UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One) ☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

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 every Interactive Data File required to be submitted 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 such files).

                                                                                                                                                                 Yes [X]   No [  ]

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

Large accelerated filer	[X]	Accelerated filer	[   ]
Non-accelerated filer	[   ]	Smaller reporting company	[   ]
		Emerging growth company	[   ]

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

                                                                                                                                                                              Yes [   ]   No [   ]

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

                                                                                                                                                                              Yes [   ]   No [X]

Securities registered pursuant to Section 12(b) of the Act

		Name of each exchange
Title of each class	Trading Symbol(s)	on which registered
Common Shares (Par Value $1.00 Per Share)	T	New York Stock Exchange
Floating Rate AT&T Inc.	T 19B	New York Stock Exchange
Global Notes due June 4, 2019
Floating Rate AT&T Inc.	T 20C	New York Stock Exchange
Global Notes due August 3, 2020
1.875% AT&T Inc.	T 20	New York Stock Exchange
Global Notes due December 4, 2020

2.65% AT&T Inc.	T 21B	New York Stock Exchange
Global Notes due December 17, 2021
1.45% AT&T Inc.	T 22B	New York Stock Exchange
Global Notes due June 1, 2022
2.50% AT&T Inc.	T 23	New York Stock Exchange
Global Notes due March 15, 2023
Floating Rate AT&T Inc.	T23 D	New York Stock Exchange
Global Notes due September 5, 2023
1.05% AT&T Inc.	T 23E	New York Stock Exchange
Global Notes due September 5, 2023
1.30% AT&T Inc.	T 23A	New York Stock Exchange
Global Notes due September 5, 2023
2.75% AT&T Inc.	T 23C	New York Stock Exchange
Global Notes due May 19, 2023
2.40% AT&T Inc.	T 24A	New York Stock Exchange
Global Notes due March 15, 2024
3.50% AT&T Inc.	T 25	New York Stock Exchange
Global Notes due December 17, 2025
1.80% AT&T Inc.	T 26D	New York Stock Exchange
Global Notes due September 5, 2026

		Name of each exchange
Title of each class	Trading Symbol(s)	on which registered
2.90% AT&T Inc.	T 26A	New York Stock Exchange
Global Notes due December 4, 2026
2.35% AT&T Inc.	T 29D	New York Stock Exchange
Global Notes due September 5, 2029
4.375% AT&T Inc.	T 29B	New York Stock Exchange
Global Notes due September 14, 2029
2.60% AT&T Inc.	T 29A	New York Stock Exchange
Global Notes due December 17, 2029
3.55% AT&T Inc.	T 32	New York Stock Exchange
Global Notes due December 17, 2032
5.20% AT&T Inc.	T 33	New York Stock Exchange
Global Notes due November 18, 2033
3.375% AT&T Inc.	T 34	New York Stock Exchange
Global Notes due March 15, 2034
2.45% AT&T Inc.	T 35	New York Stock Exchange
Global Notes due March 15, 2035
3.15% AT&T Inc.	T 36A	New York Stock Exchange
Global Notes due September 4, 2036
7.00% AT&T Inc.	T 40	New York Stock Exchange
Global Notes due April 30, 2040
4.25% AT&T Inc.	T 43	New York Stock Exchange
Global Notes due June 1, 2043
4.875% AT&T Inc.	T 44	New York Stock Exchange
Global Notes due June 1, 2044

5.35% AT&T Inc.	TBB	New York Stock Exchange
Global Notes due November 1, 2066
5.625% AT&T Inc.	TBC	New York Stock Exchange
Global Notes due August 1, 2067

At April 30, 2019, there were 7,298 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
		March 31,
		2019		2018
Operating Revenues
Service	$	40,684	$	33,646
Equipment		4,143		4,392
Total operating revenues		44,827		38,038
Operating Expenses
Cost of revenues
Equipment		4,502		4,848
Broadcast, programming and operations		7,652		5,166
Other cost of revenues (exclusive of depreciation and          amortization shown separately below)		8,585		7,932
Selling, general and administrative		9,649		7,897
Depreciation and amortization		7,206		5,994
Total operating expenses		37,594		31,837
Operating Income		7,233		6,201
Other Income (Expense)
Interest expense		(2,141)		(1,771)
Equity in net income (loss) of affiliates		(7)		9
Other income (expense) – net		286		1,702
Total other income (expense)		(1,862)		(60)
Income Before Income Taxes		5,371		6,141
Income tax expense		1,023		1,382
Net Income		4,348		4,759
Less: Net Income Attributable to Noncontrolling Interest		(252)		(97)
Net Income Attributable to AT&T	$	4,096	$	4,662
Basic Earnings Per Share Attributable to AT&T	$	0.56	$	0.75
Diluted Earnings Per Share Attributable to AT&T	$	0.56	$	0.75
Weighted Average Number of Common Shares    Outstanding – Basic (in millions)		7,313		6,161
Weighted Average Number of Common Shares    Outstanding – with Dilution (in millions)		7,342		6,180
See Notes to Consolidated Financial Statements.

5

AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
	Three months ended
	March 31,
	2019		2018
Net income	$	4,348	$	4,759
Other comprehensive income (loss), net of tax:
Foreign currency:
Translation adjustment (includes $0 and $2 attributable to noncontrolling interest),            net of taxes of $49 and $175		288		108
Securities:
Net unrealized gains (losses), net of taxes of $5 and $(4)		16		(12)
Derivative instruments:
Net unrealized gains, net of taxes of $34 and $180		127		674
Reclassification adjustment included in net income, net of taxes of $2 and $3		11		12
Defined benefit postretirement plans:
Net prior service (cost) credit arising during period, net of taxes of $0 and $185		-		567
Amortization of net prior service credit included in net income, net of taxes of $(113)            and $(105)		(346)		(323)
Other comprehensive income (loss)		96		1,026
Total comprehensive income		4,444		5,785
Less: Total comprehensive income attributable to noncontrolling interest		(252)		(99)
Total Comprehensive Income Attributable to AT&T	$	4,192	$	5,686
See Notes to Consolidated Financial Statements.

