AT&T INC. - Quarter Report: 2020 September (Form 10-Q)

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 September 30, 2020


☐			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 001-8610

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

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
Depositary Shares, each representing a 1/1000th interest in a share of 5.000% Perpetual Preferred Stock, Series A	T PRA	New York Stock Exchange
Depositary Shares, each representing a 1/1000th interest in a share of 4.750% Perpetual Preferred Stock, Series C	T PRC	New York Stock Exchange
AT&T Inc. 1.875% Global Notes due December 4, 2020	T 20	New York Stock Exchange
AT&T Inc. 2.650% Global Notes due December 17, 2021	T 21B	New York Stock Exchange
AT&T Inc. 1.450% Global Notes due June 1, 2022	T 22B	New York Stock Exchange
AT&T Inc. 2.500% Global Notes due March 15, 2023	T 23	New York Stock Exchange
AT&T Inc. 2.750% Global Notes due May 19, 2023	T 23C	New York Stock Exchange
AT&T Inc. Floating Rate Global Notes due September 5, 2023	T 23D	New York Stock Exchange
AT&T Inc. 1.050% Global Notes due September 5, 2023	T 23E	New York Stock Exchange
AT&T Inc. 1.300% Global Notes due September 5, 2023	T 23A	New York Stock Exchange
AT&T Inc. 1.950% Global Notes due September 15, 2023	T 23F	New York Stock Exchange
AT&T Inc. 2.400% Global Notes due March 15, 2024	T 24A	New York Stock Exchange
AT&T Inc. 3.500% Global Notes due December 17, 2025	T 25	New York Stock Exchange
AT&T Inc. 0.250% Global Notes due March 4, 2026	T 26E	New York Stock Exchange
AT&T Inc. 1.800% Global Notes due September 5, 2026	T 26D	New York Stock Exchange


		Name of each exchange
Title of each class	Trading Symbol(s)	on which registered
AT&T Inc. 2.900% Global Notes due December 4, 2026	T 26A	New York Stock Exchange
AT&T Inc. 1.600% Global Notes due May 19, 2028	T 28C	New York Stock Exchange
AT&T Inc. 2.350% Global Notes due September 5, 2029	T 29D	New York Stock Exchange
AT&T Inc. 4.375% Global Notes due September 14, 2029	T 29B	New York Stock Exchange
AT&T Inc. 2.600% Global Notes due December 17, 2029	T 29A	New York Stock Exchange
AT&T Inc. 0.800% Global Notes due March 4, 2030	T 30B	New York Stock Exchange
AT&T Inc. 2.050% Global Notes due May 19, 2032	T 32A	New York Stock Exchange
AT&T Inc. 3.550% Global Notes due December 17, 2032	T 32	New York Stock Exchange
AT&T Inc. 5.200% Global Notes due November 18, 2033	T 33	New York Stock Exchange
AT&T Inc. 3.375% Global Notes due March 15, 2034	T 34	New York Stock Exchange
AT&T Inc. 2.450% Global Notes due March 15, 2035	T 35	New York Stock Exchange
AT&T Inc. 3.150% Global Notes due September 4, 2036	T 36A	New York Stock Exchange
AT&T Inc. 2.600% Global Notes due May 19, 2038	T 38C	New York Stock Exchange
AT&T Inc. 1.800% Global Notes due September 14, 2039	T 39B	New York Stock Exchange
AT&T Inc. 7.000% Global Notes due April 30, 2040	T 40	New York Stock Exchange
AT&T Inc. 4.250% Global Notes due June 1, 2043	T 43	New York Stock Exchange
AT&T Inc. 4.875% Global Notes due June 1, 2044	T 44	New York Stock Exchange
AT&T Inc. 4.000% Global Notes due June 1, 2049	T 49A	New York Stock Exchange
AT&T Inc. 4.250% Global Notes due March 1, 2050	T 50	New York Stock Exchange
AT&T Inc. 3.750% Global Notes due September 1, 2050	T 50A	New York Stock Exchange
AT&T Inc. 5.350% Global Notes due November 1, 2066	TBB	New York Stock Exchange
AT&T Inc. 5.625% Global Notes due August 1, 2067	TBC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 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 ☒ 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 ☒ 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	☒	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 ☒

At October 31, 2020, there were 7,126 million common shares outstanding.

AT&T INC.

SEPTEMBER 30, 2020

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,
	2020		2019		2020		2019
Operating Revenues
Service	$	37,782	$	40,317	$	113,716	$	122,024
Equipment	4,558		4,271		12,353		12,348
Total operating revenues	42,340		44,588		126,069		134,372

Operating Expenses
Cost of revenues
Equipment	4,552		4,484		12,622		13,047
Broadcast, programming and operations	6,912		7,066		19,555		22,448
Other cost of revenues (exclusive of depreciation and amortization shown separately below)	8,375		8,604		24,833		25,910
Selling, general and administrative	9,266		9,584		27,857		29,077
Asset impairments and abandonments	73		—		2,515		—
Depreciation and amortization	7,030		6,949		21,537		21,256
Total operating expenses	36,208		36,687		108,919		111,738
Operating Income	6,132		7,901		17,150		22,634
Other Income (Expense)
Interest expense	(1,972)		(2,083)		(6,031)		(6,373)
Equity in net income (loss) of affiliates	5		3		(11)		36
Other income (expense) — net	(231)		(935)		1,589		(967)
Total other income (expense)	(2,198)		(3,015)		(4,453)		(7,304)
Income Before Income Taxes	3,934		4,886		12,697		15,330
Income tax expense	766		937		3,003		3,059
Net Income	3,168		3,949		9,694		12,271
Less: Net Income Attributable to Noncontrolling Interest	(352)		(249)		(987)		(762)
Net Income Attributable to AT&T	$	2,816	$	3,700	$	8,707	$	11,509
Less: Preferred Stock Dividends	(54)		—		(138)		—
Net Income Attributable to Common Stock	$	2,762	$	3,700	$	8,569	$	11,509
Basic Earnings Per Share Attributable to Common Stock	$	0.39	$	0.50	$	1.19	$	1.57
Diluted Earnings Per Share Attributable to Common Stock	$	0.39	$	0.50	$	1.19	$	1.57
Weighted Average Number of Common Shares Outstanding — Basic (in millions)	7,147		7,327		7,160		7,321
Weighted Average Number of Common Shares Outstanding — with Dilution (in millions)	7,173		7,356		7,186		7,350

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,
	2020		2019		2020		2019
Net income	$	3,168	$	3,949	$	9,694	$	12,271
Other comprehensive income (loss), net of tax:
Foreign currency:
Translation adjustment (includes $(2), $(17), $(61) and $(15) attributable to noncontrolling interest), net of taxes of $47, $(69), $(150) and $(21)	90		(342)		(1,459)		(181)
Securities:
Net unrealized gains (losses), net of taxes of $1, $7, $28 and $22	1		25		81		67
Derivative instruments:
Net unrealized gains (losses), net of taxes of $229, $(168), $(574) and $(299)	860		(516)		(2,166)		(1,006)
Reclassification adjustment included in net income, net of taxes of $7, $2, $11 and $7	27		7		44		24
Defined benefit postretirement plans:
Amortization of net prior service credit included in net income, net of taxes of $(150), $(112), $(451) and $(332)	(460)		(343)		(1,382)		(1,031)
Other comprehensive income (loss)	518		(1,169)		(4,882)		(2,127)
Total comprehensive income	3,686		2,780		4,812		10,144
Less: Total comprehensive income attributable to noncontrolling interest	(350)		(232)		(926)		(747)
Total Comprehensive Income Attributable to AT&T	$	3,336	$	2,548	$	3,886	$	9,397

See Notes to Consolidated Financial Statements.


AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	September 30, 2020		December 31, 2019
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	9,758	$	12,130
Accounts receivable — net of related allowances for credit loss of $1,386 and $1,235	19,379		22,636
Prepaid expenses	1,420		1,631
Other current assets	19,414		18,364
Total current assets	49,971		54,761
Noncurrent Inventories and Theatrical Film and Television Production Costs	13,948		12,434
Property, plant and equipment	333,797		333,538
Less: accumulated depreciation and amortization	(205,075)		(203,410)
Property, Plant and Equipment — Net	128,722		130,128
Goodwill	143,688		146,241
Licenses — Net	98,397		97,907
Trademarks and Trade Names — Net	23,575		23,567
Distribution Networks — Net	14,249		15,345
Other Intangible Assets — Net	17,523		20,798
Investments in and Advances to Equity Affiliates	2,325		3,695
Operating Lease Right-Of-Use Assets	24,546		24,039
Other Assets	21,609		22,754
Total Assets	$	538,553	$	551,669
Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	5,898	$	11,838
Accounts payable and accrued liabilities	42,728		45,956
Advanced billings and customer deposits	5,862		6,124
Accrued taxes	1,336		1,212
Dividends payable	3,741		3,781
Total current liabilities	59,565		68,911
Long-Term Debt	152,980		151,309
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes	60,448		59,502
Postemployment benefit obligation	17,928		18,788
Operating lease liabilities	22,056		21,804
Other noncurrent liabilities	30,520		29,421
Total deferred credits and other noncurrent liabilities	130,952		129,515
Stockholders’ Equity
Preferred stock ($1 par value, 10,000,000 authorized):
Series A (48,000 issued and outstanding at September 30, 2020 and December 31, 2019)	—		—
Series B (20,000 issued and outstanding at September 30, 2020 and 0 issued and outstanding at December 31, 2019)	—		—
Series C (70,000 issued and outstanding at September 30, 2020 and 0 issued and outstanding at December 31, 2019)	—		—
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2020 and December 31, 2019: issued 7,620,748,598 at September 30, 2020 and December 31, 2019)	7,621		7,621
Additional paid-in capital	130,139		126,279
Retained earnings	55,094		57,936
Treasury stock (495,703,331 at September 30, 2020 and 366,193,458 at December 31, 2019, at cost)	(17,950)		(13,085)
Accumulated other comprehensive income	649		5,470
Noncontrolling interest	19,503		17,713
Total stockholders’ equity	195,056		201,934
Total Liabilities and Stockholders’ Equity	$	538,553	$	551,669

See Notes to Consolidated Financial Statements.


AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
	Nine months ended
	September 30,
	2020		2019
Operating Activities
Net income	$	9,694	$	12,271
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	21,537		21,256
Amortization of television and film costs	6,448		7,059
Undistributed earnings from investments in equity affiliates	108		81
Provision for uncollectible accounts	1,611		1,855
Deferred income tax expense	2,248		1,039
Net (gain) loss on investments, net of impairments	(689)		(1,014)
Pension and postretirement benefit expense (credit)	(2,245)		(1,297)
Actuarial (gain) loss on pension and postretirement benefits	63		4,048
Asset impairments and abandonments	2,515		—
Changes in operating assets and liabilities:
Receivables	2,321		2,503
Other current assets, inventories and theatrical film and television production costs	(7,836)		(9,337)
Accounts payable and other accrued liabilities	(4,905)		(936)
Equipment installment receivables and related sales	(148)		848
Deferred customer contract acquisition and fulfillment costs	453		(796)
Postretirement claims and contributions	(409)		(635)
Other - net	2,282		(220)
Total adjustments	23,354		24,454
Net Cash Provided by Operating Activities	33,048		36,725
Investing Activities
Capital expenditures, including $(92) and $(160) of interest during construction	(13,283)		(15,843)
Acquisitions, net of cash acquired	(1,215)		(1,124)
Dispositions	428		3,775
(Purchases), sales and settlements of securities and investments, net	444		523
Advances to and investments in equity affiliates, net	(100)		(333)
Net Cash Used in Investing Activities	(13,726)		(13,002)
Financing Activities
Net change in short-term borrowings with original maturities of three months or less	(17)		(22)
Issuance of other short-term borrowings	9,440		4,012
Repayment of other short-term borrowings	(7,710)		(4,702)
Issuance of long-term debt	31,987		15,034
Repayment of long-term debt	(37,583)		(24,368)
Payment of vendor financing	(1,965)		(2,601)
Issuance of preferred stock	3,869		—
Purchase of treasury stock	(5,483)		(409)
Issuance of treasury stock	88		576
Issuance of preferred interests in subsidiary	1,979		1,488
Dividends paid	(11,215)		(11,162)
Other - net	(5,158)		(187)
Net Cash Used in Financing Activities	(21,768)		(22,341)
Net (decrease) increase in cash and cash equivalents and restricted cash	(2,446)		1,382
Cash and cash equivalents and restricted cash beginning of year	12,295		5,400
Cash and Cash Equivalents and Restricted Cash End of Period	$	9,849	$	6,782

See Notes to Consolidated Financial Statements.


