Edgar Filing: AT&T INC.

q3_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 September 30, 2012

		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 October 31, 2012 there were 5,680 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				Nine months ended
		September 30,				September 30,
		2012		2011		2012		2011
Operating Revenues
Wireless service	$	14,906	$	14,261	$	44,237	$	42,379
Data		7,977		7,459		23,695		21,979
Voice		5,565		6,242		17,155		19,132
Directory		-		803		1,049		2,512
Other		3,011		2,713		8,720		8,218
Total operating revenues		31,459		31,478		94,856		94,220
Operating Expenses
Cost of services and sales (exclusive of depreciation
and amortization shown separately below)		12,718		12,656		38,000		38,225
Selling, general and administrative		8,192		7,969		24,330		23,983
Depreciation and amortization		4,512		4,618		13,571		13,804
Total operating expenses		25,422		25,243		75,901		76,012
Operating Income		6,037		6,235		18,955		18,208
Other Income (Expense)
Interest expense		(824)		(889)		(2,624)		(2,583)
Equity in net income of affiliates		182		193		537		649
Other income (expense) – net		47		46		122		132
Total other income (expense)		(595)		(650)		(1,965)		(1,802)
Income Before Income Taxes		5,442		5,585		16,990		16,406
Income tax expense		1,741		1,899		5,672		5,594
Net Income		3,701		3,686		11,318		10,812
Less: Net Income Attributable to Noncontrolling Interest		(66)		(63)		(197)		(190)
Net Income Attributable to AT&T	$	3,635	$	3,623	$	11,121	$	10,622
Basic Earnings Per Share Attributable to AT&T	$	0.63	$	0.61	$	1.90	$	1.79
Diluted Earnings Per Share Attributable to AT&T	$	0.63	$	0.61	$	1.90	$	1.79
Weighted Average Number of Common Shares
Outstanding – Basic (in millions)		5,771		5,936		5,848		5,931
Weighted Average Number of Common Shares
Outstanding – with Dilution (in millions)		5,792		5,954		5,869		5,950
Dividends Declared Per Common Share	$	0.44	$	0.43	$	1.32	$	1.29
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
Net income	$	3,701	$	3,686	$	11,318	$	10,812
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of taxes of $33, $(280), $109 and $(157)		57		(519)		199		(291)
Net unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses), net of taxes of $31, $(88), $58 and $(59)		59		(165)		108		(110)
Reclassification adjustment realized in net income, net of taxes of $(28), $(2), $(34) and $(23)		(51)		(2)		(63)		(43)
Net unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses), net of taxes of $126, $(135), $68 and $(143)		232		(249)		125		(263)
Reclassification adjustment included in net income, net of taxes of $4, $1, $11 and $4		8		2		21		7
Defined benefit postretirement plans:
Net actuarial loss from equity method investees arising during period, net of taxes of $0, $0, $(29) and $0		-		-		(53)		-
Amortization of net prior service credit included in net income, net of taxes of $(84), $(69), $(255) and $(206)		(137)		(112)		(411)		(336)
Other		(1)		2		-		1
Other comprehensive income (loss)		167		(1,043)		(74)		(1,035)
Total comprehensive income		3,868		2,643		11,244		9,777
Less: Total comprehensive income attributable to noncontrolling interest		(66)		(63)		(197)		(190)
Total Comprehensive Income Attributable to AT&T	$	3,802	$	2,580	$	11,047	$	9,587
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	September 30,		December 31,
	2012		2011
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	2,217	$	3,185
Accounts receivable - net of allowances for doubtful accounts of $606 and $878		12,398		13,606
Prepaid expenses		1,337		1,155
Deferred income taxes		1,312		1,470
Other current assets		1,694		3,611
Total current assets		18,958		23,027
Property, plant and equipment		267,639		260,279
Less: accumulated depreciation and amortization		(159,422)		(153,192)
Property, Plant and Equipment – Net		108,217		107,087
Goodwill		69,762		70,842
Licenses		52,082		51,374
Customer Lists and Relationships – Net		1,622		2,757
Other Intangible Assets – Net		5,038		5,212
Investments in and Advances to Equity Affiliates		4,563		3,718
Other Assets		6,607		6,327
Total Assets	$	266,849	$	270,344

Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	3,433	$	3,453
Accounts payable and accrued liabilities		18,936		19,858
Advanced billing and customer deposits		3,709		3,872
Accrued taxes		2,209		1,003
Dividends payable		2,511		2,608
Total current liabilities		30,798		30,794
Long-Term Debt		60,314		61,300
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		29,092		25,748
Postemployment benefit obligation		33,842		34,011
Other noncurrent liabilities		11,529		12,694
Total deferred credits and other noncurrent liabilities		74,463		72,453