6

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	March 31,		December 31,
	2019		2018
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	6,516	$	5,204
Accounts receivable - net of allowances for doubtful accounts of $905 and $907		23,863		26,472
Prepaid expenses		1,518		2,047
Other current assets		14,575		17,704
Total current assets		46,472		51,427
Noncurrent Inventories and Theatrical Film and Television Production Costs		10,270		7,713
Property, plant and equipment		332,517		330,690
Less: accumulated depreciation and amortization		(200,466)		(199,217)
Property, Plant and Equipment – Net		132,051		131,473
Goodwill		146,434		146,370
Licenses – Net		97,001		96,144
Trademarks and Trade Names – Net		24,218		24,345
Distribution Networks – Net		16,623		17,069
Other Intangible Assets – Net		24,732		26,269
Investments in and Advances to Equity Affiliates		6,230		6,245
Operating Lease Right-of-Use Assets		20,235		-
Other Assets		24,118		24,809
Total Assets	$	548,384	$	531,864
Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	11,538	$	10,255
Accounts payable and accrued liabilities		42,306		43,184
Advanced billings and customer deposits		5,956		5,948
Accrued taxes		1,130		1,179
Dividends payable		3,722		3,854
Total current liabilities		64,652		64,420
Long-Term Debt		163,942		166,250
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		59,207		57,859
Postemployment benefit obligation		19,664		19,218
Operating lease liabilities		18,253		-
Other noncurrent liabilities		27,715		30,233
Total deferred credits and other noncurrent liabilities		124,839		107,310
Stockholders’ Equity
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2019 and    December 31, 2018: issued 7,620,748,598 at March 31, 2019 and December 31, 2018)		7,621		7,621
Additional paid-in capital		125,174		125,525
Retained earnings		59,424		58,753
Treasury stock (323,523,763 at March 31, 2019 and 339,120,073
at December 31, 2018, at cost)		(11,452)		(12,059)
Accumulated other comprehensive income		4,345		4,249
Noncontrolling interest		9,839		9,795
Total stockholders’ equity		194,951		193,884
Total Liabilities and Stockholders’ Equity	$	548,384	$	531,864
See Notes to Consolidated Financial Statements.

7

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
	Three months ended
	March 31,
	2019		2018
Operating Activities
Net income	$	4,348	$	4,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,206		5,994
Amortization of television and film costs		2,497		-
Undistributed earnings from investments in equity affiliates		112		(2)
Provision for uncollectible accounts		592		438
Deferred income tax expense		1,069		1,222
Net (gain) loss from investments, net of impairments		(175)		2
Actuarial (gain) loss on pension and postretirement benefits		432		(930)
Changes in operating assets and liabilities:
Accounts receivable		1,894		(439)
Other current assets, inventories and theatrical film and television production costs		(2,510)		614
Accounts payable and other accrued liabilities		(3,686)		(1,962)
Equipment installment receivables and related sales		652		505
Deferred customer contract acquisition and fulfillment costs		(375)		(826)
Retirement benefit funding		-		(140)
Other - net		(1,004)		(288)
Total adjustments		6,704		4,188
Net Cash Provided by Operating Activities		11,052		8,947
Investing Activities
Capital expenditures:
Purchase of property and equipment		(5,121)		(5,957)
Interest during construction		(61)		(161)
Acquisitions, net of cash acquired		(117)		(234)
Dispositions		10		56
(Purchases) sales of securities, net		(1)		(116)
Advances to and investments in equity affiliates, net		(111)		(1,007)
Cash collections of deferred purchase price		-		267
Net Cash Used in Investing Activities		(5,401)		(7,152)
Financing Activities
Net change in short-term borrowings with original maturities of three months or less		(256)		-
Issuance of other short-term borrowings		296		-
Repayment of other short-term borrowings		(176)		-
Issuance of long-term debt		9,182		2,565
Repayment of long-term debt		(9,840)		(4,911)
Purchase of treasury stock		(189)		(145)
Issuance of treasury stock		167		11
Dividends paid		(3,714)		(3,070)
Other		109		2,048
Net Cash Used in Financing Activities		(4,421)		(3,502)
Net increase (decrease) in cash and cash equivalents and restricted cash		1,230		(1,707)
Cash and cash equivalents and restricted cash beginning of year		5,400		50,932
Cash and Cash Equivalents and Restricted Cash End of Period	$	6,630	$	49,225
See Notes to Consolidated Financial Statements.