AT&T INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
	Three months ended						Nine months ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Preferred Stock - Series A
Balance at beginning of period	—	$	—	—	$	—	—	$	—	—	$	—
Issuance of stock	—	—		—	—		—	—		—	—
Balance at end of period	—	$	—	—	$	—	—	$	—	—	$	—
Preferred Stock - Series B
Balance at beginning of period	—	$	—	—	$	—	—	$	—	—	$	—
Issuance of stock	—	—		—	—		—	—		—	—
Balance at end of period	—	$	—	—	$	—	—	$	—	—	$	—
Preferred Stock - Series C
Balance at beginning of period	—	$	—	—	$	—	—	$	—	—	$	—
Issuance of stock	—	—		—	—		—	—		—	—
Balance at end of period	—	$	—	—	$	—	—	$	—	—	$	—
Common Stock
Balance at beginning of period	7,621	$	7,621	7,621	$	7,621	7,621	$	7,621	7,621	$	7,621
Issuance of stock	—	—		—	—		—	—		—	—
Balance at end of period	7,621	$	7,621	7,621	$	7,621	7,621	$	7,621	7,621	$	7,621
Additional Paid-In Capital
Balance at beginning of period		$	130,046		$	125,109		$	126,279		$	125,525
Repurchase and acquisition of common stock		—			—			67			—
Issuance of preferred stock		—			—			3,869			—
Issuance of treasury stock		(2)			(1)			(56)			(128)
Share-based payments		91			31			(24)			(258)
Changes related to acquisition of interests held by noncontrolling owners		4			—			4			—
Balance at end of period		$	130,139		$	125,139		$	130,139		$	125,139
Retained Earnings
Balance at beginning of period		$	56,045		$	59,389		$	57,936		$	58,753
Cumulative effect of accounting change and other adjustments		—			—			(293)			316
Adjusted beginning balance		56,045			59,389			57,643			59,069
Net income attributable to AT&T		2,816			3,700			8,707			11,509
Preferred stock dividends		(35)			—			(103)			—
Common stock dividends ( $0.52, $0.51, $1.56, and $1.53 per share)		(3,732)			(3,742)			(11,153)			(11,231)
Balance at end of period		$	55,094		$	59,347		$	55,094		$	59,347

See Notes to Consolidated Financial Statements.


AT&T INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - continued
Dollars and shares in millions except per share amounts
(Unaudited)
	Three months ended						Nine months ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Treasury Stock
Balance at beginning of period	(495)	$	(17,945)	(316)	$	(11,151)	(366)	$	(13,085)	(339)	$	(12,059)
Repurchase and acquisition of common stock	(1)	(19)		(5)	(186)		(149)	(5,600)		(14)	(466)
Issuance of treasury stock	—	14		4	142		19	735		36	1,330
Balance at end of period	(496)	$	(17,950)	(317)	$	(11,195)	(496)	$	(17,950)	(317)	$	(11,195)
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of period		$	129		$	3,289		$	5,470		$	4,249
Other comprehensive income attributable to AT&T		520			(1,152)			(4,821)			(2,112)
Balance at end of period		$	649		$	2,137		$	649		$	2,137
Noncontrolling Interest
Balance at beginning of period		$	17,557		$	9,824		$	17,713		$	9,795
Cumulative effect of accounting change and other adjustments		—			—			(7)			29
Adjusted beginning balance		17,557			9,824			17,706			9,824
Net income attributable to noncontrolling interest		352			249			987			762
Issuance and acquisition of noncontrolling owners		1,978			1,488			1,979			1,498
Distributions		(382)			(266)			(1,108)			(791)
Translation adjustments attributable to noncontrolling interest, net of taxes		(2)			(17)			(61)			(15)
Balance at end of period		$	19,503		$	11,278		$	19,503		$	11,278
Total Stockholders' Equity at beginning of period		$	193,453		$	194,081		$	201,934		$	193,884
Total Stockholders' Equity at end of period		$	195,056		$	194,327		$	195,056		$	194,327

See Notes to Consolidated Financial Statements.

AT&T INC.

SEPTEMBER 30, 2020

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. 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, 2019. 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, including potential impacts arising from the COVID-19 pandemic, that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain prior period amounts have been conformed to the current period’s presentation, including the combination of our prior Xandr segment with the WarnerMedia segment.

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

Adopted and Pending Accounting Standards and Other Changes

Credit Losses As of January 1, 2020, we adopted, through modified retrospective application, the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13, as amended), which replaces the incurred loss impairment methodology under prior GAAP with an expected credit loss model. ASU 2016-13 affects trade receivables, loans, contract assets, certain beneficial interests, off-balance-sheet credit exposures not accounted for as insurance and other financial assets that are not subject to fair value through net income, as defined by the standard. Under the expected credit loss model, we are required to consider future economic trends to estimate expected credit losses over the lifetime of the asset. Upon adoption, we recorded a $293 reduction to “Retained earnings,” $395 increase to “allowances for doubtful accounts” applicable to our trade and loan receivables, $10 reduction of contract assets, $105 reduction of net deferred income tax liability and $7 reduction of “Noncontrolling interest” as an opening adjustment. Our adoption of ASU 2016-13 did not have a material impact on our financial statements.

Reference Rate Reform In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04), which provides optional expedients, and allows for certain exceptions to existing GAAP, for contract modifications triggered by the expected market transition of certain benchmark interest rates to alternative reference rates. ASU 2020-04 applies to contracts, hedging relationships and other arrangements that reference the London Interbank Offering Rate (LIBOR) or any other rates ending after December 31, 2022. We are evaluating the impact of our adoption of ASU 2020-04, including optional expedients, to our financial statements.

Convertible Instruments In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity” (ASU 2020-06), which eliminated certain separation models regarding cash conversion and beneficial conversion features to simplify reporting for convertible instruments as a single liability or equity, with no separate accounting for embedded conversion features. ASU 2020-06 will be effective for fiscal years beginning after December 31, 2021, under modified retrospective or full retrospective application, subject to early adoption in 2021. We are evaluating the impact of our adoption of ASU 2020-06 on our financial statements.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Intangible Assets In the second quarter, driven by significant and adverse economic and political environments in Latin America, including the impact of the COVID-19 pandemic, we experienced accelerated subscriber losses and revenue decline in the region, as well as closure of our operations in Venezuela. When combining these business trends and higher weighted-average cost of capital resulting from the increase in country-risk premiums in the region, we concluded that it is more likely than not that the fair value of the Vrio reporting unit, estimated using discounted cash flow and market multiple approaches, is less than its carrying amount. We recorded a $2,212 goodwill impairment in the reporting unit in the second quarter, with $105 attributable to noncontrolling interest. The impairment is not deductible for tax purposes and resulted in an increase in our effective tax rate.

During the first quarter of 2020, we reassessed and changed the estimated economic lives of certain trade names in our Latin America business from indefinite to finite-lived and began amortizing them using the straight-line method over their average remaining economic life of 15 years. This change had an insignificant impact on our financial statements.

Also during the first quarter of 2020, in conjunction with the nationwide launch of AT&T TV and our customers’ continued shift from linear to streaming video services, we reassessed the estimated economic lives and renewal assumptions for our orbital slot licenses. As a result, we have changed the estimated lives of these licenses from indefinite to finite-lived, effective January 1, 2020, and began amortizing our orbital slot licenses using the sum-of-months-digits method over their average remaining economic life of 15 years. This change in accounting increased amortization expense $373, or $0.04 per diluted share available to common stock during the third quarter and $1,138, or $0.12, per diluted share available to common stock for the first nine months of 2020.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019, is shown in the table below.


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Numerators
Numerator for basic earnings per share:
Net Income	$	3,168	$	3,949	$	9,694	$	12,271
Less: Net income attributable to noncontrolling interest	(352)		(249)		(987)		(762)
Net Income attributable to AT&T	2,816		3,700		8,707		11,509
Less: Preferred stock dividends	(54)		—		(138)		—
Net income attributable to common stock	2,762		3,700		8,569		11,509
Dilutive potential common shares:
Share-based payment	5		6		16		16
Numerator for diluted earnings per share	$	2,767	$	3,706	$	8,585	$	11,525
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding	7,147		7,327		7,160		7,321
Dilutive potential common shares:
Share-based payment (in shares)	26		29		26		29
Denominator for diluted earnings per share	7,173		7,356		7,186		7,350
Basic earnings per share attributable to Common Stock	$	0.39	$	0.50	$	1.19	$	1.57
Diluted earnings per share attributable to Common Stock	$	0.39	$	0.50	$	1.19	$	1.57

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

In the first quarter of 2020, we completed an accelerated share repurchase agreement with a third-party financial institution to repurchase AT&T common stock. Under the terms of the agreement, we paid the financial institution $4,000 and received 104.8 million shares.

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, 2019	$	(3,056)		$	48		$	(37)		$	8,515		$	5,470
Other comprehensive income (loss) before reclassifications	(1,398)			81			(2,166)			—			(3,483)
Amounts reclassified from accumulated OCI	—		1	—		1	44		2	(1,382)		3	(1,338)
Net other comprehensive income (loss)	(1,398)			81			(2,122)			(1,382)			(4,821)
Balance as of September 30, 2020	$	(4,454)		$	129		$	(2,159)		$	7,133		$	649

	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	(166)			67			(1,006)			—			(1,105)
Amounts reclassified from accumulated OCI	—		1	—		1	24		2	(1,031)		3	(1,007)
Net other comprehensive income (loss)	(166)			67			(982)			(1,031)			(2,112)
Balance as of September 30, 2019	$	(3,250)		$	65		$	(164)		$	5,486		$	2,137

1(Gains) losses are included in “Other income (expense) - net” in the consolidated statements of income.

2(Gains) losses are primarily included in “Interest expense” in the consolidated statements of income (see Note 7).

3The amortization of prior service credits associated with postretirement benefits are included in “Other income (expense) - net” in the consolidated statements of income (see Note 6).

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 three reportable segments: (1) Communications, (2) WarnerMedia and (3) Latin America.

We have recast our segment results for all prior periods to include our prior Xandr segment within our WarnerMedia segment.

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.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The Communications segment provides wireless and wireline telecom, video and broadband services to consumers located in the U.S. 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 records advertising revenue.

•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 Xandr, previously a separate reportable segment, have been combined with the WarnerMedia segment within Eliminations and other. This segment contains the following:

•Turner 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 and streaming services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment.

•Warner Bros. primarily 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.

•Eliminations & Other includes the Xandr advertising business and Otter Media Holdings operations, and also removes transactions between the Turner, Home Box Office and Warner Bros. business units, including internal sales of content to the HBO Max platform that began in the fourth quarter of 2019 (see Note 5).

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.

Corporate and Other reconciles our segment results to consolidated operating income and income before income taxes, and includes:

•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, and (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.”

