and Standard & Poor’s Rating Services and two rating levels by Fitch Ratings, before the final collateral exchange in June, we would have been required to post additional collateral of $50. At December 31, 2013, we had posted collateral of $8 (a deposit asset) and held collateral of $1,600 (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,
 
 
2014
 
2013
 
Interest rate swaps
  $ 6,350     $ 4,750  
Cross-currency swaps
    20,650       17,787  
Total
  $ 27,000     $ 22,537  

Following is the related hedged items affecting our financial position and performance:
 
 
 
 
   
 
   
 
   
 
 
Effect of Derivatives on the Consolidated Statements of Income
 
 
   
 
   
 
 
   
Three months ended
   
Six months ended
 
Fair Value Hedging Relationships   June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  
Interest rate swaps (Interest expense):                        
     Gain (Loss) on interest rate swaps
  $ 22     $ (63 )   $ 11     $ (87 )
     Gain (Loss) on long-term debt
    (22 )     63       (11 )     87  

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, 2014
   
June 30, 2013
   
June 30, 2014
   
June 30, 2013
 
Cross-currency swaps:
 
 
   
 
   
 
   
 
 
     Gain (Loss) recognized in accumulated OCI
  $ (160 )   $ 184     $ (149 )   $ 325  
 
                               
Interest rate locks:
                               
     Interest income (expense) reclassified from
        accumulated OCI into income
    (11 )     (12 )     (22 )     (23 )
 
                               
Foreign exchange contracts:
                               
     Gain (Loss) recognized in accumulated OCI
    -       2       (2 )     -  

17 
 

 
AT&T INC.
JUNE 30, 2014

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

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions
Leap  On March 13, 2014, we acquired Leap, a provider of prepaid wireless service, for fifteen dollars per outstanding share of Leap’s common stock, or $1,248 (excluding Leap’s cash on hand), plus one nontransferable contingent value right (CVR) per share. The CVR will entitle each Leap stockholder to a pro rata share of the net proceeds of the future sale of the Chicago 700 MHz A-band Federal Communications Commission (FCC) license held by Leap.

The preliminary values of assets acquired under the terms of the agreement were: $3,000 in licenses, $510 in property, plant and equipment, $520 of customer lists, $340 for trade names and $716 of goodwill. The estimated fair value of debt associated with the acquisition of Leap was $3,889, all of which was redeemed or matured by July 31, 2014.
 
Pending Acquisition
DIRECTV  On May 18, 2014, we announced an agreement to acquire DIRECTV in a stock-and-cash transaction for ninety-five dollars per share of DIRECTV’s common stock, or approximately $48,500 at the date of announcement. As of June 30, 2014, DIRECTV had approximately $17,691 in net debt. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our stock price is below $34.90 per share at closing and 1.724 AT&T shares if our stock price is above $38.58 at closing. If our stock price is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. DIRECTV is a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers.

The merger agreement must be adopted by DIRECTV’s stockholders and is subject to review by the FCC and the Department of Justice and to other closing conditions. It is also a condition that all necessary consents by certain state public utility commissions and foreign governmental entities have been obtained and are in full force and effect. We have obtained all required state regulatory consents. The transaction is expected to close within 12 months of the announcement. The agreement provides certain mutual termination rights for us and DIRECTV, including the right of either party to terminate the agreement if the merger is not consummated by May 18, 2015, subject to extension in certain cases to a date no later than November 13, 2015. Either party may also terminate the agreement if the DIRECTV stockholders' approval has not been obtained at a duly convened meeting of DIRECTV stockholders or an order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and non-appealable. In addition, we may terminate the agreement if the DIRECTV board of directors changes its recommendation of the merger in a manner adverse to AT&T prior to the DIRECTV stockholders’ approval having been obtained. The parties also have agreed that in the event that DIRECTV’s agreement for the “NFL Sunday Ticket” service is not renewed substantially on the terms discussed between the parties, the Company may elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as DIRECTV used its reasonable best efforts to obtain such renewal. Under certain circumstances relating to a competing transaction, DIRECTV may be required to pay a termination fee to us in connection with or following a termination of the agreement.