8

AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
	March 31, 2019			March 31, 2018
	Shares	Amount		Shares	Amount
Common Stock
Balance at beginning of year	7,621	$	7,621	6,495	$	6,495
Issuance of stock	-		-	-		-
Balance at end of period	7,621	$	7,621	6,495	$	6,495
Additional Paid-In Capital
Balance at beginning of year		$	125,525		$	89,563
Issuance of treasury stock			(77)			(4)
Share-based payments			(274)			(155)
Balance at end of period		$	125,174		$	89,404
Retained Earnings
Balance at beginning of year		$	58,753		$	50,500
Net income attributable to AT&T ($0.56 and $0.75    per diluted share)			4,096			4,662
Dividends to stockholders ($0.51 and $0.50 per share)			(3,741)			(3,092)
Cumulative effect of accounting changes			316			2,997
Balance at end of period		$	59,424		$	55,067
Treasury Stock
Balance at beginning of year	(339)	$	(12,059)	(356)	$	(12,714)
Repurchase and acquisition of common stock	(7)		(208)	(4)		(164)
Issuance of treasury stock	22		815	12		446
Balance at end of period	(324)	$	(11,452)	(348)	$	(12,432)
Accumulated Other Comprehensive Income    Attributable to AT&T, net of tax
Balance at beginning of year		$	4,249		$	7,017
Other comprehensive income attributable to AT&T			96			1,024
Amounts reclassified to retained earnings			-			(655)
Balance at end of period		$	4,345		$	7,386
Noncontrolling Interest
Balance at beginning of year		$	9,795		$	1,146
Net income attributable to noncontrolling interest			252			97
Interest acquired by noncontrolling owners			9			-
Distributions			(246)			(124)
Translation adjustments attributable to noncontrolling    interest, net of taxes			-			2
Cumulative effect of accounting changes			29			35
Balance at end of period		$	9,839		$	1,156
Total Stockholders’ Equity at beginning of year		$	193,884		$	142,007
Total Stockholders’ Equity at end of period		$	194,951		$	147,076
See Notes to Consolidated Financial Statements.

9

AT&T INC.

MARCH 31, 2019

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 “we,” “AT&T” or the “Company.” The consolidated financial statements include the accounts of the Company and subsidiaries and affiliates which we control, including the operating results of Warner Media, LLC (formerly Time Warner Inc. and referred to as “Time Warner” or “WarnerMedia”), which was acquired on June 14, 2018 (see Note 8). AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. 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, 2018. The results for the interim periods are not necessarily indicative of those for the full year.These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items.

All significant intercompany transactions are eliminated in the consolidation process. Investments in subsidiaries and partnerships which we do not control but have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees’ other comprehensive income (OCI) items.

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 prior period amounts have been conformed to the current period’s presentation.

In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.

Adopted Accounting Standards and Other Changes

Leases  As of January 1, 2019, we adopted, with modified retrospective application, Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements (see Note 10). ASC 842 requires lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets. For income statement recognition purposes, leases are classified as either a finance or an operating lease without relying upon bright-line tests.

The key change upon adoption of the standard was balance sheet recognition, given that the recognition of lease expense on our income statement is similar to our current accounting. Using the modified retrospective transition method of adoption, we did not adjust the balance sheet for comparative periods but recorded a cumulative effect adjustment to retained earnings on January 1, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward our historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements that were not accounted for as leases. We excluded all the leases with original terms of one year or less. Additionally, we elected to not separate lease and non-lease components for certain classes of assets in arrangements where we are the lessee and for certain classes of assets where we are the lessor. Our accounting for finance leases did not change from our prior accounting for capital leases.

The adoption of ASC 842 resulted in the recognition of an operating lease liability of $22,121 and an operating right-of-use asset of the same amount. Existing prepaid and deferred rent accruals were recorded as an offset to the right-of-use asset, resulting in a net asset of $20,960. The cumulative effect of the adoption to retained earnings was an increase of $316 reflecting the reclassification of deferred gains related to sale/leaseback transactions. We do not believe the standard will materially impact our future income statements or have a notable impact on our liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements.

10

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

Deferral of Episodic Television and Film Costs  In March 2019, the FASB issued ASU No. 2019-02, “Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials” (ASU 2019-02), which we early adopted as of January 1, 2019, with prospective application. The standard eliminates certain revenue-related constraints on capitalization of inventory costs for episodic television that existed under prior guidance. In addition, the balance sheet classification requirements that existed in prior guidance for film production costs and programming inventory were eliminated. As of January 1, 2019, we reclassified $2,274 of our programming inventory costs from “Other current assets” to “Other Assets” in accordance with the guidance. This change in accounting does not materially impact our income statement.

Spectrum Licenses in MexicoDuring the first quarter of 2019, in conjunction with the renewal process of certain spectrum licenses in Mexico, we reassessed the estimated economic lives and renewal assumptions for these licenses. As a result, we have changed the life of these licenses from indefinite to finite-lived. On January 1, 2019, we began amortizing our spectrum licenses in Mexico over their average remaining economic life of 25 years. This change in accounting does not materially impact our income statement.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018, is shown in the table below:

	Three months ended
	March 31,
	2019		2018
Numerators
Numerator for basic earnings per share:
Net Income	$	4,348	$	4,759
Less: Net income attributable to noncontrolling interest		(252)		(97)
Net Income attributable to AT&T		4,096		4,662
Dilutive potential common shares:
Share-based payment		6		5
Numerator for diluted earnings per share	$	4,102	$	4,667
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding		7,313		6,161
Dilutive potential common shares:
Share-based payment (in shares)		29		19
Denominator for diluted earnings per share		7,342		6,180
Basic earnings per share attributable to AT&T	$	0.56	$	0.75
Diluted earnings per share attributable to AT&T	$	0.56	$	0.75

11

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated OCI are presented below. All amounts are net of tax and exclude noncontrolling interest.