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

•Certain significant items, which includes (1) employee separation charges associated with voluntary and/or strategic offers, (2) losses resulting from abandonment of network assets and impairments, 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 channel distribution 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.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the three months ended September 30, 2020
	Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Communications
Mobility	$	17,894	$	10,182	$	7,712	$	2,021	$	5,691	$	—	$	5,691
Entertainment Group	10,053		7,997		2,056		1,277		779		—		779
Business Wireline	6,340		3,833		2,507		1,329		1,178		—		1,178
Total Communications	34,287		22,012		12,275		4,627		7,648		—		7,648
WarnerMedia
Turner	3,176		2,088		1,088		69		1,019		(6)		1,013
Home Box Office	1,781		1,694		87		27		60		—		60
Warner Bros.	2,411		1,973		438		43		395		(23)		372
Eliminations and other	146		(171)		317		32		285		40		325
Total WarnerMedia	7,514		5,584		1,930		171		1,759		11		1,770
Latin America
Vrio	753		675		78		126		(48)		14		(34)
Mexico	643		662		(19)		124		(143)		—		(143)
Total Latin America	1,396		1,337		59		250		(191)		14		(177)
Segment Total	43,197		28,933		14,264		5,048		9,216		$	25	$	9,241
Corporate and Other
Corporate	431		1,012		(581)		61		(642)
Acquisition-related items	—		38		(38)		1,921		(1,959)
Certain significant items	—		113		(113)		—		(113)
Eliminations and consolidations	(1,288)		(918)		(370)		—		(370)
AT&T Inc.	$	42,340	$	29,178	$	13,162	$	7,030	$	6,132

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the three months ended September 30, 2019
	Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Communications
Mobility	$	17,701	$	9,948	$	7,753	$	2,011	$	5,742	$	—	$	5,742
Entertainment Group	11,197		8,797		2,400		1,316		1,084		—		1,084
Business Wireline	6,503		4,022		2,481		1,271		1,210		—		1,210
Total Communications	35,401		22,767		12,634		4,598		8,036		—		8,036
WarnerMedia
Turner	3,007		1,460		1,547		68		1,479		10		1,489
Home Box Office	1,819		1,072		747		33		714		10		724
Warner Bros.	3,333		2,706		627		39		588		(25)		563
Eliminations and other	191		91		100		25		75		20		95
Total WarnerMedia	8,350		5,329		3,021		165		2,856		15		2,871
Latin America
Vrio	1,013		851		162		162		—		13		13
Mexico	717		774		(57)		122		(179)		—		(179)
Total Latin America	1,730		1,625		105		284		(179)		13		(166)
Segment Total	45,481		29,721		15,760		5,047		10,713		$	28	$	10,741
Corporate and Other
Corporate	407		703		(296)		131		(427)
Acquisition-related items	—		190		(190)		1,771		(1,961)
Certain significant items	—		39		(39)		—		(39)
Eliminations and consolidations	(1,300)		(915)		(385)		—		(385)
AT&T Inc.	$	44,588	$	29,738	$	14,850	$	6,949	$	7,901

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the nine months ended September 30, 2020
	Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Communications
Mobility	$	52,445	$	29,083	$	23,362	$	6,078	$	17,284	$	—	$	17,284
Entertainment Group	30,637		23,618		7,019		3,875		3,144		—		3,144
Business Wireline	19,046		11,563		7,483		3,948		3,535		—		3,535
Total Communications	102,128		64,264		37,864		13,901		23,963		—		23,963
WarnerMedia
Turner	9,326		5,145		4,181		207		3,974		—		3,974
Home Box Office	4,905		4,236		669		73		596		15		611
Warner Bros.	8,907		7,506		1,401		124		1,277		(50)		1,227
Eliminations and other	(962)		(882)		(80)		97		(177)		65		(112)
Total WarnerMedia	22,176		16,005		6,171		501		5,670		30		5,700
Latin America
Vrio	2,392		2,119		273		400		(127)		26		(101)
Mexico	1,826		1,914		(88)		373		(461)		—		(461)
Total Latin America	4,218		4,033		185		773		(588)		26		(562)
Segment Total	128,522		84,302		44,220		15,175		29,045		$	56	$	29,101
Corporate and Other
Corporate	1,256		2,819		(1,563)		241		(1,804)
Acquisition-related items	—		431		(431)		6,122		(6,553)
Certain significant items	—		2,539		(2,539)		—		(2,539)
Eliminations and consolidations	(3,709)		(2,709)		(1,000)		(1)		(999)
AT&T Inc.	$	126,069	$	87,382	$	38,687	$	21,537	$	17,150

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the nine months ended September 30, 2019
	Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Communications
Mobility	$	52,356	$	29,511	$	22,845	$	6,027	$	16,818	$	—	$	16,818
Entertainment Group	33,893		25,839		8,054		3,978		4,076		—		4,076
Business Wireline	19,588		12,029		7,559		3,735		3,824		—		3,824
Total Communications	105,837		67,379		38,458		13,740		24,718		—		24,718
WarnerMedia
Turner	9,860		5,813		4,047		167		3,880		46		3,926
Home Box Office	5,045		3,124		1,921		67		1,854		40		1,894
Warner Bros.	10,240		8,543		1,697		122		1,575		(19)		1,556
Eliminations and other	845		438		407		69		338		70		408
Total WarnerMedia	25,990		17,918		8,072		425		7,647		137		7,784
Latin America
Vrio	3,112		2,598		514		496		18		25		43
Mexico	2,093		2,312		(219)		372		(591)		—		(591)
Total Latin America	5,205		4,910		295		868		(573)		25		(548)
Segment Total	137,032		90,207		46,825		15,033		31,792		$	162	$	31,954
Corporate and Other
Corporate	1,290		2,129		(839)		505		(1,344)
Acquisition-related items	(72)		579		(651)		5,719		(6,370)
Certain significant items	—		381		(381)		—		(381)
Eliminations and consolidations	(3,878)		(2,814)		(1,064)		(1)		(1,063)
AT&T Inc.	$	134,372	$	90,482	$	43,890	$	21,256	$	22,634

AT&T INC.

SEPTEMBER 30, 2020

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 September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Communications	$	7,648	$	8,036	$	23,963	$	24,718
WarnerMedia	1,770		2,871		5,700		7,784
Latin America	(177)		(166)		(562)		(548)
Segment Contribution	9,241		10,741		29,101		31,954
Reconciling Items:
Corporate and Other	(642)		(427)		(1,804)		(1,344)
Merger and integration items	(38)		(190)		(431)		(651)
Amortization of intangibles acquired	(1,921)		(1,771)		(6,122)		(5,719)
Asset impairments and abandonments	(73)		—		(2,515)		—
Gain on spectrum transaction1	—		—		900		—
Employee separation costs and benefit-related losses	(40)		(39)		(924)		(381)
Segment equity in net income of affiliates	(25)		(28)		(56)		(162)
Eliminations and consolidations	(370)		(385)		(999)		(1,063)
AT&T Operating Income	6,132		7,901		17,150		22,634
Interest Expense	1,972		2,083		6,031		6,373
Equity in net income (loss) of affiliates	5		3		(11)		36
Other income (expense) - net	(231)		(935)		1,589		(967)
Income Before Income Taxes	$	3,934	$	4,886	$	12,697	$	15,330

1Included as a reduction of "Selling, general and administrative expenses" in the consolidated statement of income.

The following table presents intersegment revenues by segment:


Intersegment Reconciliation
	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Intersegment Revenues
Communications	$	3	$	2	$	7	$	10
WarnerMedia	812		819		2,402		2,538
Latin America	—		—		—		—
Total Intersegment Revenues	815		821		2,409		2,548
Consolidations	473		479		1,300		1,330
Eliminations and consolidations	$	1,288	$	1,300	$	3,709	$	3,878

AT&T INC.

SEPTEMBER 30, 2020

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 and by business unit. Intercompany transactions between segments and the dual reporting of certain advertising revenues are included in “Eliminations and consolidations.” Intercompany transactions between Turner, Home Box Office and Warner Bros., including internal sales of HBO Max that began in the fourth quarter of 2019, are included in “Eliminations and other.”


For the three months ended September 30, 2020
	Service Revenues
	Wireless		Advanced Data		Legacy Voice & Data		Subscription		Content		Advertising		Other		Equipment		Total
Communications
Mobility	$	13,811	$	—	$	—	$	—	$	—	$	72	$	—	$	4,011	$	17,894
Entertainment Group	—		2,128		538		6,556		—		408		373		50		10,053
Business Wireline	—		3,348		2,031		—		—		—		780		181		6,340
WarnerMedia
Turner	—		—		—		1,840		175		1,077		84		—		3,176
Home Box Office	—		—		—		1,624		150		—		7		—		1,781
Warner Bros.	—		—		—		11		2,293		1		106		—		2,411
Eliminations and other1	—		—		—		87		(488)		529		18		—		146
Latin America
Vrio	—		—		—		753		—		—		—		—		753
Mexico	385		—		—		—		—		—		—		258		643
Corporate and Other	169		14		138		—		—		—		52		58		431
Eliminations and consolidations2	—		—		—		(790)		—		(408)		(90)		—		(1,288)
Total Operating Revenues	$	14,365	$	5,490	$	2,707	$	10,081	$	2,130	$	1,679	$	1,330	$	4,558	$	42,340
1“Eliminations and other” of $488 include Warner Bros. content sales of approximately $200 with HBO Max, $180 with HBO linear and $100 with Turner.
2“Eliminations and consolidations” of $790 include approximately $370 and $250 of Turner and HBO linear channel distribution arrangements with the Entertainment Group, respectively, and $120 of HBO Max customer subscriptions at Mobility.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the three months ended September 30, 2019
	Service Revenues
	Wireless		Advanced Data		Legacy Voice & Data		Subscription		Content		Advertising		Other		Equipment		Total
Communications
Mobility	$	13,856	$	—	$	—	$	—	$	—	$	74	$	—	$	3,771	$	17,701
Entertainment Group	—		2,117		628		7,512		—		421		517		2		11,197
Business Wireline	—		3,269		2,252		—		—		—		783		199		6,503
WarnerMedia
Turner	—		—		—		1,927		89		913		78		—		3,007
Home Box Office	—		—		—		1,533		284		—		2		—		1,819
Warner Bros.	—		—		—		23		3,129		13		168		—		3,333
Eliminations and other1	—		—		—		57		(387)		523		(2)		—		191
Latin America
Vrio	—		—		—		1,013		—		—		—		—		1,013
Mexico	455		—		—		—		—		—		—		262		717
Corporate and Other	124		13		6		—		—		—		227		37		407
Eliminations and consolidations2	—		—		—		(798)		—		(421)		(81)		—		(1,300)
Total Operating Revenues	$	14,435	$	5,399	$	2,886	$	11,267	$	3,115	$	1,523	$	1,692	$	4,271	$	44,588
1“Eliminations and other” of $387 include Warner Bros. content sales of approximately $110 with HBO linear and $170 with Turner.
2“Eliminations and consolidations” of $798 include approximately $430 and $330 of Turner and HBO linear channel distribution arrangements with the Entertainment Group, respectively.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the nine months ended September 30, 2020
	Service Revenues
	Wireless		Advanced Data		Legacy Voice & Data		Subscription		Content		Advertising		Other		Equipment		Total
Communications
Mobility	$	41,314	$	—	$	—	$	—	$	—	$	206	$	—	$	10,925	$	52,445
Entertainment Group	—		6,329		1,679		20,220		—		1,115		1,189		105		30,637
Business Wireline	—		9,943		6,227		—		—		—		2,315		561		19,046
WarnerMedia
Turner	—		—		—		5,693		595		2,830		208		—		9,326
Home Box Office	—		—		—		4,403		488		—		14		—		4,905
Warner Bros.	—		—		—		37		8,532		4		334		—		8,907
Eliminations and other1	—		—		—		221		(2,650)		1,416		51		—		(962)
Latin America
Vrio	—		—		—		2,392		—		—		—		—		2,392
Mexico	1,197		—		—		—		—		—		—		629		1,826
Corporate and Other	464		38		424		—		—		—		197		133		1,256
Eliminations and consolidations2	—		—		—		(2,349)		—		(1,115)		(245)		—		(3,709)
Total Operating Revenues	$	42,975	$	16,310	$	8,330	$	30,617	$	6,965	$	4,456	$	4,063	$	12,353	$	126,069
1“Eliminations and other” of $2,650 include Warner Bros. contents sales of approximately $1,850 with HBO Max, $510 with HBO linear and $220 with Turner.
2“Eliminations and consolidations” of $2,349 include approximately $1,170 and $880 of Turner and HBO linear channel distribution arrangements with the Entertainment Group, respectively, and $150 of HBO Max customer subscriptions at Mobility.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the nine months ended September 30, 2019
	Service Revenues
	Wireless		Advanced Data		Legacy Voice & Data		Subscription		Content		Advertising		Other		Equipment		Total
Communications
Mobility	$	41,171	$	—	$	—	$	—	$	—	$	212	$	—	$	10,973	$	52,356
Entertainment Group	—		6,296		1,969		22,872		—		1,170		1,580		6		33,893
Business Wireline	—		9,649		6,973		—		—		—		2,430		536		19,588
WarnerMedia
Turner	—		—		—		5,835		335		3,440		250		—		9,860
Home Box Office	—		—		—		4,383		655		—		7		—		5,045
Warner Bros.	—		—		—		67		9,636		33		504		—		10,240
Eliminations and other1	—		—		—		160		(776)		1,451		10		—		845
Latin America
Vrio	—		—		—		3,112		—		—		—		—		3,112
Mexico	1,376		—		—		—		—		—		—		717		2,093
Corporate and Other	437		40		20		—		—		—		605		116		1,218
Eliminations and consolidations2	—		—		—		(2,475)		—		(1,170)		(233)		—		(3,878)
Total Operating Revenues	$	42,984	$	15,985	$	8,962	$	33,954	$	9,850	$	5,136	$	5,153	$	12,348	$	134,372
1“Eliminations and other” of $776 included Warner Bros. content sales of approximately $310 with HBO linear and $290 with Turner.
2“Eliminations and consolidations” of $2,475 include approximately $1,340 and $1,000 of Turner and HBO linear channel distribution arrangements with the Entertainment Group, respectively.