18 
 

 
AT&T INC.
JUNE 30, 2014

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

Disposition
América Móvil  In May 2014, in conjunction with the announcement of our intention to dispose of our investment in América Móvil and the resignation of our board members from the board of América Móvil, we discontinued accounting for this investment under the equity method due to our lack of significant influence. On June 30, 2014, we sold our remaining stake in América Móvil for approximately $5,566 and recorded a pre-tax gain of $1,243. At closing, we received $4,565 cash and have agreed to receive a final cash payment of approximately $1,001 within 60 days. To date we have received partial payments totaling $650.

Pending Disposition
Connecticut Wireline  In December 2013, we entered into an agreement to sell our incumbent local exchange operations in Connecticut for $2,000 in cash. The transaction was approved by the FCC on July 25, 2014 and is pending before the Connecticut Public Utilities Regulatory Authority and other state regulatory authorities. We expect the deal to close in the fourth quarter of 2014, subject to customary closing conditions.

We applied held-for-sale treatment to the assets and liabilities of the Connecticut operations, and, accordingly, included the assets in “Other current assets,” and the related liabilities in “Accounts payable and accrued liabilities,” on our consolidated balance sheets. However, the business does not qualify as discontinued operations as we expect significant continuing direct cash flows related to the disposed operations. Assets and liabilities of the Connecticut operations included the following:

 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
Assets held for sale:
 
 
   
 
 
Current assets
  $ 122     $ 155  
Property, plant and equipment - net
    1,388       1,289  
Goodwill
    799       799  
Other assets
    18       17  
Total assets
  $ 2,327     $ 2,260  
 
               
Liabilities related to assets held for sale:
               
Current liabilities
  $ 125     $ 128  
Noncurrent liabilities
    478       480  
Total liabilities
  $ 603     $ 608  

19 
 

 
AT&T INC.
JUNE 30, 2014

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

NOTE 8. SALE OF EQUIPMENT INSTALLMENT RECEIVABLES
 
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 24 months, with the right to trade in the original equipment for a new device and have the remaining unpaid balance satisfied. As of June 30, 2014, gross equipment installment receivables of $2,427 were included on our consolidated balance sheets.
 
On June 27, 2014, we entered into uncommitted agreements pertaining to the sale of equipment installment receivables and related security with Citibank, N.A. and various other relationship banks as purchasers (collectively, the Purchasers) with a funding amount not expected to exceed $2,000 at any given time. Under the agreement, we may transfer the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables. Under the terms of the arrangement, we continue to bill and collect on behalf of our customers for the receivables sold.
 
On June 27, 2014, we sold to the Purchasers equipment installment receivables totaling $1,637 (or $1,391 net of allowance, imputed interest and trade-in right guarantees) and received cash proceeds of $819 and will collect the remaining balance over the remaining term of the equipment installment contracts. We have recorded a deferred purchase price of $565 that assumes customers elect to trade-in their device and agree to a new contract with AT&T; however, if customers choose not to trade-in, we expect to receive the remaining installments. The deferred purchase price was recorded at estimated fair value, which was based on remaining installment payments expected to be collected, adjusted by the expected timing and value of the device trade-ins. The value of the device trade-ins considers estimated prices offered to us by independent, third parties that contemplate changes in value after the launch of a device. Our maximum exposure to loss as a result of selling these is limited to the amount of our deferred purchase price at any point in time.
 
This transaction did not have a material impact in our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheet. We will reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.
 

20 
 

 
AT&T INC.
JUNE 30, 2014
 
 
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, 2013. 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 2014 and 2013 are summarized as follows:

 
 
Second Quarter
   
Six-Month Period
 
 
 
2014
   
2013
   
Percent
Change
   
2014
   
2013
   
Percent
Change
 
 
Operating Revenues
  $ 32,575     $ 32,075       1.6   %   $ 65,051     $ 63,431       2.6   %
Operating expenses
                                               
   Cost of services and sales
    14,212       13,270       7.1       27,533       25,824       6.6  
   Selling, general and administrative
    8,197       8,121       0.9       16,457       16,454       -  
   Depreciation and amortization
    4,550       4,571       (0.5 )     9,167       9,100       0.7  
Total Operating Expenses
    26,959       25,962       3.8       53,157       51,378       3.5  
Operating Income