		Foreign Currency Translation Adjustment		Net Unrealized Gains (Losses) on Securities			Net Unrealized Gains (Losses) on Derivative Instruments			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2018		$	(3,084)	$	(2)		$	818		$	6,517		$	4,249
Other comprehensive income    (loss) before reclassifications			288		16			127			-			431
Amounts reclassified    from accumulated OCI			-		-			11	1		(346)	2		(335)
Net other comprehensive    income (loss)			288		16			138			(346)			96
Balance as of March 31, 2019		$	(2,796)	$	14		$	956		$	6,171		$	4,345
		Foreign Currency Translation Adjustment		Net Unrealized Gains (Losses) on Securities			Net Unrealized Gains (Losses) on Derivative Instruments			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2017		$	(2,054)	$	660		$	1,402		$	7,009		$	7,017
Other comprehensive income    (loss) before reclassifications			106		(12)			674			567			1,335
Amounts reclassified    from accumulated OCI			-		-			12	1		(323)	2		(311)
Net other comprehensive    income (loss)			106		(12)			686			244			1,024
Amounts reclassified to    retained earnings			-		(655)	3		-			-			(655)
Balance as of March 31, 2018		$	(1,948)	$	(7)		$	2,088		$	7,253		$	7,386
1	(Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7).
2	The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the
	consolidated statements of income (see Note 6).
3	With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings.

12

AT&T INC.

MARCH 31, 2019

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 products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America, and (4) Xandr.

We also evaluate segment and business unit performance based on EBITDA and/or EBITDA margin, which is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

The Communications segment provides wireless and wireline telecom, video and broadband services to consumers located in the U.S. or in U.S. territories and businesses globally. This segment contains the following business units:

● Mobility provides nationwide wireless service and equipment.

● Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms.

● Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.

The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content in various physical and digital formats globally. Historical financial results from AT&T’s Regional Sports Networks (RSNs) and equity investments (predominantly Game Show Network and Otter Media), previously included in Entertainment Group, have been reclassified into the WarnerMedia segment and are combined with the Time Warner operations for the period subsequent to our acquisition on June 14, 2018. This segment contains the following business units:

● Turner is comprised of the historic Turner division as well as the financial results of our RSNs. This business unit primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.

● Home Box Office consists of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment.

● Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.

The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:

● Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean.

● Mexico provides wireless service and equipment to customers in Mexico.

The Xandr segment provides advertising services and includes AppNexus, an advertising technology company we acquired in August 2018. Xander services utilize data insights to develop and deliver targeted advertising across video and digital platforms. Certain revenues in this segment are also reported by the Communications segment and are eliminated upon consolidation.

13

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

Corporate and Other reconcile our segment results to consolidated operating income and income before income taxes, and include:

● Corporate, which consists of: (1) businesses no longer integral to our operations or which we no longer actively market, (2) corporate support functions, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense)-net and (5) the recharacterization of $150 of programming intangible asset amortization, for released programming acquired in the Time Warner acquisition, which we continue to report within WarnerMedia segment operating expense, to consolidated amortization expense.

● Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, including amortization of intangible assets.

● Certain significant items includes (1) employee separation charges associated with voluntary and/or strategic offers, (2) losses resulting from abandonment or impairment of assets and (3) other items for which the segments are not being evaluated.

● Eliminations and consolidations, which (1) removes transactions involving dealings between our segments, including content licensing between WarnerMedia and Communications, and (2) includes adjustments for our reporting of the advertising business.

Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.

For the three months ended March 31, 2019
		Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Communications
Mobility	$	17,567	$	10,181	$	7,386	$	2,035	$	5,351	$	-	$	5,351
Entertainment Group		11,328		8,527		2,801		1,323		1,478		-		1,478
Business Wireline		6,498		4,040		2,458		1,235		1,223		-		1,223
Total Communications		35,393		22,748		12,645		4,593		8,052		-		8,052
WarnerMedia
Turner		3,443		2,136		1,307		60		1,247		25		1,272
Home Box Office		1,510		921		589		22		567		15		582
Warner Bros.		3,518		2,919		599		52		547		6		553
Other		(92)		17		(109)		9		(118)		21		(97)
Total WarnerMedia		8,379		5,993		2,386		143		2,243		67		2,310
Latin America
Vrio		1,067		866		201		169		32		-		32
Mexico		651		725		(74)		131		(205)		-		(205)
Total Latin America		1,718		1,591		127		300		(173)		-		(173)
Xandr		426		160		266		13		253		-		253
Segment Total		45,916		30,492		15,424		5,049		10,375	$	67	$	10,442
Corporate and Other
Corporate		209		513		(304)		169		(473)
Acquisition-related items		(42)		73		(115)		1,988		(2,103)
Certain significant items		-		248		(248)		-		(248)
Eliminations and consolidations		(1,256)		(938)		(318)		-		(318)
AT&T Inc.	$	44,827	$	30,388	$	14,439	$	7,206	$	7,233

14

AT&T INC. MARCH 31, 2019 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued Dollars in millions except per share amounts For the three months ended March 31, 2018
		Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Communications
Mobility	$	17,355	$	10,102	$	7,253	$	2,095	$	5,158	$	-	$	5,158
Entertainment Group		11,431		8,811		2,620		1,310		1,310		(1)		1,309
Business Wireline		6,747		4,016		2,731		1,170		1,561		(1)		1,560
Total Communications		35,533		22,929		12,604		4,575		8,029		(2)		8,027
WarnerMedia
Turner		112		74		38		1		37		27		64
Home Box Office		-		-		-		-		-		-		-
Warner Bros.		-		-		-		-		-		-		-
Other		-		8		(8)		-		(8)		(17)		(25)
Total WarnerMedia		112		82		30		1		29		10		39
Latin America
Vrio		1,354		1,001		353		205		148		-		148
Mexico		671		803		(132)		127		(259)		-		(259)
Total Latin America		2,025		1,804		221		332		(111)		-		(111)
Xandr		337		50		287		1		286		-		286
Segment Total		38,007		24,865		13,142		4,909		8,233	$	8	$	8,241
Corporate and Other
Corporate		333		735		(402)		23		(425)
Acquisition-related items		-		67		(67)		1,062		(1,129)
Certain significant items		-		180		(180)		-		(180)
Eliminations and consolidations		(302)		(4)		(298)		-		(298)
AT&T Inc.	$	38,038	$	25,843	$	12,195	$	5,994	$	6,201

15

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

The following table is a reconciliation of Segment Contributions to “Income Before Income Taxes” reported on our consolidated statements of income.