Deferred Customer Contract Acquisition and Fulfillment Costs

Costs to acquire and fulfill 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 three years to five years. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table presents the deferred customer contract acquisition and fulfillment costs included on our consolidated balance sheets:


	September 30,		December 31,
Consolidated Balance Sheets	2020		2019
Deferred Acquisition Costs
Other current assets	$	2,831	$	2,462
Other Assets	3,114		2,991
Total deferred customer contract acquisition costs	$	5,945	$	5,453
Deferred Fulfillment Costs
Other current assets	$	4,234	$	4,519
Other Assets	5,781		6,439
Total deferred customer contract fulfillment costs	$	10,015	$	10,958

The following table presents deferred customer contract acquisition and fulfillment cost amortization included in “Other cost of revenue” for the nine months ended:


	September 30,		September 30,
Consolidated Statements of Income	2020		2019
Deferred acquisition cost amortization	$	1,969	$	1,565
Deferred fulfillment cost amortization	3,888		3,656

Contract Assets and Liabilities

A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration. The contract asset will decrease as services are provided and billed. For example, when installment sales include promotional discounts (e.g., “buy one get one free”) the difference between revenue recognized and consideration received is recorded as a contract asset to be amortized over the contract term.

When consideration is received in advance of the delivery of goods or services, a contract liability is recorded for deferred revenue. Reductions in the contract liability will be recorded as we satisfy the performance obligations.

The following table presents contract assets and liabilities on our consolidated balance sheets:


	September 30,		December 31,
Consolidated Balance Sheets	2020		2019
Contract asset	$	2,817	$	2,472
Contract liability	6,617		6,999

Our beginning of period contract liability recorded as customer contract revenue during 2020 was $5,340.

Our consolidated balance sheets at September 30, 2020 and December 31, 2019 included $1,729 and $1,611, respectively, for the current portion of our contract asset in “Other current assets” and $5,762 and $5,939, 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.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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 September 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $39,385, of which we expect to recognize approximately 74% by the end of 2021, with the balance recognized thereafter.

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. We do not have significant funding requirements in 2020.

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.

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				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Pension cost:
Service cost - benefits earned during the period	$	257	$	260	$	772	$	743
Interest cost on projected benefit obligation	421		463		1,265		1,520
Expected return on assets	(888)		(905)		(2,667)		(2,636)
Amortization of prior service credit	(28)		(28)		(85)		(85)
Actuarial (gain) loss	—		1,888		—		4,019
Net pension (credit) cost	$	(238)	$	1,678	$	(715)	$	3,561

Postretirement cost:
Service cost – benefits earned during the period	$	14	$	19	$	40	$	55
Interest cost on accumulated postretirement benefit obligation	104		185		312		557
Expected return on assets	(44)		(57)		(133)		(169)
Amortization of prior service credit	(583)		(425)		(1,747)		(1,277)
Net postretirement (credit) cost	$	(509)	$	(278)	$	(1,528)	$	(834)
Combined net pension and postretirement (credit) cost	$	(747)	$	1,400	$	(2,243)	$	2,727

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental pension benefits costs not included in the table above were $19 and $24 in the third quarter and $57 and $74 for the first nine months of 2020 and 2019, respectively. During the third quarter of 2020, we recorded an actuarial loss of $63.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework in ASC 820, “Fair Value Measurement,” 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 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, 2019.

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, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Notes and debentures1	$	155,218	$	181,872	$	161,109	$	182,124
Commercial paper	1,754		1,754		—		—
Bank borrowings	—		—		4		4
Investment securities2	3,669		3,669		3,723		3,723
1Includes credit agreement borrowings.
2Excludes investments accounted for under the equity method.

The carrying amount of debt with an original maturity of less than one year approximates fair 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.

AT&T INC.

SEPTEMBER 30, 2020

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 September 30, 2020 and December 31, 2019. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities,” “Other current assets” and “Accounts payable and accrued liabilities” on our consolidated balance sheets.


	September 30, 2020
	Level 1		Level 2		Level 3		Total
Equity Securities
Domestic equities	$	893	$	—	$	—	$	893
International equities	148		—		—		148
Fixed income equities	233		—		—		233
Available-for-Sale Debt Securities	—		1,524		—		1,524
Asset Derivatives
Cross-currency swaps	—		322		—		322
Foreign exchange contracts	—		16		—		16
Liability Derivatives

Cross-currency swaps	—		(4,244)		—		(4,244)
Foreign exchange contracts	—		(6)		—		(6)


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Equity Securities
Domestic equities	$	844	$	—	$	—	$	844
International equities	183		—		—		183
Fixed income equities	229		—		—		229
Available-for-Sale Debt Securities	—		1,444		—		1,444
Asset Derivatives
Interest rate swaps	—		2		—		2
Cross-currency swaps	—		172		—		172
Interest rate locks	—		11		—		11
Foreign exchange contracts	—		89		—		89
Liability Derivatives
Cross-currency swaps	—		(3,187)		—		(3,187)
Interest rate locks	—		(95)		—		(95)

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 is 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.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Total gains (losses) recognized on equity securities	$	64	$	21	$	22	$	231
Gains (Losses) recognized on equity securities sold	—		74		(24)		101
Unrealized gains (losses) recognized on equity securities held at end of period	$	64	$	(53)	$	46	$	130

At September 30, 2020, available-for-sale debt securities totaling $1,524 have maturities as follows - less than one year: $62; one to three years: $155; three to five years: $163; five or more years: $1,144.

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 Periodically, we enter into and designate 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.

Unrealized 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 derivatives designated as 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 nine months ended September 30, 2020 and 2019, 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 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 certain forecasted film production costs and film tax incentives denominated in foreign currencies.

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, changes in fair value are reported as a component of accumulated OCI and are reclassified into the consolidated statements of income in the same period the hedged transaction affects earnings.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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. Over the next 12 months, we expect to reclassify $95 from accumulated OCI to “Interest expense” due to the amortization of net losses on historical interest rate locks.

We settled all interest rate locks in May 2020 in conjunction with the issuance of fixed rate debt obligations that the interest rate locks were hedging and paid $731 that was largely offset by the return of collateral at the time of settlement. Cash flows from the interest rate lock settlements and return of collateral were reported as Financing Activities in our Statement of Cash Flows, consistent with our accounting policy for these instruments.

Net Investment Hedging We have designated €1,450 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of our subsidiaries. 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 OCI, net on the consolidated balance sheet. Net losses on net investment hedges recognized in accumulated OCI in the third quarter were $70 and for the first nine months of 2020 were $75.

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, 2020, we had posted collateral of $485 (a deposit asset) and held collateral of $4 (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 September, we would have been required to post additional collateral of $25. 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 $3,237. 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 $241. At December 31, 2019, we had posted collateral of $204 (a deposit asset) and held collateral of $44 (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:


	September 30,		December 31,
	2020		2019
Interest rate swaps	$	—	$	853
Cross-currency swaps	42,969		42,325
Interest rate locks	—		3,500
Foreign exchange contracts	204		269
Total	$	43,173	$	46,947

Following are 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	2020		2019		2020		2019
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps	$	(1)	$	—	$	(5)	$	59
Gain (Loss) on long-term debt	1		—		5		(59)

In addition, the net swap settlements that accrued and settled in the quarters ended September 30, 2020 and 2019 were offset against interest expense.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table presents information for our cash flow hedging relationships:


	Three months ended				Nine months ended
	September 30,				September 30,
Cash Flow Hedging Relationships	2020		2019		2020		2019
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	1,079	$	(487)	$	(2,091)	$	(1,082)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI	10		5		(1)		2
Other income (expense) - net reclassified from accumulated OCI into income	(9)		6		4		16
Interest rate locks:
Gain (Loss) recognized in accumulated OCI	—		(202)		(648)		(225)
Interest income (expense) reclassified from accumulated OCI into income	(25)		(15)		(59)		(47)

NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

HBO Latin America Group (HBO LAG) In May 2020, we acquired the remaining interest in HBO LAG for $141, net of cash acquired. At acquisition, we remeasured the fair value of the total business, which exceeded the carrying amount of our equity method investment and resulted in a pre-tax gain of $68. We consolidated that business upon close and recorded those assets at fair value, including $640 of trade names, $271 of distribution networks and $343 of goodwill that is reported in the WarnerMedia segment. These estimates are preliminary in nature and subject to adjustments, which will be finalized within one year from the date of acquisition.

Spectrum Auctions In June 2020, we completed the acquisition of $2,379 of 37/39 GHz spectrum in a Federal Communications Commission (FCC) auction. Prior to the auction, we exchanged the 39 GHz licenses with a book value of approximately $300 that were previously acquired through FiberTower Corporation for vouchers to be applied against the winning bids and recorded a $900 gain in the first quarter of 2020. These vouchers yielded a value of approximately $1,200, which was applied toward our gross bids. In the second quarter of 2020, we made the final cash payment of $949, bringing the total cash payment to $1,186.

Dispositions Subsequent to the Third Quarter

Central European Media Enterprises Ltd. (CME) On October 13, 2020, we completed the sale of our 65.3% interest in CME, a European broadcasting company, and received $1,100. Upon close, we received relief from a debt guarantee originally covering approximately $1,100 that was reduced to $600 by September 30, 2020.

Operations in Puerto Rico On October 31, 2020, we completed the sale of wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands for approximately $1,950. These operations were classified as held-for-sale, and, accordingly, we included the assets in “Other current assets,” and the related liabilities in “Accounts payable and accrued liabilities,” on our consolidated balance sheet at September 30, 2020.

The proceeds will be used to redeem $1,950 of cumulative preferred interests in a subsidiary that held notes secured by the proceeds of this sale.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 9. SALES OF RECEIVABLES

We have agreements with various third-party financial institutions pertaining to the sales 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) revolving service and trade receivables. 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.

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.

Our equipment installment and revolving receivable programs are discussed in detail below. The following table sets forth a summary of the receivables and accounts being serviced:


	September 30, 2020				December 31, 2019
	Equipment				Equipment
	Installment		Revolving		Installment		Revolving
Gross receivables:	$	4,241	$	3,516	$	4,576	$	3,324
Balance sheet classification
Accounts receivable
Notes receivable	2,190		—		2,467		—
Trade receivables	481		3,329		477		2,809
Other Assets
Noncurrent notes and trade receivables	1,570		187		1,632		515

Outstanding portfolio of receivables derecognized from our consolidated balance sheets	8,238		5,100		9,713		4,300
Cash proceeds received, net of remittances1	5,944		5,100		7,211		4,300
1Represents amounts to which financial institutions remain entitled, excluding the deferred purchase price.

Equipment Installment Receivables Program

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 through our bankruptcy-remote subsidiary 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.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table sets forth a summary of equipment installment receivables sold under this program during the three and nine months ended September 30, 2020 and 2019:


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Gross receivables sold	$	1,624	$	2,098	$	5,497	$	7,043
Net receivables sold1	1,578		2,014		5,300		6,693
Cash proceeds received	1,387		1,700		4,562		5,895
Deferred purchase price recorded	226		352		811		922
Guarantee obligation recorded	55		67		126		261
1Receivables net of allowance, imputed interest and equipment trade-in right guarantees.

The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently adjusted for changes in present value of expected cash flows. 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).