Stockholders’ Equity
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2012 and
December 31, 2011: issued 6,495,231,088 at September 30, 2012 and December 31, 2011)		6,495		6,495
Additional paid-in capital		90,982		91,156
Retained earnings		28,907		25,453
Treasury stock (788,169,469 at September 30, 2012 and 568,719,202
at December 31, 2011, at cost)		(28,533)		(20,750)
Accumulated other comprehensive income		3,106		3,180
Noncontrolling interest		317		263
Total stockholders’ equity		101,274		105,797
Total Liabilities and Stockholders’ Equity	$	266,849	$	270,344
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
	Nine months ended
	September 30,
	2012		2011
Operating Activities
Net income	$	11,318	$	10,812
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,571		13,804
Undistributed earnings from investments in equity affiliates		(483)		(539)
Provision for uncollectible accounts		835		805
Deferred income tax expense and noncurrent unrecognized tax benefits		3,441		4,942
Net (gain) loss from sale of investments, net of impairments		(27)		(57)
Changes in operating assets and liabilities:
Accounts receivable		(450)		(573)
Other current assets		1,459		1,342
Accounts payable and accrued liabilities		387		(2,533)
Other - net		(1,107)		(853)
Total adjustments		17,626		16,338
Net Cash Provided by Operating Activities		28,944		27,150

Investing Activities
Construction and capital expenditures:
Capital expenditures		(13,619)		(14,625)
Interest during construction		(197)		(119)
Acquisitions, net of cash acquired		(551)		(430)
Dispositions		807		76
Sales (purchases) of securities, net		311		45
Other		(2)		28
Net Cash Used in Investing Activities		(13,251)		(15,025)

Financing Activities
Net change in short-term borrowings with original maturities of three months or less		-		(1,620)
Issuance of long-term debt		6,935		7,935
Repayment of long-term debt		(8,042)		(1,298)
Purchase of treasury stock		(8,374)		-
Issuance of treasury stock		460		216
Dividends paid		(7,738)		(7,627)
Other		98		(406)
Net Cash Used in Financing Activities		(16,661)		(2,800)
Net (decrease) increase in cash and cash equivalents		(968)		9,325
Cash and cash equivalents beginning of year		3,185		1,437
Cash and Cash Equivalents End of Period	$	2,217	$	10,762
Cash paid during the nine months ended September 30 for:
Interest	$	3,335	$	3,066
Income taxes, net of refunds	$	390	$	(121)
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)
	September 30, 2012
	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		$	91,156
Issuance of treasury stock			119
Share-based payments			(133)
Share of equity method investee capital transactions			(160)
Balance at end of period		$	90,982

Retained Earnings
Balance at beginning of year		$	25,453
Net income attributable to AT&T ($1.90 per diluted share)			11,121
Dividends to stockholders ($1.32 per share)			(7,646)
Other			(21)
Balance at end of period		$	28,907

Treasury Stock
Balance at beginning of year	(568)	$	(20,750)
Purchase of stock	(245)		(8,374)
Issuance of treasury stock	25		591
Balance at end of period	(788)	$	(28,533)

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year		$	3,180
Other comprehensive loss attributable to AT&T			(74)
Balance at end of period		$	3,106

Noncontrolling Interest
Balance at beginning of year		$	263
Net income attributable to noncontrolling interest			197
Distributions			(143)
Balance at end of period		$	317

Total Stockholders’ Equity at beginning of year		$	105,797
Total Stockholders’ Equity at end of period		$	101,274
See Notes to Consolidated Financial Statements.

AT&T INC.

SEPTEMBER 30, 2012

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) 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, 2011.

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 in the United States and internationally, providing wireless communications services, local exchange services, long-distance services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale services. On May 8, 2012, we completed the sale of our Advertising Solutions segment to an affiliate of Cerberus Capital Management, L.P. for approximately $740 in cash after closing adjustments, a $200 note and a 47% equity interest in the new entity, YP Holdings LLC (YP Holdings). Our operating results include the results of the Advertising Solutions segment through May 8. Beginning on May 9, we included our 47% equity in YP Holdings in equity in net income of affiliates in our Other segment and on our consolidated income statement.

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

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation, including a reclassification of certain operating expenses based on an enhanced activity-based expense tracking system.