		Three months ended March 31,
		2019		2018
Communications	$	8,052	$	8,027
WarnerMedia		2,310		39
Latin America		(173)		(111)
Xandr		253		286
Segment Contribution		10,442		8,241
Reconciling Items:
Corporate and Other		(473)		(425)
Merger and integration items		(115)		(67)
Amortization of intangibles acquired		(1,988)		(1,062)
Employee separation charges		(248)		(51)
Natural disaster items		-		(104)
Foreign currency devaluation		-		(25)
Segment equity in net income of affiliates		(67)		(8)
Eliminations and consolidations		(318)		(298)
AT&T Operating Income		7,233		6,201
Interest Expense		2,141		1,771
Equity in net income (loss) of affiliates		(7)		9
Other income (expense) - net		286		1,702
Income Before Income Taxes	$	5,371	$	6,141

The following table presents intersegment revenues by segment.

Intersegment Reconciliation
	Three months ended March 31,
	2019		2018
Intersegment revenues
Communications	$	-	$	-
WarnerMedia		858		31
Latin America		-		-
Xandr		-		-
Total Intersegment Revenues		858		31
Consolidations		398		271
Eliminations and consolidations	$	1,256	$	302

16

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

NOTE 5. REVENUE RECOGNITION

Revenue Categories
The following tables set forth reported revenue by category:
For the three months ended March 31, 2019
	Service Revenues
		Wireless		Advanced Data		Legacy Voice & Data		Subscription		Content		Advertising		Other		Equipment		Total
Communications
Mobility	$	13,725	$	-	$	-	$	-	$	-	$	67	$	-	$	3,775	$	17,567
Entertainment Group		-		2,070		683		7,724		-		350		501		-		11,328
Business Wireline		-		3,186		2,404		-		-		-		749		159		6,498
WarnerMedia
Turner		-		-		-		1,965		135		1,261		82		-		3,443
Home Box Office		-		-		-		1,334		173		-		3		-		1,510
Warner Bros.		-		-		-		21		3,332		10		155		-		3,518
Eliminations and Other		-		-		-		49		(152)		8		3		-		(92)
Latin America
Vrio		-		-		-		1,067		-		-		-		-		1,067
Mexico		442		-		-		-		-		-		-		209		651
Xandr		-		-		-		-		-		426		-		-		426
Corporate and Other		-		-		-		-		-		-		167		-		167
Eliminations and    consolidations		-		-		-		-		(837)		(350)		(69)		-		(1,256)
Total Operating Revenues	$	14,167	$	5,256	$	3,087	$	12,160	$	2,651	$	1,772	$	1,591	$	4,143	$	44,827

For the three months ended March 31, 2018
	Service Revenues
		Wireless		Advanced Data		Legacy Voice & Data		Subscription		Content		Advertising		Other		Equipment		Total
Communications
Mobility	$	13,362	$	-	$	-	$	-	$	-	$	41	$	-	$	3,952	$	17,355
Entertainment Group		-		1,878		806		7,891		-		334		519		3		11,431
Business Wireline		-		3,043		2,865		-		-		-		669		170		6,747
WarnerMedia
Turner		-		-		-		98		-		14		-		-		112
Home Box Office		-		-		-		-		-		-		-		-		-
Warner Bros.		-		-		-		-		-		-		-		-		-
Eliminations and Other		-		-		-		-		-		-		-		-		-
Latin America
Vrio		-		-		-		1,354		-		-		-		-		1,354
Mexico		404		-		-		-		-		-		-		267		671
Xandr		-		-		-		-		-		337		-		-		337
Corporate and Other		-		-		-		-		-		-		333		-		333
Eliminations and    consolidations		-		-		-		-		-		(334)		32		-		(302)
Total Operating Revenues	$	13,766	$	4,921	$	3,671	$	9,343	$	-	$	392	$	1,553	$	4,392	$	38,038

17

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

Deferred Customer Contract Acquisition and Fulfillment Costs

Costs to acquire customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from two to five years. Costs to fulfill customer contracts are deferred and amortized over periods ranging generally from four to five years, reflecting the estimated economic lives of the respective customer relationships, subject to an assessment of the recoverability of such costs. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.

Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $4,297 and $11,592 as of March 31, 2019, respectively, of which $2,143 and $4,214 were included in Other current assets on our consolidated balance sheets. For the three months ended March 31, 2019, we amortized $547 and $1,098 of these costs, respectively.

Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $3,974 and $11,540 as of December 31, 2018, respectively, of which $1,901 and $4,090 were included in Other current assets on our consolidated balance sheets. For the three months ended March 31, 2018, we amortized $263 and $1,047 of these costs, respectively.

Contract Assets and Liabilities

A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration (i.e., we must perform additional services or satisfy another performance obligation in order to bill and receive consideration). The contract asset will decrease as services are provided and billed. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Reductions in the contract liability will be recorded as we satisfy the performance obligations.

The following table presents contract assets and liabilities at March 31, 2019 and December 31, 2018:

		March 31,		December 31,
		2019		2018
Contract asset	$	2,198	$	1,896
Contract liability		6,899		6,856

Our beginning of period contract liability recorded as customer contract revenue during 2019 was $4,379.