The following table presents the previously transferred equipment installment receivables, which we repurchased in exchange for the associated deferred purchase price during the three and nine months ended September 30, 2020 and 2019:


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Fair value of repurchased receivables	$	373	$	268	$	946	$	926
Carrying value of deferred purchase price	373		259		931		891
Gain on repurchases1	$	—	$	9	$	15	$	35
1These gains are included in "Selling, general and administrative" in the consolidated statements of income.

At September 30, 2020 and December 31, 2019, our deferred purchase price receivable was $2,163 and $2,336, respectively, of which $1,538 and $1,569 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at September 30, 2020 and December 31, 2019 was $319 and $384, respectively, of which $234 and $148 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.

Revolving Receivables Program

In 2019, we entered into a one-year revolving agreement to transfer up to $4,300 of certain receivables through our bankruptcy-remote subsidiaries to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred. In the first quarter of 2020, we expanded the program limit to $5,300. In the second quarter of 2020, we extended the agreement by one year. As customers pay their balances, we transfer additional receivables into the program, resulting in our gross receivables sold exceeding net cash flow impacts (e.g., collect and reinvest). The transferred receivables are fully guaranteed by our bankruptcy-remote subsidiaries, which hold additional receivables in the amount of $3,516 that are pledged as collateral under this agreement. The transfers are recorded at fair value of the proceeds received and obligations assumed less derecognized receivables. The obligation is subsequently adjusted for changes in estimated expected credit losses and interest rates. Our maximum exposure to loss related to these receivables transferred is limited to the amount outstanding.

The fair value measurement used for the obligation is considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table sets forth a summary of receivables sold:


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Gross receivables sold/cash proceeds received1	$	3,563	$	2,873	$	11,590	$	8,725
Collections reinvested under revolving agreement	3,563		2,873		10,590		5,000
Collections not reinvested	200		269		200		269
Net cash proceeds received (remitted)	$	(200)	$	(269)	$	800	$	3,456

Net receivables sold2	$	3,553	$	2,864	$	11,510	$	8,361
Obligations recorded (reversed)	58		39		172		475
1There were no initial sales of receivables in either of the three-month periods and $1,000 and $3,725 for the nine months ended September 30, 2020 and 2019, respectively.
2Receivables net of allowance, return and incentive reserves and imputed interest.

NOTE 10. LEASES

We have operating and finance leases for certain facilities and equipment used in operations. Our leases generally have remaining lease terms of up to 15 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				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Operating lease cost	$	1,546	$	1,481	$	4,372	$	4,333

Finance lease cost:
Amortization of right-of-use assets	$	76	$	67	$	216	$	203
Interest on lease obligation	39		42		116		126
Total finance lease cost	$	115	$	109	$	332	$	329

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Supplemental cash flow information related to leases is as follows:


	Nine months ended
	September 30,
	2020		2019
Cash Flows from Operating Activities
Cash paid for amounts included in lease obligations
Operating cash flows from operating leases	$	3,651	$	3,338
Supplemental Lease Cash Flow Disclosures
Operating lease right-of-use assets obtained in exchange for new operating lease obligations	3,908		7,068

Supplemental balance sheet information related to leases is as follows:


	September 30, 2020			December 31, 2019
Operating Leases
Operating lease right-of-use assets	$	24,546		$	24,039

Accounts payable and accrued liabilities	$	3,483		$	3,451
Operating lease obligation	22,056			21,804
Total operating lease obligation	$	25,539		$	25,255
Finance Leases
Property, plant and equipment, at cost	$	3,485		$	3,534
Accumulated depreciation and amortization	(1,363)			(1,296)
Property, plant and equipment, net	$	2,122		$	2,238

Current portion of long-term debt	$	174		$	162
Long-term debt	1,732			1,872
Total finance lease obligation	$	1,906		$	2,034

	September 30,
	2020			2019
Weighted-Average Remaining Lease Term (years)
Operating leases	8.5			8.7
Finance leases	10.1			10.4

Weighted-Average Discount Rate
Operating leases	4.1		%	4.3		%
Finance leases	8.1		%	8.4		%

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Future minimum maturities of lease obligations are as follows:


At September 30, 2020	Operating		Finance
	Leases		Leases
Remainder of 2020	$	1,226	$	99
2021	4,679		316
2022	4,372		298
2023	3,981		278
2024	3,449		258
Thereafter	13,543		1,720
Total lease payments	31,250		2,969
Less imputed interest	(5,711)		(1,063)
Total	$	25,539	$	1,906

NOTE 11. STOCKHOLDERS' EQUITY

We have authorized 10 million preferred shares of AT&T stock, each with a par value of $1.00 per share. Cumulative perpetual preferred shares consist of the following:

•Series A: 48 thousand shares outstanding at September 30, 2020 and December 31, 2019, with a $25,000 per share liquidation preference and a dividend rate of 5.00%.

•Series B: 20 thousand shares outstanding at September 30, 2020 and zero issued and outstanding at December 31, 2019, with a €100,000 per share liquidation preference, and an initial dividend rate of 2.875%, subject to reset beginning on May 1, 2025.

•Series C: 70 thousand shares outstanding at September 30, 2020 and zero issued and outstanding at December 31, 2019, with a $25,000 per share liquidation preference and a dividend rate of 4.75%.

So long as the preferred dividends are declared and paid on a timely basis on each series of preferred shares, there are no limitations on our ability to declare a dividend on or repurchase AT&T common shares. The preferred shares are optionally redeemable by AT&T at the liquidation price generally on or after five years from the issuance date, or upon certain other contingent events.

Telco LLC

In September 2020, we issued $2,000 nonconvertible cumulative preferred interests out of a newly created limited liability company (Telco LLC) that was formed to hold telecommunication-related assets. The preferred interests are entitled to cash distributions, subject to declaration and are included in “Noncontrolling interest” on the consolidated balance sheets.

Members’ equity in Telco LLC consist of (1) member’s interests, which are held by a consolidated subsidiary of AT&T, and (2) preferred interests (Telco preferred interests), which pay an initial preferred distribution of 4.25% annually, subject to declaration, and subject to reset every seven years. Failure to pay distributions on the Telco preferred interests would not limit cash movements between affiliates, or our ability to declare a dividend on or repurchase AT&T shares. We can call the Telco preferred interests at the issue price beginning seven years from the issuance date.

The Telco preferred interests holders have the option to require redemption upon the occurrence of certain contingent events, such as the failure of Telco LLC to pay the preferred distribution for two or more periods or to meet certain other requirements, including a minimum credit rating. If notice is given, all other holders of equal or more subordinate classes of members equity are entitled to receive the same form of consideration payable to the holders of the preferred interests, resulting in a deemed liquidation for accounting purposes.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 12. 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:


	September 30,				December 31,
	2020		2019		2019		2018
Cash and cash equivalents	$	9,758	$	6,588	$	12,130	$	5,204
Restricted cash in Other current assets	2		15		69		61
Restricted cash in Other Assets	89		179		96		135
Cash and Cash Equivalents and Restricted Cash	$	9,849	$	6,782	$	12,295	$	5,400


Consolidated Statements of Cash Flows	Nine months ended
	September 30,
Cash paid (received) during the period for:	2020		2019
Interest	$	6,661	$	6,938
Income taxes, net of refunds	306		420
Spectrum acquisitions	1,062		1,022

Other Noncash Investing and Financing Activities In connection with capital improvements and the acquisition of other productive assets, we negotiate favorable payment terms (referred to as vendor financing), which are reported as financing activities when paid. For the first nine months, we recorded vendor financing commitments related to capital investments of approximately $3,148 in 2020 and $1,917 in 2019.

Total vendor financing payables included in our September 30, 2020 consolidated balance sheet were approximately $3,252, with $1,474 due within one year (in “Accounts payable and accrued liabilities”) and the remainder predominantly due within two to three years (in “Other noncurrent liabilities”).

Financing Activities

Debt Transactions At September 30, 2020, our total long-term debt obligations totaled $158,878. Our debt activity during the nine months ended September 30, 2020 primarily consisted of the following:

•Net borrowings of approximately $1,710 of debt under our commercial paper program during the first nine months.

•Entry into and draw on a $5,500 Term Loan Credit Agreement, with certain commercial banks and Bank of America, N.A., as lead agent, in April 2020, which was redeemed in May 2020 (originally due on December 31, 2020).

•Issuance of $16,545 of AT&T global notes due 2027 to 2060 in the second quarter.

•Issuance of €3,000 million global notes ($3,281 at issuance) due 2028 to 2038 in the second quarter.

•Issuance of $11,000 of global notes due 2028 to 2061 in the third quarter.

•Redemption of $12,689 of AT&T global notes due 2020 to 2047 in the second quarter.

•Redemption of $1,800 under term loan credit agreements with certain banks in the second quarter.

•Redemption of $1,000 annual put reset securities issued by BellSouth in the second quarter.

•Redemption of $4,264 of AT&T, WarnerMedia and DIRECTV notes due 2022 in the third quarter.

•Redemption of $1,158 of AT&T and WarnerMedia global notes due 2022 to 2023 in the third quarter.

•Redemption of €2,250 of AT&T floating-rate notes due 2020 (approximately $2,637 at maturity) in the third quarter.

•Redemption of R$3,381 of Sky Serviços de Banda Larga Ltda. floating-rate private loan due 2021 (approximately $1,000 when issued in April 2018 and $638 at redemption due to strengthening of the U.S. dollar against Brazilian real) in the third quarter.

•Repurchases of $11,384 of AT&T global notes and subsidiary notes due 2021 to 2025 tendered for cash in the third quarter.

•Exchange of $17,677 of AT&T and subsidiary notes, due 2031 to 2058, for $1,459 of cash and $21,500 of three new series of AT&T global notes due 2053 to 2059 in the third quarter.

AT&T INC.

SEPTEMBER 30, 2020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Our long-term debt issuances carried a weighted average interest rate of 3.2%, and our long-term debt redemptions had a weighted average interest rate of 3.2%.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share 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 have three reportable segments: (1) Communications, (2) WarnerMedia and (3) Latin America. 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.

We have recast our segment results for all prior periods to include our prior Xandr segment within our WarnerMedia segment.


	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating Revenues
Communications	$	34,287	$	35,401	(3.1)	%	$	102,128	$	105,837	(3.5)	%
WarnerMedia	7,514		8,350		(10.0)		22,176		25,990		(14.7)
Latin America	1,396		1,730		(19.3)		4,218		5,205		(19.0)
Corporate and other	431		407		5.9		1,256		1,218		3.1
Eliminations and consolidation	(1,288)		(1,300)		0.9		(3,709)		(3,878)		4.4
AT&T Operating Revenues	42,340		44,588		(5.0)		126,069		134,372		(6.2)

Operating Contribution
Communications	7,648		8,036		(4.8)		23,963		24,718		(3.1)
WarnerMedia	1,770		2,871		(38.3)		5,700		7,784		(26.8)
Latin America	(177)		(166)		(6.6)		(562)		(548)		(2.6)
Segment Operating Contribution	$	9,241	$	10,741	(14.0)	%	$	29,101	$	31,954	(8.9)	%

The Communications segment provides services to businesses and consumers located in the U.S. and businesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the following business units:

•Mobility provides nationwide wireless service and equipment.

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

•Turner primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

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.

COVID-19 Update

Disruptions caused by the coronavirus (COVID-19) and measures taken to prevent its spread or mitigate its effects both domestically and internationally have impacted our results of operations. We recorded approximately $190, or $0.02 per diluted share, in the third quarter and $940, or $0.10 per diluted share, for the first nine months of 2020, of incremental costs associated with voluntary corporate actions taken to protect and compensate front-line employees and contractors or additional WarnerMedia production disruption.

In addition to these incremental costs, we estimate that our operations and comparability were impacted by approximately $1,715, or $0.19 per diluted share, in the third quarter and $2,185, or $0.24 per diluted share, for the first nine months of 2020, for: (1) the resumption of the NBA season, resulting in the shift to third quarter of sports costs historically incurred during the second quarter, and associated advertising revenues, (2) lower television licensing and production revenues due to production hiatus, (3) the partial closure of movie theaters and postponement of theatrical releases, leading to lower content revenues and associated expenses, and (4) the reluctance of consumers to travel at previous levels, driving significantly lower international wireless roaming services that do not have a directly correlated expense reduction.