Employee Separations We established obligations for expected termination benefits provided under existing plans to former or inactive employees after employment but before retirement. At September 30, 2012, we had severance accruals of $118 and at December 31, 2011, we had severance accruals of $335. The decline was primarily due to payments during the period.

Stock Repurchase Program In December 2010, the Board of Directors authorized the repurchase of up to 300 million shares of AT&T common stock. We began buying back stock under this program in the first quarter of 2012. For the nine months ended September 30, 2012, we had repurchased approximately 245 million shares totaling $8,374. In July 2012, the Board of Directors authorized the repurchase of an additional 300 million shares. We intend to continue repurchasing shares.

To implement these authorizations, we use open market repurchase programs, relying on Rule 10b5-1 of the Securities Exchange Act of 1934 where feasible. We also use accelerated share repurchase programs with large financial institutions to repurchase our stock.

AT&T INC.

SEPTEMBER 30, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for net income attributable to AT&T for the three and nine months ended September 30, 2012 and 2011, are shown in the table below:

	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
Numerators
Numerator for basic earnings per share:
Net Income	$	3,701	$	3,686	$	11,318	$	10,812
Net income attributable to noncontrolling interest		(66)		(63)		(197)		(190)
Net Income attributable to AT&T		3,635		3,623		11,121		10,622
Dilutive potential common shares:
Other share-based payment		3		3		9		8
Numerator for diluted earnings per share	$	3,638	$	3,626	$	11,130	$	10,630
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding		5,771		5,936		5,848		5,931
Dilutive potential common shares:
Stock options		4		3		4		4
Other share-based payment		17		15		17		15
Denominator for diluted earnings per share		5,792		5,954		5,869		5,950
Basic earnings per share attributable to AT&T	$	0.63	$	0.61	$	1.90	$	1.79
Diluted earnings per share attributable to AT&T	$	0.63	$	0.61	$	1.90	$	1.79

At September 30, 2012 and 2011, we had issued and outstanding options to purchase approximately 18 million and 85 million shares of AT&T common stock. For the quarter ended September 30, 2012 and 2011, the exercise prices of 2 million and 58 million options 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 September 30, 2012 and 2011, the exercise prices of 16 million and 24 million vested stock options were below market price.

AT&T INC.

SEPTEMBER 30, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 3. 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 various operating segments based on segment income before income taxes. We make our capital allocations decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and other assets needed 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. The customers and long-lived assets of our reportable segments are predominantly in the United States. For the quarter ended September 30, 2012, we have three reportable segments: (1) Wireless, (2) Wireline, and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions. On May 8, 2012, we completed the sale of our Advertising Solutions segment and received a 47 percent equity interest in the new entity YP Holdings (see Note 1).

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services. The Wireless segment results have been reclassified to include the operating results of a subsidiary that provides services for subscribers to wirelessly monitor their home that was previously reported in the Wireline segment.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, AT&T U-verse® TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements. The Wireline segment results have been reclassified to exclude the operating results of the home monitoring business moved to our Wireless segment and to include the operating results of customer information services, which were previously reported in our Other segment’s results.

The Advertising Solutions segment included our directory operations, which published Yellow and White Pages directories and sold directory advertising and Internet-based advertising and local search.

The Other segment includes our portion of the results from our international equity investments, our 47 percent equity interest in YP Holdings and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest cost and expected return on plan assets for our pension and postretirement benefit plans. The Other segment results have been reclassified to exclude the operating results of customer information services, which are now reported in our Wireline segment’s results.

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

AT&T INC.

SEPTEMBER 30, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2012
	Wireless			Wireline			Advertising Solutions		Other			Consolidations			Consolidated Results
Total segment operating revenues	$	16,632		$	14,813		$	-	$	14		$	-		$	31,459
Operations and support expenses		10,549			10,134			-		227			-			20,910
Depreciation and amortization expenses		1,730			2,774			-		8			-			4,512
Total segment operating expenses		12,279			12,908			-		235			-			25,422
Segment operating income (loss)		4,353			1,905			-		(221	)		-			6,037
Interest expense		-			-			-		-			824			824
Equity in net income (loss) of affiliates		(17	)		-			-		199			-			182
Other income (expense) – net		-			-			-		-			47			47
Segment income (loss) before income taxes	$	4,336		$	1,905		$	-	$	(22	)	$	(777	)	$	5,442