Our consolidated balance sheets at March 31, 2019 and December 31, 2018 included approximately $1,462 and $1,244, respectively, for the current portion of our contract asset in “Other current assets” and $5,715 and $5,752, respectively, for the current portion of our contract liability in “Advanced billings and customer deposits.”

Remaining Performance Obligations

Remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. In determining the transaction price allocated, we do not include non-recurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year, which are primarily prepaid wireless, video and residential internet agreements.

Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $39,627 of which we expect to recognize approximately 80% by the end of 2020, with the balance recognized thereafter.

18

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

NOTE 6. PENSION AND POSTRETIREMENT BENEFITS

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

During the quarter, for certain management participants in our pension plan who terminated employment before April 1, 2019, we offered the option of more favorable 2018 interest rates and mortality basis for determining lump-sum distributions. For the quarter ended March 31, 2019 we recorded special termination benefits of $93 associated with this offer in “Other income (expense) – net.” During the first quarter, we also committed to a plan to offer certain terminated vested pension plan participants the opportunity to receive their benefit in a lump-sum amount.

We recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. We anticipate total distributions from the pension plan will exceed the threshold of service and interest costs for 2019, requiring us to follow settlement accounting. We have remeasured our pension benefit obligations at March 31, 2019, and will remeasure our pension benefit obligation at each quarter-end of 2019 as we expect settlements to occur during each quarter.

As part of our first-quarter 2019 remeasurement, we decreased the weighted-average discount rate used to measure our pension benefit obligation from 4.50% to 4.10%. The discount rate in effect for determining pension service and interest costs after remeasurement is 4.30% and 3.70%, respectively. The remeasurement reflects an actual return on plan assets of 5.80% (quarterly rate) relative to our expected long-term rate of 7.00% (annual rate).

The following table details pension and postretirement benefit costs included in the accompanying consolidated statements of income. The service cost component of net periodic pension cost (benefit) is recorded in operating expenses in the consolidated statements of income while the remaining components are recorded in “Other income (expense) – net.”

	Three months ended
	March 31,
	2019		2018
Pension cost:
Service cost – benefits earned during the period	$	240	$	291
Interest cost on projected benefit obligation		549		487
Expected return on assets		(851)		(760)
Amortization of prior service credit		(33)		(30)
Actuarial (gain) loss		432		-
Net pension (credit) cost	$	337	$	(12)
Postretirement cost:
Service cost – benefits earned during the period	$	18	$	29
Interest cost on accumulated postretirement benefit obligation		186		191
Expected return on assets		(56)		(77)
Amortization of prior service credit		(426)		(397)
Actuarial (gain) loss		-		(930)
Net postretirement (credit) cost	$	(278)	$	(1,184)
Combined net pension and postretirement (credit) cost	$	59	$	(1,196)

19

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended 2019 and 2018, net supplemental pension benefits costs not included in the table above were $25 and $21.

NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.

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. Our valuation techniques 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, 2018.

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:

		March 31, 2019				December 31, 2018
		Carrying		Fair		Carrying		Fair
		Amount		Value		Amount		Value
Notes and debentures1		$	170,532	$	179,576	$	171,529	$	172,287
Commercial paper			2,957		2,957		3,048		3,048
Bank borrowings			4		4		4		4
Investment securities2			3,606		3,606		3,409		3,409
1	Includes credit agreement borrowings.
2	Excludes investments accounted for under the equity method.

The carrying amount 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.

20

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

Following is the fair value leveling for investment securities that are measured at fair value and derivatives as of March 31, 2019 and December 31, 2018. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.

	March 31, 2019
	Level 1		Level 2		Level 3		Total
Equity Securities
Domestic equities	$	1,092	$	-	$	-	$	1,092
International equities		263		-		-		263
Fixed income equities		208		-		-		208
Available-for-Sale Debt Securities		-		989		-		989
Asset Derivatives
Interest rate swaps		-		2		-		2
Cross-currency swaps		-		427		-		427
Foreign exchange contracts		-		87		-		87
Liability Derivatives
Interest rate swaps		-		(13)		-		(13)
Cross-currency swaps		-		(2,697)		-		(2,697)
Foreign exchange contracts		-		(6)		-		(6)

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Equity Securities
Domestic equities	$	1,061	$	-	$	-	$	1,061
International equities		256		-		-		256
Fixed income equities		172		-		-		172
Available-for-Sale Debt Securities		-		870		-		870
Asset Derivatives
Cross-currency swaps		-		472		-		472
Foreign exchange contracts		-		87		-		87
Liability Derivatives
Interest rate swaps		-		(39)		-		(39)
Cross-currency swaps		-		(2,563)		-		(2,563)
Foreign exchange contracts		-		(2)		-		(2)

Investment Securities

Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities are estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

21

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

The components comprising total gains and losses on equity securities are as follows:

	Three months ended
	March 31,
	2019		2018
Total gains (losses) recognized on equity securities	$	160	$	(13)
Gains (Losses) recognized on equity securities sold		86		52
Unrealized gains (losses) recognized on equity securities held at end of period		74		(65)

At March 31, 2019, available-for-sale debt securities totaling $989 have maturities as follows - less than one year: $46; one to three years: $178; three to five years: $98; for five or more years: $667.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in “Other current assets” and our investment securities are recorded in “Other Assets” on the consolidated balance sheets.

Derivative Financial Instruments

We enter into derivative transactions 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.

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.

We also designate some of our foreign exchange contracts as fair value hedges. The purpose of these contracts is to hedge currency risk associated with foreign-currency-denominated operating assets and liabilities.