Subscriber counts at September 30, 2020, exclude customers who we have agreed not to terminate service under the Federal Communications Commission (FCC) "Keep Americans Connected Pledge" or state mandates. For reporting purposes, we excluded 121,000 postpaid (97,000 phone), 13,000 broadband (4,000 fiber) and 7,000 premium TV nonpaying customers even though they are still receiving service.

Third-quarter 2020 subscriber net adds include 233,000 postpaid (151,000 phone), 104,000 broadband (28,000 fiber) and 116,000 premium TV "Keep Americans Connected Pledge" paying accounts.

With partial reopening of the economy and improved collections experience, the economic effects of the pandemic and resulting societal changes remain unpredictable. There are a number of uncertainties that could impact our future results of operations, including the effectiveness of COVID-19 mitigation measures; the duration of the pandemic; global economic conditions; changes to our operations; changes in consumer confidence, behaviors and spending; work from home trends; and the sustainability of supply chains. We expect operating results and cash flows to continue to be adversely impacted by COVID-19 for the duration of the pandemic. We expect our fourth-quarter results to be impacted by the following:

•Lower revenues from the partial closure of movie theaters and postponement of theatrical releases, partially offset by lower production and other programming expenses;

•The decline in revenues from international roaming wireless services due to reduced travel; and

•Higher expenses to protect front-line employees, contractors and customers.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

RESULTS OF OPERATIONS

Consolidated Results Our financial results are summarized in the discussions that follow. Additional analysis is discussed in our “Segment Results” section. Certain prior period amounts have been reclassified to conform to the current period’s presentation.


	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating Revenues
Service	$	37,782	$	40,317	(6.3)	%	$	113,716	$	122,024	(6.8)	%
Equipment	4,558		4,271		6.7		12,353		12,348		—
Total Operating Revenues	42,340		44,588		(5.0)		126,069		134,372		(6.2)

Operating expenses
Operations and support	29,178		29,738		(1.9)		87,382		90,482		(3.4)
Depreciation and amortization	7,030		6,949		1.2		21,537		21,256		1.3
Total Operating Expenses	36,208		36,687		(1.3)		108,919		111,738		(2.5)
Operating Income	6,132		7,901		(22.4)		17,150		22,634		(24.2)
Interest expense	1,972		2,083		(5.3)		6,031		6,373		(5.4)
Equity in net income (loss) of affiliates	5		3		66.7		(11)		36		—
Other income (expense) - net	(231)		(935)		(75.3)		1,589		(967)		—
Income Before Income Taxes	3,934		4,886		(19.5)		12,697		15,330		(17.2)
Net Income	3,168		3,949		(19.8)		9,694		12,271		(21.0)
Net Income Attributable to AT&T	2,816		3,700		(23.9)		8,707		11,509		(24.3)
Net Income Attributable to Common Stock	$	2,762	$	3,700	(25.4)	%	$	8,569	$	11,509	(25.5)	%

Operating revenues decreased in the third quarter and in the first nine months of 2020. Communications segment revenue declines were driven by continued declines in video and legacy services, partially offset by increases in strategic and managed business service and third-quarter growth in wireless equipment revenues. Lower WarnerMedia segment revenues reflect limited and postponed theatrical releases and home entertainment releases as well as lower television licensing and productions revenues, partially offset by increased sports-related advertising revenue in the third quarter that shifted from the second quarter. Latin America segment revenue declines were primarily due to foreign exchange rates.

Operations and support expenses decreased in the third quarter and in the first nine months of 2020. The decreases were driven by lower broadcast and programming costs in our Communications segment and, for the first nine months, our WarnerMedia segment. Expense declines in the third quarter were partially offset by increased sports-related programming costs that shifted from the second quarter and increased HBO Max investments in the WarnerMedia segment. Expense declines for the first nine months were also driven by a noncash gain of $900 on a spectrum transaction in the first quarter and our continued focus on cost management, partially offset by charges for a goodwill impairment at our Vrio business unit in the second quarter, employee separation charges and incremental costs related to COVID-19. As part of our cost and efficiency initiatives, we expect operations and support expense improvements to continue as we size our operations to reflect the current economic activity level.

Depreciation and amortization expense increased in the third quarter and for the first nine months of 2020.

Amortization expense increased $87, or 4.6% in the third quarter and $222, or 3.6% for the first nine months of 2020 due to the amortization of orbital slot licenses, which began in the first quarter of 2020 (see Note 1).

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

Depreciation expense decreased $6, or 0.1% in the third quarter and increased $59, or 0.4% for the first nine months of 2020. The increase for the nine months period was primarily due to ongoing capital spend for network upgrades and expansion partially offset by fully depreciated assets in our Communications segment.

Operating income decreased in the third quarter and for the first nine months of 2020. Our operating income margin for the third quarter decreased from 17.7% in 2019 to 14.5% in 2020 and for the first nine months decreased from 16.8% in 2019 to 13.6% in 2020.

Interest expense decreased in the third quarter and first nine months of 2020, primarily due to lower interest rates and debt balances.

Equity in net income of affiliates increased in the third quarter and decreased for the first nine months of 2020, reflecting changes in our investment portfolio, including our second-quarter 2020 acquisition of the remaining interest in HBO Latin America Group (HBO LAG).

Other income (expense) – net increased in the third quarter and for the first nine months of 2020. The increases were primarily due to the recognition of an actuarial loss of $63 in the third quarter and for the first nine months of 2020, compared to actuarial losses totaling $1,917 and $4,048 in the third quarter and for the first nine months of 2019, respectively, and higher prior service credit amortization in 2020 (see Note 6). Partially offsetting the increases were $1,224 of debt redemption costs in the third quarter, the write-off of certain investments in 2020 and the second-quarter 2019 gain on sale of our interest in Hulu.

Income taxes decreased in the third quarter and for the first nine months of 2020. The decrease in income tax expense in the third quarter was primarily attributable to lower income before tax. The decrease in income tax expense for the first nine months of 2020 was primarily attributable to lower income before income tax offset by the second quarter Vrio goodwill impairment, which is not deductible for tax purposes.

Our effective tax rate was 19.5% for the third quarter and 23.7% for the first nine months of 2020, versus 19.2% and 20.0% for the comparable year-prior periods, respectively. The increase in our effective tax rate for the first nine months was primarily due to the second quarter Vrio goodwill impairment, which is not deductible for tax purposes.


COMMUNICATIONS SEGMENT	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Segment Operating Revenues
Mobility	$	17,894	$	17,701	1.1	%	$	52,445	$	52,356	0.2	%
Entertainment Group	10,053		11,197		(10.2)		30,637		33,893		(9.6)
Business Wireline	6,340		6,503		(2.5)		19,046		19,588		(2.8)
Total Segment Operating Revenues	34,287		35,401		(3.1)		102,128		105,837		(3.5)

Segment Operating Contribution
Mobility	5,691		5,742		(0.9)		17,284		16,818		2.8
Entertainment Group	779		1,084		(28.1)		3,144		4,076		(22.9)
Business Wireline	1,178		1,210		(2.6)		3,535		3,824		(7.6)
Total Segment Operating Contribution	$	7,648	$	8,036	(4.8)	%	$	23,963	$	24,718	(3.1)	%

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


Selected Subscribers and Connections
	September 30,
(000s)	2020	2019
Mobility Subscribers1	176,744	162,300
Total domestic broadband connections1	15,375	15,575
Network access lines in service	7,562	8,831
U-verse VoIP connections	3,942	4,539
1Excludes 121 wireless and 13 broadband customers who we have agreed not to terminate service under the "Keep Americans Connected Pledge," which was implemented March 13, 2020, or state mandates.

Operating revenues decreased in the third quarter and for the first nine months of 2020, driven by declines in our Entertainment Group and Business Wireline business units, partially offset by increases in our Mobility business unit. The decreases reflect the continued shift away from linear video and legacy services and lower wireless service revenues from a decline in international travel. Equipment sales increased in the third quarter but were down for the first nine months due to lower equipment sales in the first quarter of 2020 resulting from pandemic-related store closures. Partially offsetting these declines was growth in our prepaid subscriber base.

Operating contribution decreased in the third quarter and for the first nine months of 2020. The decline in the third quarter reflects lower contribution from all business units. Lower contribution for the first nine months was due to declines in our Business Wireline and Entertainment Group business units, largely offset by improvement in our Mobility business unit. Our Communications segment operating income margin in the third quarter decreased from 22.7% in 2019 to 22.3% in 2020 and for the first nine months increased from 23.4% in 2019 to 23.5% in 2020.


Communications Business Unit Discussion
Mobility Results
	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating revenues
Service	$	13,883	$	13,930	(0.3)	%	$	41,520	$	41,383	0.3	%
Equipment	4,011		3,771		6.4		10,925		10,973		(0.4)
Total Operating Revenues	17,894		17,701		1.1		52,445		52,356		0.2

Operating expenses
Operations and support	10,182		9,948		2.4		29,083		29,511		(1.5)
Depreciation and amortization	2,021		2,011		0.5		6,078		6,027		0.8
Total Operating Expenses	12,203		11,959		2.0		35,161		35,538		(1.1)
Operating Income	5,691		5,742		(0.9)		17,284		16,818		2.8
Equity in Net Income (Loss) of Affiliates	—		—		—		—		—		—
Operating Contribution	$	5,691	$	5,742	(0.9)	%	$	17,284	$	16,818	2.8	%

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

The following tables highlight other key measures of performance for Mobility:


Subscribers
	September 30,		Percent
(in 000s)	2020	2019	Change
Postpaid2	75,969	75,152	1.1	%
Prepaid	18,100	17,740	2.0
Reseller	6,708	7,120	(5.8)
Connected devices1	75,967	62,288	22.0
Total Mobility Subscribers	176,744	162,300	8.9	%

1Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems.

2Excludes 121 customers who we have agreed not to terminate service under the "Keep Americans Connected Pledge" or state mandates.


Net Additions
	Third Quarter						Nine-Month Period
					Percent						Percent
(in 000s)	2020		2019		Change		2020		2019		Change
Postpaid Phone Net Additions5	645		101		—	%	657		254		—	%
Total Phone Net Additions5	776		255		—		880		780		12.8

Postpaid2, 5, 6	1,081		(217)		—		954		(570)		—
Prepaid6, 7	245		227		7.9		365		669		(45.4)
Reseller6	(4)		(231)		98.3		(252)		(677)		62.8
Connected devices3	4,203		3,900		7.8		9,976		10,947		(8.9)
Mobility Net Subscriber Additions1	5,525		3,679		50.2	%	11,043		10,369		6.5	%

Postpaid Churn4, 5	0.85	%	1.19	%	(34)	BP	0.99	%	1.14	%	(15)	BP
Postpaid Phone-Only Churn4, 5	0.69	%	0.95	%	(26)	BP	0.80	%	0.91	%	(11)	BP

1Excludes acquisition-related additions during the period.

2In addition to postpaid phones, includes tablets and wearables and other. Tablet net (losses) were (44) and (397) for the three months and (470) and (1,164) for the nine months ended September 30, 2020 and 2019, respectively. Wearables and other net adds were 481 and 78 for the three months and 768 and 342 for the nine months ended September 30, 2020 and 2019, respectively.

3Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes postpaid tablets and other postpaid data devices.

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

5The third quarter includes 233 (151 phone) "Keep Americans Connected Pledge" paying accounts. The third quarter and nine-month periods ended September 30, 2020, exclude 121 (97 phone) customers who we have agreed not to terminate service under the "Keep Americans Connected Pledge" or state mandates. The third quarter and nine-month period ended September 30, 2020, churn excluding "Keep Americans Connected Pledge" paying accounts was 0.95% postpaid (0.77% phone) and 1.02% postpaid (0.82% phone), respectively.

6The third quarter and nine-month period ended September 30, 2020, exclude subscribers transferred in connection with business dispositions.

7The third quarter and nine-month period ended September 30, 2020, exclude 188 subscriber disconnections resulting from updating our prepaid activation policy.

Service revenue decreased in the third quarter and increased for the first nine months of 2020. The third quarter decrease is due to lower roaming revenue from continued declines in international travel. The increase for the first nine months was largely due to growth in prepaid subscribers and connected devices, offset by impacts of the pandemic.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

ARPU

Postpaid ARPU decreased in the third quarter and for the first nine months. ARPU during 2020 reflects the decline in international roaming revenues and waived fees.