For the nine months ended September 30, 2012
	Wireless			Wireline			Advertising Solutions		Other			Consolidations			Consolidated Results
Total segment operating revenues	$	49,121		$	44,645		$	1,049	$	41		$	-		$	94,856
Operations and support expenses		30,337			30,516			773		704			-			62,330
Depreciation and amortization expenses		5,092			8,348			106		25			-			13,571
Total segment operating expenses		35,429			38,864			879		729			-			75,901
Segment operating income (loss)		13,692			5,781			170		(688	)		-			18,955
Interest expense		-			-			-		-			2,624			2,624
Equity in net income (loss) of affiliates		(45	)		(1	)		-		583			-			537
Other income (expense) – net		-			-			-		-			122			122
Segment income (loss) before income taxes	$	13,647		$	5,780		$	170	$	(105	)	$	(2,502	)	$	16,990

For the three months ended September 30, 2011
	Wireless			Wireline			Advertising Solutions		Other			Consolidations			Consolidated Results
Total segment operating revenues	$	15,606		$	15,055		$	803	$	14		$	-		$	31,478
Operations and support expenses		9,376			10,295			554		400			-			20,625
Depreciation and amortization expenses		1,620			2,892			94		12			-			4,618
Total segment operating expenses		10,996			13,187			648		412			-			25,243
Segment operating income (loss)		4,610			1,868			155		(398	)		-			6,235
Interest expense		-			-			-		-			889			889
Equity in net income (loss) of affiliates		(8	)		-			-		201			-			193
Other income (expense) – net		-			-			-		-			46			46
Segment income (loss) before income taxes	$	4,602		$	1,868		$	155	$	(197	)	$	(843	)	$	5,585

For the nine months ended September 30, 2011
	Wireless			Wireline			Advertising Solutions		Other			Consolidations			Consolidated Results
Total segment operating revenues	$	46,519		$	45,136		$	2,512	$	53		$	-		$	94,220
Operations and support expenses		29,023			30,752			1,707		726			-			62,208
Depreciation and amortization expenses		4,741			8,726			301		36			-			13,804
Total segment operating expenses		33,764			39,478			2,008		762			-			76,012
Segment operating income (loss)		12,755			5,658			504		(709	)		-			18,208
Interest expense		-			-			-		-			2,583			2,583
Equity in net income (loss) of affiliates		(19	)		-			-		668			-			649
Other income (expense) – net		-			-			-		-			132			132
Segment income (loss) before income taxes	$	12,736		$	5,658		$	504	$	(41	)	$	(2,451	)	$	16,406

AT&T INC.

SEPTEMBER 30, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 4. PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of various noncontributory pension and death benefit plans. We also provide certain medical, dental and life insurance 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. No significant cash contributions are required under ERISA regulations during 2012. In October 2012, we filed an application with the U.S. Department of Labor for approval to contribute a preferred equity interest in our Mobility business to the trust used to pay pension benefits, under plans sponsored by AT&T. The preferred equity interest is estimated to be valued at $9,500 upon contribution. We anticipate approval in 2013, and expect to make the contribution at that time.

The following table details pension and postretirement benefit costs included in operating expenses (in cost of services and sales, and selling, general and administrative expenses) in the accompanying consolidated statements of income. We recognize actuarial gains and losses from remeasuring our pension and postretirement plan obligations and assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required.

In the following table, expense credits are denoted with parentheses. A portion of these benefit costs is capitalized as part of the benefit load on internal construction projects, providing a small reduction in the net expense recorded.

	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
Pension cost:
Service cost – benefits earned during the period	$	301	$	297	$	915	$	890
Interest cost on projected benefit obligation		700		740		2,100		2,219
Expected return on assets		(880)		(923)		(2,640)		(2,767)
Amortization of prior service (credit)		(3)		(4)		(11)		(12)
Net pension cost	$	118	$	110	$	364	$	330

Postretirement cost:
Service cost – benefits earned during the period	$	81	$	90	$	247	$	271
Interest cost on accumulated postretirement benefit obligation		446		513		1,340		1,538
Expected return on assets		(200)		(260)		(601)		(780)
Amortization of prior service (credit)		(215)		(173)		(647)		(520)
Net postretirement cost	$	112	$	170	$	339	$	509

Combined net pension and postretirement cost	$	230	$	280	$	703	$	839

Our combined net pension and postretirement cost decreased $50 in the third quarter and $136 for the first nine months of 2012. The decreases were related to higher amortization of prior service credits due to our plan change that provides prescription drug benefits on a group basis under Medicare Part D, as allowed under federal healthcare law. The combined net pension and postretirement cost also reflects the prior year’s performance of the U.S. securities markets and declining bond rates, which contribute to lower interest costs on the projected benefit obligation largely offset by lower expected return on plan assets.