Accrued and realized gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged. Unrealized gains on fair value hedges are recorded at fair market value as assets, and unrealized losses are recorded at fair market value as liabilities. Changes in the fair value of derivative instruments designated as fair value hedges are offset against the change in fair value of the hedged assets or liabilities through earnings. In the three months ended March 31, 2019 and 2018, no ineffectiveness was measured on 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 foreign-denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated interest rate to a fixed U.S. dollar denominated interest rate.

We also designate some of our foreign exchange contracts as cash flow hedges. The purpose of these contracts is to hedge currency risk associated with variability in anticipated foreign-currency-denominated cash flows, such as unremitted or forecasted royalty and license fees owed to WarnerMedia’s domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency.

22

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into the consolidated statements of income 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 cash flow hedges each quarter. In the three months ended March 31, 2019 and 2018, no ineffectiveness was measured on 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 $63 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

Net Investment Hedging  We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.

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 March 31, 2019, we had posted collateral of $334 (a deposit asset) and held collateral of $166 (a receipt liability). Under the agreements, if AT&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to post additional collateral of $175. If AT&T’s credit rating had been downgraded four ratings levels by Fitch Ratings, two levels by S&P, and two levels by Moody’s, we would have been required to post additional collateral of $1,360. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- by S&P, we would have been required to post additional collateral of $258. At December 31, 2018, we had posted collateral of $1,675 (a deposit asset) and held collateral of $103 (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) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

	March 31,		December 31,
	2019		2018
Interest rate swaps	$	1,633	$	3,483
Cross-currency swaps		42,192		42,192
Foreign exchange contracts		1,238		2,094
Total	$	45,063	$	47,769

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

Effect of Derivatives on the Consolidated Statements of Income
	Three months ended
	March 31,
Fair Value Hedging Relationships	2019		2018
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps	$	24	$	(53)
Gain (Loss) on long-term debt		(24)		53

23

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were offset against interest expense.

	Three months ended
	March 31,
Cash Flow Hedging Relationships	2019		2018
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	168	$	854
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI		(7)		-
Other income (expense) - net reclassified from         accumulated OCI into income		3		-
Interest rate locks:
Interest income (expense) reclassified from          accumulated OCI into income		(16)		(15)

NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

Time Warner  On June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. The deal combines Time Warner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world's largest pay-TV subscriber bases and scale in TV, mobile and broadband distribution. We expect that the transaction will advance our direct-to-consumer efforts and provide us with the ability to develop innovative new offerings.

In July 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. On February 26, 2019, the D.C. Circuit unanimously affirmed our win. AT&T’s representations to the DOJ regarding its operation of Turner expired on February 28, 2019. The DOJ did not ask the D.C. Circuit to rehear its appeal before the applicable April 12, 2019 deadline, and it stated publicly on February 26, 2018 that “[t]he department has no plans to seek further review” of the D.C. Circuit’s decision. The DOJ’s deadline to file a petition for writ of certiorari with the United States Supreme Court is May 28, 2019.

We paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,358, excluding Time Warner’s net debt at acquisition. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement,” other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content, in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.

24

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

The following table summarizes the preliminary estimated fair values of the Time Warner assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date:

Assets acquired
Cash	$	1,889
Accounts receivable		9,052
All other current assets		2,913
Noncurrent inventory and theatrical film and television production costs		5,591
Property, plant and equipment		4,785
Intangible assets subject to amortization
Distribution network		18,040
Released television and film content		10,806
Trademarks and trade names		18,081
Other		10,300
Investments and other assets		9,449
Goodwill		38,569
Total assets acquired		129,475
Liabilities assumed
Current liabilities, excluding current portion of long-term debt		8,303
Debt maturing within one year		4,471
Long-term debt		18,394
Other noncurrent liabilities		18,948
Total liabilities assumed		50,116
Net assets acquired		79,359
Noncontrolling interest		(1)
Aggregate value of consideration paid	$	79,358

These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecorded pre-acquisition contingencies where the related asset or liability, or an impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units within the WarnerMedia segment any changes in goodwill should be recorded.

25

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

NOTE 9. SALES OF RECEIVABLES

As described further below, we have agreements with various third-party financial institutions pertaining to the sale of certain types of our accounts receivable. The most significant of these programs are discussed in detail below and generally consist of (1) receivables arising from equipment installment plans, which are sold for cash and a deferred purchase price, and (2) receivables related to licensed programming and advertising. Under these programs, we transfer receivables to purchasers in exchange for cash and additional consideration upon settlement of the receivables, where applicable. Under the terms of our agreements for these programs, we continue to bill and collect the payments from our customers on behalf of the financial institutions.

As of March 31, 2019 and December 31, 2018, gross receivables included on our consolidated balance sheets, related to these programs, are $6,611 and $5,994, respectively, of which $3,072 and $3,457 are notes receivable that are included in “Accounts receivable - net.”

The outstanding portfolio of receivables derecognized from our consolidated balance sheets, but which we continue to service, was $10,863 and $9,065 at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $8,387.

The following table sets forth a summary of receivables sold during the three months ended March 31, 2019 and 2018:

		Three months ended
		March 31,
		2019		2018
Gross receivables sold		$	4,101	$	3,010
Net receivables sold1			3,909		2,795
Cash proceeds received			3,675		2,395
Deferred purchase price recorded			309		519
Guarantee obligation recorded			138		123
1	Receivables net of allowance, imputed interest and trade-in right guarantees.