Churn

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn and postpaid phone-only churn were lower in the first nine months due to migrations to unlimited plans, continued network improvements and lower overall involuntary disconnects partly related to the "Keep Americans Connected Pledge."

Equipment revenue increased in the third quarter and decreased for the first nine months of 2020. The increase in the third quarter is primarily driven by a mix of sales of higher-priced postpaid smartphone sales and data devices, such as wireless modems and hotspots. The decrease for the first nine months is due to suppressed equipment sales in the first quarter resulting from pandemic-related store closures.

Operations and support expenses increased in the third quarter and decreased for the first nine months of 2020. The increase in the third quarter is largely driven by higher commission deferral amortization, content costs associated with plans offering HBO Max and higher sales costs, partially offset by lower bad debt expense. The increase in commission deferral amortization is partly offset by the impacts of the second-quarter 2020 updates to extend the expected economic life of our Mobility customers.

The decrease for the first nine months was driven by lower equipment sales and marketing expense, cost initiatives, asset optimization and higher bad debt expense in 2019 resulting from prior-year charges in response to credit easing policies. Partially offsetting the decrease were costs associated with plans offering HBO Max and higher commission deferral amortization.

Depreciation expense increased in the third quarter and for the first nine months of 2020 primarily due to ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets.

Operating income decreased in the third quarter and increased for the first nine months of 2020. Our Mobility operating income margin in the third quarter decreased from 32.4% in 2019 to 31.8% in 2020, and for the first nine months increased from 32.1% in 2019 to 33.0% in 2020. Our Mobility EBITDA margin in the third quarter decreased from 43.8% in 2019 to 43.1% in 2020, and for the first nine months increased from 43.6% in 2019 to 44.5% in 2020. EBITDA is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization.

Subscriber Relationships

As the wireless industry has matured, future wireless growth will depend on our ability to offer innovative services, plans and devices that take advantage of our premier 5G wireless network, which went nationwide in July 2020, and to provide these services in bundled product offerings. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. To support higher mobile data usage, our priority is to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible.

To attract and retain subscribers in a mature and highly competitive market, we have launched a wide variety of plans, including our FirstNet and prepaid products, and arrangements that bundle our video services. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. We offer unlimited data plans and such subscribers also tend to have higher retention and lower churn rates. Our offerings are intended to encourage existing subscribers to upgrade their current services and/or add devices, attract subscribers from other providers and/or minimize subscriber churn.

Connected Devices

Connected devices include data-centric devices such as wholesale automobile systems, monitoring devices, fleet management and session-based tablets. The number of connected device subscribers increased in 2020, and during the third quarter and for the first nine months of 2020, we added approximately 3.0 million and 6.7 million wholesale connected cars, respectively, through agreements with various carmakers and experienced strong growth in other Internet of Things (IoT) connections. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


Entertainment Group Results
	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating revenues
Video entertainment	$	6,964	$	7,933	(12.2)	%	$	21,335	$	24,042	(11.3)	%
High-speed internet	2,128		2,117		0.5		6,329		6,296		0.5
Legacy voice and data services	538		628		(14.3)		1,679		1,969		(14.7)
Other service and equipment	423		519		(18.5)		1,294		1,586		(18.4)
Total Operating Revenues	10,053		11,197		(10.2)		30,637		33,893		(9.6)

Operating expenses
Operations and support	7,997		8,797		(9.1)		23,618		25,839		(8.6)
Depreciation and amortization	1,277		1,316		(3.0)		3,875		3,978		(2.6)
Total Operating Expenses	9,274		10,113		(8.3)		27,493		29,817		(7.8)
Operating Income	779		1,084		(28.1)		3,144		4,076		(22.9)
Equity in Net Income (Loss) of Affiliates	—		—		—		—		—		—
Operating Contribution	$	779	$	1,084	(28.1)	%	$	3,144	$	4,076	(22.9)	%

The following tables highlight other key measures of performance for Entertainment Group:


Connections
	September 30,		Percent
(in 000s)	2020	2019	Change
Video Connections
Premium TV1	17,100	20,418	(16.3)	%
AT&T TV Now	683	1,145	(40.3)
Total Video Connections1	17,783	21,563	(17.5)

Total Broadband Connections1	14,102	14,301	(1.4)
Fiber Broadband Connections	4,678	3,696	26.6

Retail Consumer Switched Access Lines	2,977	3,467	(14.1)
U-verse Consumer VoIP Connections	3,361	3,973	(15.4)
Total Retail Consumer Voice Connections	6,338	7,440	(14.8)	%
1Excludes 7 premium TV and 13 broadband connections who we have agreed not to terminate service under the "Keep Americans Connected Pledge" or state mandates.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


Net Additions
	Third Quarter				Nine-Month Period
			Percent				Percent
(in 000s)	2020	2019	Change		2020	2019	Change
Video Net Additions
Premium TV1	(590)	(1,163)	49.3	%	(2,373)	(2,485)	4.5	%
AT&T TV Now	(37)	(195)	81.0		(243)	(446)	45.5
Net Video Additions1	(627)	(1,358)	53.8		(2,616)	(2,931)	10.7

Net Broadband Additions1	158	(119)	—		(17)	(108)	84.3
Fiber Broadband Net Additions	357	318	12.3	%	791	933	(15.2)	%
1The third quarter includes 116 video and 104 broadband (28 fiber) "Keep Americans Connected Pledge" paying accounts. The third quarter and nine-month period ended September 30, 2020, exclude 7 premium TV and 13 broadband (4 fiber) connections who we have agreed not to terminate service under the "Keep Americans Connected Pledge."

Video entertainment revenues are comprised of subscription and advertising revenues. Revenues decreased in the third quarter and for the first nine months of 2020, largely driven by a decline in premium TV and OTT subscribers as we continue to focus on retention of existing subscribers with a particular focus on our high-value subscribers, and lower subscription-based advertising revenues driven by impacts of the pandemic. Consistent with the rest of the industry, our customers continue to shift from a premium linear service to more economically priced OTT and subscription video on demand offerings, which has impacted our video revenues.

High-speed internet revenues increased in the third quarter and for the first nine months of 2020, driven by higher ARPU resulting from an increase in high-speed fiber net additions and pricing, partially offset by a decline in the average subscriber base.

Legacy voice and data service revenues decreased in the third quarter and for the first nine months of 2020, reflecting the continued decline in the number of customers.

Operations and support expenses decreased in the third quarter and for the first nine months of 2020. Contributing to the decreases were lower content and selling costs largely due to fewer subscribers, the impact of one less week of NFL games compared to the prior year, and our ongoing focus on cost initiatives. Partially offsetting the decreases were annual content rate increases, higher commission and fulfillment cost deferral amortization, including the impact of the second-quarter 2020 updates to decrease the estimated economic life for our Entertainment Group customers, and pandemic-related compassion payments made in the first half of 2020.

Depreciation expense decreased in the third quarter and for the first nine months of 2020 due to network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income decreased in the third quarter and for the first nine months of 2020. Our Entertainment Group operating income margin in the third quarter decreased from 9.7% in 2019 to 7.7% in 2020, and for the first nine months decreased from 12.0% in 2019 to 10.3% in 2020. Our Entertainment Group EBITDA margin in the third quarter decreased from 21.4% in 2019 to 20.5% in 2020, and for the first nine months decreased from 23.8% in 2019 to 22.9% in 2020.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


Business Wireline Results
	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating revenues
Strategic and managed services	$	3,967	$	3,900	1.7	%	$	11,789	$	11,513	2.4	%
Legacy voice and data services	2,031		2,252		(9.8)		6,227		6,973		(10.7)
Other service and equipment	342		351		(2.6)		1,030		1,102		(6.5)
Total Operating Revenues	6,340		6,503		(2.5)		19,046		19,588		(2.8)

Operating expenses
Operations and support	3,833		4,022		(4.7)		11,563		12,029		(3.9)
Depreciation and amortization	1,329		1,271		4.6		3,948		3,735		5.7
Total Operating Expenses	5,162		5,293		(2.5)		15,511		15,764		(1.6)
Operating Income	1,178		1,210		(2.6)		3,535		3,824		(7.6)
Equity in Net Income (Loss) of Affiliates	—		—		—		—		—		—
Operating Contribution	$	1,178	$	1,210	(2.6)	%	$	3,535	$	3,824	(7.6)	%

Strategic and managed services revenues increased in the third quarter and for the first nine months of 2020. Our strategic services are made up of (1) data services, including our VPN, dedicated internet ethernet and broadband, (2) voice service, including VoIP and cloud-based voice solutions, (3) security and cloud solutions, and (4) managed, professional and outsourcing services. Revenue increases were primarily attributable to growth in our security and cloud solutions, dedicated internet and voice services and also includes the impact of higher demand for connectivity due to the pandemic.

Legacy voice and data service revenues decreased in the third quarter and for the first nine months of 2020, primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.

Other service and equipment revenues decreased in the third quarter and for the first nine months of 2020, reflecting prior-year licensing of intellectual property assets. Revenue trends are impacted by the licensing of intellectual property assets, which vary from period-to-period. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from customer premises equipment.

Operations and support expenses decreased in the third quarter and for the first nine months of 2020, primarily due to our continued efforts to drive efficiencies in our network operations through automation and reductions in customer support expenses through digitization.

Depreciation expense increased in the third quarter and for the first nine months of 2020, primarily due to increases in capital spending for network upgrades and expansion.

Operating income decreased in the third quarter and for the first nine months of 2020. Our Business Wireline operating income margin in the third quarter remained consistent at 18.6% in 2019 and 18.6% in 2020, and for the first nine months decreased from 19.5% in 2019 to 18.6% in 2020. Our Business Wireline EBITDA margin in the third quarter increased from 38.2% in 2019 to 39.5% in 2020, and for the first nine months increased from 38.6% in 2019 to 39.3% in 2020.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


WARNERMEDIA SEGMENT	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Segment Operating Revenues
Turner	$	3,176	$	3,007	5.6	%	$	9,326	$	9,860	(5.4)	%
Home Box Office	1,781		1,819		(2.1)		4,905		5,045		(2.8)
Warner Bros.	2,411		3,333		(27.7)		8,907		10,240		(13.0)
Eliminations and other	146		191		(23.6)		(962)		845		—
Total Segment Operating Revenues	7,514		8,350		(10.0)		22,176		25,990		(14.7)

Cost of revenues
Turner	1,689		1,036		63.0		3,974		4,512		(11.9)
Home Box Office	1,244		847		46.9		3,155		2,356		33.9
Warner Bros.	1,600		2,261		(29.2)		6,179		7,183		(14.0)
Selling, general and administrative	1,364		1,278		6.7		4,152		3,994		4.0
Eliminations and other	(313)		(93)		—		(1,455)		(127)		—
Depreciation and amortization	171		165		3.6		501		425		17.9
Total Operating Expenses	5,755		5,494		4.8		16,506		18,343		(10.0)
Operating Income	1,759		2,856		(38.4)		5,670		7,647		(25.9)
Equity in Net Income (Loss) of Affiliates	11		15		(26.7)		30		137		(78.1)
Total Segment Operating Contribution	$	1,770	$	2,871	(38.3)	%	$	5,700	$	7,784	(26.8)	%

Our WarnerMedia segment includes our Turner, Home Box Office (HBO) and Warner Bros. business units. The order of presentation reflects the consistency of revenue streams, rather than overall magnitude as that is subject to timing and frequency of studio releases.

Operating revenues decreased in the third quarter and for the first nine months of 2020, primarily due to lower theatrical and television product revenues, reflecting the pandemic-related postponement of theatrical releases and television production delays at Warner Bros. HBO revenues also declined, driven by lower licensing revenues that were partially offset by growth in international revenues and domestic direct-to-consumer subscribers. Turner revenues were higher in the third quarter as a result of increased advertising revenues that shifted from the second quarter to the third quarter as a result of the restart of the NBA season, but lower for the nine months due to advertising revenues lost as a result of pandemic-related cancellation of other televised sporting events.