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 $31 in the third quarter of 2012, of which $29 was interest cost, and $94 for the first nine months, of which $87 was interest cost. In 2011, net supplemental retirement pension benefits cost was $35 in the third quarter, of which $31 was interest cost, and $106 for the first nine months, of which $94 was interest cost.

AT&T INC.

SEPTEMBER 30, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 5. 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 measurement 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, 2011.

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:

	September 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Notes and debentures	$	63,510	$	76,432	$	64,514	$	73,738
Investment securities		1,950		1,950		2,092		2,092

The fair values of our notes and debentures were estimated based on quoted market prices, where available. 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 under the Fair Value Measurement and Disclosure framework.

AT&T INC.

SEPTEMBER 30, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Investment Securities

Our investment securities consist of primarily available-for-sale instruments, which include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities were estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in “Other income (expense) – net” in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated other comprehensive income (accumulated OCI). Unrealized losses that are considered other than temporary are recorded in “Other income (expense) – net” with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $11 have maturities of less than one year, $103 within one to three years, $233 within three to five years, and $252 for five or more years.

Our short-term investments, other short- and long-term held-to-maturity investments (including money market securities) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values.

Our investment securities maturing within one year are recorded in “Other current assets,” and instruments with maturities of more than one year are recorded in “Other Assets” on the consolidated balance sheets.

Following is the fair value leveling for available-for-sale securities and derivatives as of September 30, 2012 and December 31, 2011:

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities
Domestic equities	$	865	$	-	$	-	$	865
International equities		445		-		-		445
Fixed income bonds		-		599		-		599
Asset Derivatives1
Interest rate swaps		-		306		-		306
Cross-currency swaps		-		472		-		472
Foreign exchange contracts		-		1		-		1
Liability Derivatives1
Cross-currency swaps		-		(791)		-		(791)
Foreign exchange contracts		-		(2)		-		(2)

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities
Domestic equities	$	947	$	-	$	-	$	947
International equities		495		-		-		495
Fixed income bonds		-		562		-		562
Asset Derivatives1
Interest rate swaps		-		521		-		521
Cross-currency swaps		-		144		-		144
Foreign exchange contracts		-		2		-		2
Liability Derivatives1
Cross-currency swaps		-		(820)		-		(820)
Interest rate locks		-		(173)		-		(173)
Foreign exchange contracts		-		(9)		-		(9)

1	Derivatives designated as hedging instruments are reflected as other assets, other liabilities and, for a portion of interest rate swaps, accounts receivable.

AT&T INC.

SEPTEMBER 30, 2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Derivative Financial Instruments

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

The majority of our derivatives are designated either as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense on the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed-rate notes payable they hedge due to changes in the designated benchmark interest rate and are recognized in interest expense. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. For the nine months ended September 30, 2012 and September 30, 2011, no ineffectiveness was measured.

Cash Flow Hedging Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities, both for the period they are outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as other income or expense in each period.

We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro and British pound sterling denominated debt. These agreements include initial and final exchanges of principal from fixed foreign denominations to fixed U.S. denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed foreign-denominated rate to a fixed U.S. denominated interest rate. We evaluate the effectiveness of our cross-currency swaps each quarter. For the nine months ended September 30, 2012 and September 30, 2011, no ineffectiveness was measured.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to income. Over the next 12 months, we expect to reclassify $45 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks. In February 2012, we utilized $800 notional value of interest rate locks related to our February 2012 debt issuance.

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 income. For the nine months ended September 30, 2012 and September 30, 2011, no ineffectiveness was measured.

AT&T INC.

SEPTEMBER 30, 2012

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 September 30, 2012, we had posted collateral of $25 (a deposit asset) and held collateral of $469 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Moody’s Investors Service and Fitch, Inc. before the final collateral exchange in September, we would have been required to post additional collateral of $174. At December 31, 2011, we had posted collateral of $98 (a deposit asset) and had no held collateral (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:

	September 30,		December 31,
	2012		2011
Interest rate swaps	$	3,000	$	8,800
Cross-currency swaps		9,481		7,502
Interest rate locks		-		800
Foreign exchange contracts		122		207
Total	$	12,603	$	17,309

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

Effect of Derivatives on the Consolidated Statements of Income
	Three months ended							Nine months ended
	September 30,							September 30,
Fair Value Hedging Relationships		2012			2011				2012			2011
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps		$	(21	)	$	92			$	(158	)	$	81
Gain (Loss) on long-term debt			21			(92	)			158			(81	)

In addition, net swap settlements that accrued and settled in the periods above were offset against interest expense.