The sales of receivables did not have a material impact on our consolidated statements of income or to “Total Assets” reported on our consolidated balance sheets. We reflect cash receipts on sold receivables as cash flows from operations in our consolidated statements of cash flows. Cash receipts on the deferred purchase price are classified as cash flows from investing activities.

Equipment Installment Receivables

We offer our customers the option to purchase certain wireless devices in installments over a specified period of time and, in many cases, once certain conditions are met, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled.

We maintain a program, under which we transfer a portion of these receivables in exchange for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. In the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the financial institutions equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation for this estimated amount at the time the receivables are transferred.

The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of device trade-ins. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).

26

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

The following table shows the previously transferred equipment installment receivables, which we repurchased in exchange for the associated deferred purchase price and cash during the three months ended March 31, 2019 and 2018:

		Three months ended
		March 31,
		2019		2018
Fair value of repurchased receivables		$	423	$	-
Carrying value of deferred purchase price			407		-
Gain (loss) on repurchases1		$	16	$	-
1	These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income.

At March 31, 2019 and December 31, 2018, our deferred purchase price receivable was $2,240 and $2,370, respectively, of which $1,418 and $1,448 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at March 31, 2019 and December 31, 2018 was $430 and $439, respectively, of which $160 and $196 are included in “Accounts payable and accrued liabilities” on our consolidated balance sheets, with the remainder in “Other noncurrent liabilities.” Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.

Programming and Advertising Receivables

In March 2019, we entered into a revolving agreement to transfer certain receivables from our WarnerMedia business to various financial institutions in exchange for cash. These receivables originate from the sale of licensed programming and advertising. Upon sale, we reclassify the allowance against these receivables to a guarantee liability. We have fully guaranteed the repayment of the transferred receivables and have also pledged, as collateral under this agreement, additional receivables in the amount of $1,402. Our maximum exposure to loss related to selling these receivables is limited to the outstanding $1,400 of sold receivables.

NOTE 10. LEASES

We have operating and finance leases for certain facilities and equipment used in operations. Our leases have remaining lease terms of 1 year to 13 years. Some of our real estate operating leases contain renewal options that may be exercised, and some of our leases include options to terminate the leases within one year.

We have recognized a right-of-use asset for both operating and finance leases, and an operating lease liability that represents the present value of our obligation to make payments over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use the unsecured borrowing rate and risk-adjust that rate to approximate a collateralized rate in the currency of the lease, which will be updated on a quarterly basis for measurement of new lease liabilities.

The components of lease expense were as follows:

	Three months ended
	March 31, 2019
Operating lease cost	$	1,242
Finance lease cost:
Amortization of right-of-use assets	$	66
Interest on lease obligation		42
Total finance lease cost	$	108

27

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

Supplemental balance sheet information related to leases is as follows:

At March 31, 2019
Operating Leases
Operating lease right-of-use assets	$	20,235
Accounts payable and accrued liabilities	$	3,072
Operating lease obligation		18,253
Total operating lease obligation	$	21,325
Finance Leases
Property, plant and equipment, at cost	$	3,377
Accumulated depreciation and amortization		(1,173)
Property, plant and equipment, net	$	2,204
Current portion of long-term debt	$	135
Long-term debt		1,852
Total finance lease obligation	$	1,987
Weighted-Average Remaining Lease Term
Operating leases		7.9	yrs
Finance leases		10.9	yrs
Weighted-Average Discount Rate
Operating leases		4.7	%
Finance leases		8.6	%

Future minimum maturities of lease liabilities are as follows:

At March 31, 2019	Operating		Finance
	Leases		Leases
Remainder of 2019	$	3,201	$	246
2020		3,981		290
2021		3,533		279
2022		3,231		263
2023		2,893		254
Thereafter		9,633		1,828
Total lease payments		26,472		3,160
Less imputed interest		(5,147)		(1,173)
Total	$	21,325	$	1,987

28

AT&T INC.

MARCH 31, 2019

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued

Dollars in millions except per share amounts

NOTE 11. ADDITIONAL FINANCIAL INFORMATION

Cash and Cash Flows

We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments.

	March 31,				December 31,
Cash and Cash Equivalents and Restricted Cash		2019		2018		2018		2017
Cash and cash equivalents	$	6,516	$	48,872	$	5,204	$	50,498
Restricted cash in Other current assets		20		8		61		6
Restricted cash in Other Assets		94		345		135		428
Cash and cash equivalents and restricted cash	$	6,630	$	49,225	$	5,400	$	50,932

	Three months ended
	March 31,
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:	2019		2018
Operating cash flows from operating leases	$	1,332	$	1,207

	Three months ended
	March 31,
Cash Paid (Received) During the Period for:		2019		2018
Interest	$	2,507	$	2,408
Income taxes, net of refunds		(379)		(1,089)

29

AT&T INC.

MARCH 31, 2019

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

Dollars, subscribers and connections in millions, except per share and per subscriber amounts

OVERVIEW

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 worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). We completed the acquisition of Time Warner Inc. (Time Warner) on June 14, 2018, and have included its results after that date. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from Time Warner prior to the acquisition are excluded.

We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our segment results presented in Note 4 and discussed below follow our internal management reporting. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. Percentage increases and decreases that are not considered meaningful are denoted with a dash.

	First Quarter
					Percent
	2019		2018		Change
Operating Revenues
Communications	$	35,393	$	35,533	(0.4)	%
WarnerMedia		8,379		112	-
Latin America		1,718		2,025	(15.2)
Xandr		426		337	26.4
Corporate and other		167		333	(49.8)
Eliminations and consolidation		(1,256)		(302)	-
AT&T Operating Revenues		44,827		38,038	17.8
Operating Contribution
Communications		8,052