	Three months ended							Nine months ended
	September 30,							September 30,
Cash Flow Hedging Relationships		2012			2011			2012			2011
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI		$	355		$	(266	)	$	190		$	(415	)

Interest rate locks:
Gain (Loss) recognized in accumulated OCI			-			(105	)		-			17
Interest income (expense) reclassified from accumulated OCI into income			(12	)		(3	)		(32	)		(11	)

Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI			3			(13	)		3			(8	)

The balance of the unrealized derivative gain (loss) in accumulated OCI was $(275) at September 30, 2012 and $(421) at December 31, 2011.

AT&T INC.

SEPTEMBER 30, 2012

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 in both the United States and internationally, providing wireless communications services, local exchange services, long-distance services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale services. 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, 2011. 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.

Consolidated Results Our financial results in the third quarter and for the first nine months of 2012 and 2011 are summarized as follows:

	Third Quarter							Nine-Month Period
	2012		2011		Percent Change			2012		2011		Percent Change
Operating Revenues	$	31,459	$	31,478		(0.1)	%	$	94,856	$	94,220		0.7	%
Operating expenses
Cost of services and sales		12,718		12,656		0.5			38,000		38,225		(0.6	)
Selling, general and administrative		8,192		7,969		2.8			24,330		23,983		1.4
Depreciation and amortization		4,512		4,618		(2.3)			13,571		13,804		(1.7	)
Total Operating Expenses		25,422		25,243		0.7			75,901		76,012		(0.1	)
Operating Income		6,037		6,235		(3.2)			18,955		18,208		4.1
Income Before Income Taxes		5,442		5,585		(2.6)			16,990		16,406		3.6
Net Income		3,701		3,686		0.4			11,318		10,812		4.7
Net Income Attributable to AT&T	$	3,635	$	3,623		0.3	%	$	11,121	$	10,622		4.7	%

Overview

Operating income decreased $198, or 3.2%, in the third quarter and increased $747, or 4.1%, for the first nine months of 2012. Both operating revenues and expenses for the quarter were affected by the May 2012 sale of our Advertising Solutions segment, as discussed below. Operating income in the third quarter and for the first nine months reflects continued growth in wireless service and equipment revenue, driven mostly by data revenue growth, along with increased revenues from AT&T U-verse® (U-verse) services and strategic business services. Growth in wireless and wireline revenues in the third quarter was more than offset by higher expenses driven primarily by increased wireless equipment, commissions and administrative costs. Our operating income margin in the third quarter decreased from 19.8% in 2011 to 19.2% in 2012 and for the first nine months increased from 19.3% in 2011 to 20.0% in 2012.

Operating revenues decreased $19, or 0.1%, in the third quarter and increased $636, or 0.7%, for the first nine months of 2012. The sale of our Advertising Solutions segment reduced revenues $803 in the third quarter and $1,463 in the first nine months. The third-quarter decrease from Advertising Solutions was offset by higher wireless service and equipment revenues and higher wireline data revenues from U-verse and strategic business services. The increase in operating revenues for the first nine months was primarily due to the continued growth in wireless service and equipment revenues and higher wireline data revenues. These increases were partially offset by the Advertising Solutions segment sale and continued declines in wireline voice.

AT&T INC.

SEPTEMBER 30, 2012

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

Dollars in millions except per share amounts

Revenue growth continues to be tempered by declines in our wireline voice revenues. Total switched access lines decreased 12.8% since September 30, 2011. Customers disconnecting access lines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data or terminated service permanently as businesses closed or consumers left residences. While we lose wireline voice revenues, we have the opportunity to increase wireless service or wireline data revenues should the customer choose us as their wireless or VoIP provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.

Cost of services and sales expenses increased $62, or 0.5%, in the third quarter and decreased $225, or 0.6%, for the first nine months of 2012. The sale of our Advertising Solutions segment reduced expenses $277 in the third quarter and $499 for the first nine months. The increase in the third quarter was primarily due to higher wireless handset costs related to smartphone sales including the launch of the latest iPhone model and wireline costs attributable to growth in U-verse subscribers, which were mostly offset by lower non-employee related charges and the sale of our Advertising Solutions segment. The decrease for the first nine months is primarily due to the sale of our Advertising Solutions segment and lower non-employee related expenses, partially offset by higher U-verse, wireless handset and wireless network costs.

Selling, general and administrative expenses increased $223, or 2.8%, in the third quarter and $347, or 1.4%, for the first nine months of 2012. The increases were primarily due to higher wireless commissions and administrative costs. The increases were partially offset by decreased sales and advertising costs, employee related expenses, and the sale of our Advertising Solutions segment, which reduced expenses $277 in the third quarter and $435 for the first nine months.

Depreciation and amortization expense decreased $106, or 2.3%, in the third quarter and $233, or 1.7%, for the first nine months of 2012. The sale of our Advertising Solutions segment reduced expenses $94 in the third quarter and $195 for the first nine months. Expenses also decreased due to lower amortization of intangibles for customer lists related to acquisitions, partially offset by increased depreciation associated with ongoing capital spending for network upgrades and expansion.

Interest expense decreased $65, or 7.3%, in the third quarter and increased $41, or 1.6%, for the first nine months of 2012. The decrease in the third quarter was due to our lower average debt balances and interest rates, partially offset by call premiums paid on the early redemption of debt in September 2012. The increase for the first nine months was primarily due to a net charge of approximately $151 related to call premiums paid for the early redemption of debt, which were partially offset by net gains on the settlement of associated interest-rate swaps. The increase from the early debt redemptions was partially offset by lower expense resulting from lower average debt balances and interest rates and an increase in the amount of interest capitalized on wireless spectrum that will be used in the future.

Equity in net income of affiliates decreased $11, or 5.7%, in the third quarter and $112, or 17.3%, for the first nine months of 2012. Decreased equity in net income of affiliates was due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil), resulting from foreign exchange losses and increased taxes. Partially offsetting the decreases were earnings from YP Holdings LLC (YP Holdings).

Other income (expense) – net We had other income of $47 in the third quarter and $122 for the first nine months of 2012, compared to other income of $46 in the third quarter and $132 for the first nine months of 2011. Income in the third quarter and for the first nine months of 2012 included interest and dividend income of $17 and $51, leveraged lease income of $5 and $46 and net gains on the sale of investments of $83 and $82. This income was partially offset by a third-quarter investment impairment of $55.

Other income in the third quarter and for the first nine months of 2011 included interest and dividend income of $13 and $56 and leveraged lease income of $4 and $15, respectively. In addition, third quarter 2011 results included an $8 gain on the sale of nonstrategic assets along with foreign exchange gains of $7, while results for the first nine months of 2011 included a net gain of $66 from sale of investments.

Income taxes decreased $158, or 8.3%, in the third quarter and increased $78, or 1.4%, for the first nine months of 2012. Our effective tax rate was 32.0% for the third quarter and 33.4% for the first nine months of 2012, as compared to 34.0% for the third quarter and 34.1% for the first nine months of 2011. The decrease in effective tax rate in this quarter is due primarily to recognition of benefits related to resolution of audit issues.

AT&T INC.

SEPTEMBER 30, 2012

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

Dollars in millions except per share amounts

Selected Financial and Operating Data
	September 30,
	2012			2011
Wireless subscribers (000)		105,871			100,738
Network access lines in service (000)		33,088			37,956
Total wireline broadband connections (000)		16,392			16,476
Debt ratio1		38.6	%		38.5	%
Ratio of earnings to fixed charges2		5.36			5.41
Number of AT&T employees3		241,130			256,210

1	Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and do not consider cash available to pay down debt. See our “Liquidity and Capital Resources” section for discussion.

2	See Exhibit 12.

3	Includes the reduction of approximately 8,200 employees as a result of the sale of our Advertising Solutions segment.

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 3 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes. We make our capital allocations decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and other assets needed 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. We have three reportable segments: (1) Wireless, (2) Wireline, and (3) Other. Our operating results prior to May 9, 2012, also included Advertising Solutions. On May 8, 2012, we completed the sale of our Advertising Solutions segment and received a 47 percent equity interest in the new entity YP Holdings (see Note 1).

The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services. The Wireless segment results have been reclassified to include the operating results of a subsidiary that provides services for subscribers to wirelessly monitor their homes that was previously reported in the Wireline segment’s results.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, U-verse TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements. The Wireline segment results have been reclassified to exclude the operating results of the home monitoring business moved to our Wireless segment and to include the operating results of customer information services, which were previously reported in our Other segment’s results.

The Advertising Solutions segment included our directory operations, which published Yellow and White Pages directories and sold directory advertising and Internet-based advertising and local search.

The Other segment includes our portion of the results from our international equity investments, our 47 percent equity interest in YP Holdings, and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest cost and expected return on plan assets for our pension and postretirement benefit plans. The Other segment results have been reclassified to exclude the operating results of customer information services, which are now reported in our Wireline segment’s results.

AT&T INC.

SEPTEMBER 30, 2012

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

Dollars in millions except per share amounts

Operations and support expenses include bad debt expense; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement service costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees. Our Wireless and Wireline segments also include certain network planning and engineering expenses, information technology, repair technicians and repair services, and property taxes as operations and support expenses.

The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”

Wireless
Segment Results
	Third Quarter							Nine-Month Period
	2012		2011		Percent Change			2012		2011		Percent Change

Segment operating revenues
Service	$	14,906	$	14,261		4.5	%	$	44,237	$	42,379		4.4	%
Equipment		1,726		1,345		28.3			4,884		4,140		18.0
Total Segment Operating Revenues		16,632		15,606		6.6			49,121		46,519		5.6
Segment operating expenses
Operations and support		10,549		9,376		12.5			30,337		29,023		4.5
Depreciation and amortization		1,730		1,620		6.8			5,092		4,741		7.4
Total Segment Operating Expenses		12,279		10,996		11.7			35,429		33,764		4.9
Segment Operating Income		4,353		4,610		(5.6)			13,692		12,755		7.3
Equity in Net Income (Loss) of Affiliates		(17)		(8)		-			(45)		(19)		-
Segment Income	$	4,336	$	4,602		(5.8)	%	$	13,647	$	12,736		7.2	%

AT&T INC.

SEPTEMBER 30, 2012

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

Dollars in millions except per share amounts

The following table highlights other key measures of performance for the Wireless segment:

	Third Quarter									Nine-Month Period
	2012			2011			Percent Change			2012			2011			Percent Change
Wireless Subscribers (000)1											105,871			100,738			5.1	%
Gross Subscriber Additions (000)2		4,914			5,946			(17.4	)%		15,162			17,154			(11.6	)
Net Subscriber Additions (000)2		678			2,123			(68.1	)		2,670			5,202			(48.7	)
Total Churn4		1.34	%		1.28	%	6 BP				1.33	%		1.36	%	(3) BP

Postpaid Subscribers (000)											69,747			68,614			1.7	%
Net Postpaid Subscriber Additions (000)2		151			319			(52.7	)%		658			712			(7.6	)
Postpaid Churn4		1.08	%		1.15	%	(7) BP				1.05	%		1.16	%	(11) BP

Prepaid Subscribers (000)											7,545			7,059			6.9	%
Net Prepaid Subscriber Additions (000)2		77			293			(73.7	)%		294			515			(42.9	)

Reseller Subscribers (000)											14,573			13,028			11.9	%
Net Reseller Subscriber Additions (000)2		137			473			(71.0	)%		793			1,282			(38.1	)

Connected Device Subscribers (000)3											14,006			12,037			16.4	%
Net Connected Device Subscriber Additions (000)		313			1,038			(69.8	)%		925			2,693			(65.7	)

1	Represents 100% of AT&T Mobility customers.

2	Excludes merger and acquisition-related additions during the period.

3	Includes data-centric devices such as eReaders, home security and automobile monitoring systems, and fleet management. Tablets are primarily reflected in our prepaid subscriber category, with the remainder in postpaid.

4	Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.

Wireless Subscriber Relationships

As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices and a wireless network that has sufficient spectrum and capacity to support these innovations and make them available to more subscribers. To attract and retain subscribers, we offer a broad handset line and a wide variety of service plans.

AT&T INC.

SEPTEMBER 30, 2012

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

Dollars in millions except per share amounts

Our handset offerings include at least 16 smartphones (handsets with voice and data capabilities using an advanced operating system to better manage data and Internet access) from nine manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models (e.g., various Android, Apple, Windows and other smartphones) or significant revisions of existing models. We believe a broad offering of a wide variety of smartphones reduces dependence on any single operating system or manufacturer as these products continue to evolve in terms of technology and subscriber appeal. In the first nine months of 2012, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid subscriber base, 63.8% (or 44.5 million subscribers) use smartphones, up from 52.6% (or 36.1 million subscribers) a year earlier. As is common in the industry, most of our subscribers’ phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. From time to time, we offer and have offered attractive handsets on an exclusive basis. As these exclusivity arrangements expire, we expect to continue to offer such handsets (based on historical industry practice), and we believe