Operating contribution decreased in the third quarter and for the first nine months of 2020. The WarnerMedia segment operating income margin in the third quarter decreased from 34.2% in 2019 to 23.4% in 2020 and for the first nine months decreased from 29.4% in 2019 to 25.6% in 2020.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


WarnerMedia Business Unit Discussion
Turner Results
	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating revenues
Subscription	$	1,840	$	1,927	(4.5)	%	$	5,693	$	5,835	(2.4)	%
Advertising	1,077		913		18.0		2,830		3,440		(17.7)
Content and other	259		167		55.1		803		585		37.3
Total Operating Revenues	3,176		3,007		5.6		9,326		9,860		(5.4)

Operating expenses
Cost of revenues	1,689		1,036		63.0		3,974		4,512		(11.9)
Selling, general and administrative	399		424		(5.9)		1,171		1,301		(10.0)
Depreciation and amortization	69		68		1.5		207		167		24.0
Total Operating Expenses	2,157		1,528		41.2		5,352		5,980		(10.5)
Operating Income	1,019		1,479		(31.1)		3,974		3,880		2.4
Equity in Net Income (Loss) of Affiliates	(6)		10		—		—		46		—
Operating Contribution	$	1,013	$	1,489	(32.0)	%	$	3,974	$	3,926	1.2	%

Operating revenues increased in the third quarter and decreased for the first nine months of 2020. The increase in the quarter was primarily due to increases in advertising revenue resulting from shifting the remainder of the NBA season into the third quarter and higher content and other revenues from sales to HBO Max, which are eliminated in consolidation within the WarnerMedia segment. Partially offsetting the increases were unfavorable foreign exchange rates and lower subscription revenues at regional sports networks.

The decrease for the nine months was primarily due to lower advertising revenues resulting from the cancellation of the NCAA Division I Men’s Basketball Tournament in the first quarter of 2020; lower subscription revenues at regional sports networks; and unfavorable exchange rates. These decreases were partially offset by higher content and other revenue, including internal sales to HBO Max.

Cost of revenues increased in the third quarter and decreased for the first nine months of 2020. The increase in the third quarter was primarily due to higher programming costs, including sports costs of approximately $600 resulting from the shift of the remainder of the NBA season from the second to the third quarter. The decrease for the first nine months was primarily due to lower sports programming costs. We expect continued impacts from shifting sporting event schedules and/or compressed seasons, for example the delay of the NBA season that historically has started in the fourth quarter.

Selling, general and administrative decreased in the third quarter and for the first nine months of 2020.

Operating income decreased in the third quarter and increased for the first nine months of 2020. Our Turner operating income margin in the third quarter decreased from 49.2% in 2019 to 32.1% in 2020, and for the first nine months increased from 39.4% in 2019 to 42.6% in 2020.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


Home Box Office Results
	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating revenues
Subscription	$	1,624	$	1,533	5.9	%	$	4,403	$	4,383	0.5	%
Content and other	157		286		(45.1)		502		662		(24.2)
Total Operating Revenues	1,781		1,819		(2.1)		4,905		5,045		(2.8)

Operating expenses
Cost of revenues	1,244		847		46.9		3,155		2,356		33.9
Selling, general and administrative	450		225		—		1,081		768		40.8
Depreciation and amortization	27		33		(18.2)		73		67		9.0
Total Operating Expenses	1,721		1,105		55.7		4,309		3,191		35.0
Operating Income	60		714		(91.6)		596		1,854		(67.9)
Equity in Net Income (Loss) of Affiliates	—		10		—		15		40		(62.5)
Operating Contribution	$	60	$	724	(91.7)	%	$	611	$	1,894	(67.7)	%

Operating revenues decreased in the third quarter and for the first nine months of 2020, primarily due to decreases in content and other revenue resulting from lower content licensing. Partially offsetting these decreases was growth in international subscription revenue primarily due to the May 2020 acquisition of HBO LAG and higher domestic direct-to-consumer subscribers. At September 30, 2020, we had 38.0 million U.S. subscribers from HBO Max and HBO, up from 34.6 million at December 31, 2019.

Cost of revenues increased in the third quarter and for the first nine months of 2020, primarily due to approximately $560 of programming investment related to HBO Max.

Selling, general and administrative increased in the third quarter and for the first nine months of 2020, primarily due to higher marketing costs associated with HBO Max.

Operating income decreased in the third quarter and for the first nine months of 2020. Our HBO operating income margin in the third quarter decreased from 39.3% in 2019 to 3.4% in 2020, and for the first nine months decreased from 36.7% in 2019 to 12.2% in 2020.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


Warner Bros. Results
	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating revenues
Theatrical product	$	1,068	$	1,375	(22.3)	%	$	3,203	$	4,408	(27.3)	%
Television product	960		1,461		(34.3)		4,605		4,384		5.0
Games and other	383		497		(22.9)		1,099		1,448		(24.1)
Total Operating Revenues	2,411		3,333		(27.7)		8,907		10,240		(13.0)

Operating expenses
Cost of revenues	1,600		2,261		(29.2)		6,179		7,183		(14.0)
Selling, general and administrative	373		445		(16.2)		1,327		1,360		(2.4)
Depreciation and amortization	43		39		10.3		124		122		1.6
Total Operating Expenses	2,016		2,745		(26.6)		7,630		8,665		(11.9)
Operating Income	395		588		(32.8)		1,277		1,575		(18.9)
Equity in Net Income (Loss) of Affiliates	(23)		(25)		8.0		(50)		(19)		—
Operating Contribution	$	372	$	563	(33.9)	%	$	1,227	$	1,556	(21.1)	%

Operating revenues decreased in the third quarter and for the first nine months of 2020, primarily due to pandemic-related movie theater closures and television and theatrical production delays.

Theatrical product revenues in the third quarter and for the first nine months were lower due to partial reopening of theaters, postponement of theatrical releases and unfavorable comparisons to the prior year, which included, in first-quarter 2019, carryover revenues from the theatrical release of Aquaman.

Television product revenues decreased in the third quarter, primarily due to lower initial telecast revenues resulting from television production delays and also lower licensing. For the first nine months, television product revenues increased from licensing, including internal sales to HBO Max, which are eliminated in consolidation within the WarnerMedia segment.

Games and other revenue declines in the third quarter and for the first nine months were primarily due to reduced studio operations and unfavorable games comparison to the prior year, which included the second-quarter 2019 release of Mortal Kombat 11.

Cost of revenues decreased in the third quarter and for the first nine months of 2020, primarily due to the production hiatus and lower marketing of theatrical product, partially offset by incremental production shutdown costs.

Selling, general and administrative decreased in the third quarter and for the first nine months of 2020, primarily due to lower print and advertising expenses and lower distribution fees. Favorable collection experience in the third quarter allowed us to reduce our first quarter bad debt estimates.

Operating income decreased in the third quarter and for the first nine months of 2020. Our Warner Bros. operating income margin in the third quarter decreased from 17.6% in 2019 to 16.4% in 2020, and for the first nine months decreased from 15.4% in 2019 to 14.3% in 2020.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


LATIN AMERICA SEGMENT	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Segment Operating Revenues
Vrio	$	753	$	1,013	(25.7)	%	$	2,392	$	3,112	(23.1)	%
Mexico	643		717		(10.3)		1,826		2,093		(12.8)
Total Segment Operating Revenues	1,396		1,730		(19.3)		4,218		5,205		(19.0)

Segment Operating Contribution
Vrio	(34)		13		—		(101)		43		—
Mexico	(143)		(179)		20.1		(461)		(591)		22.0
Total Segment Operating Contribution	$	(177)	$	(166)	(6.6)	%	$	(562)	$	(548)	(2.6)	%

Operating Results

Our Latin America operations conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates, subjecting results to foreign currency fluctuations. In May 2020, we found it necessary to close our DIRECTV operations in Venezuela due to political instability in the country and to comply with sanctions of the U.S. government.

Operating revenues decreased in the third quarter and for the first nine months of 2020 primarily driven by foreign exchange rates and the impact of COVID-19.

Operating contribution decreased in the third quarter and for the first nine months of 2020, reflecting foreign exchange rates and the impact of COVID-19. Our Latin America segment operating income margin in the third quarter decreased from (10.3)% in 2019 to (13.7)% in 2020, and for the first nine months decreased from (11.0)% in 2019 to (13.9)% in 2020.


Latin America Business Unit Discussion
Vrio Results
	Third Quarter						Nine-Month Period
					Percent						Percent
	2020		2019		Change		2020		2019		Change
Operating revenues	$	753	$	1,013	(25.7)	%	$	2,392	$	3,112	(23.1)	%

Operating expenses
Operations and support	675		851		(20.7)		2,119		2,598		(18.4)
Depreciation and amortization	126		162		(22.2)		400		496		(19.4)
Total Operating Expenses	801		1,013		(20.9)		2,519		3,094		(18.6)
Operating Income (Loss)	(48)		—		—		(127)		18		—
Equity in Net Income (Loss) of Affiliates	14		13		7.7		26		25		4.0
Operating Contribution	$	(34)	$	13	—	%	$	(101)	$	43	—	%

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

The following tables highlight other key measures of performance for Vrio:


					September 30,		Percent
(in 000s)					2020	2019	Change
Vrio Video Subscribers					10,893	13,306	(18.1)	%

	Third Quarter				Nine -Month Period
			Percent				Percent
(in 000s)	2020	2019	Change		2020	2019	Change
Vrio Video Net Additions1	229	(167)	—	%	(197)	(310)	36.5	%
1The nine-month period ended September 30, 2020, excludes the impact of 2.2 million subscriber disconnections resulting from the closure of our DIRECTV operations in Venezuela.

Operating revenues decreased in the third quarter and for the first nine months of 2020, primarily driven by foreign exchange and COVID-19 impacts.

Operations and support expenses decreased in the third quarter and for the first nine months of 2020, primarily driven by foreign exchange and COVID-19 impacts. Approximately 21% of Vrio expenses are U.S. dollar based, with the remainder in the local currency.

Depreciation expense decreased in the third quarter and for the first nine months of 2020, primarily due to changes in foreign exchange rates.

Operating income decreased in the third quarter and for the first nine months of 2020. Our Vrio operating income was $(48), or an operating income margin of (6.4)%, compared to an operating income of $0 in the year-earlier quarter. Our Vrio operating income margin for the first nine months decreased from 0.6% in 2019 to (5.3)% in 2020. Our Vrio EBITDA margin in the third quarter decreased from 16.0% in 2019 to 10.4% in 2020, and for the first nine months decreased from 16.5% in 2019 to 11.4% in 2020.


Mexico Results
	Third Quarter						Nine-Month Period
	2020		2019		Percent Change		2020		2019		Percent Change
Operating revenues
Service	$	385	$	455	(15.4)		$	1,197	$	1,376	(13.0)	%
Equipment	258		262		(1.5)		629		717		(12.3)
Total Operating Revenues	643		717		(10.3)		1,826		2,093		(12.8)

Operating expenses
Operations and support	662		774		(14.5)		1,914		2,312		(17.2)
Depreciation and amortization	124		122		1.6		373		372		0.3
Total Operating Expenses	786		896		(12.3)		2,287		2,684		(14.8)
Operating Income (Loss)	(143)		(179)		20.1		(461)		(591)		22.0
Equity in Net Income (Loss) of Affiliates	—		—		—		—		—		—
Operating Contribution	$	(143)	$	(179)	20.1	%	$	(461)	$	(591)	22.0	%

The following tables highlight other key measures of performance for Mexico:


					September 30,		Percent
(in 000s)					2020	2019	Change
Mexico Wireless Subscribers
Postpaid					4,710	5,352	(12.0)	%
Prepaid					13,249	12,848	3.1
Reseller					455	419	8.6
Total Mexico Wireless Subscribers					18,414	18,619	(1.1)	%

	Third Quarter				Nine-Month Period
			Percent				Percent
(in 000s)	2020	2019	Change		2020	2019	Change
Mexico Wireless Net Additions1
Postpaid	(61)	(137)	55.5	%	(393)	(359)	(9.5)	%
Prepaid	472	668	(29.3)		(335)	1,183	—
Reseller	30	67	(55.2)		83	166	(50.0)
Mexico Wireless Net Additions	441	598	(26.3)	%	(645)	990	—	%
1The nine-month period ended September 30, 2020, excludes the impact of 101 subscriber disconnections resulting from conforming our policy on reporting of fixed wireless resellers.

Service revenues decreased in the third quarter and for the first nine months of 2020, primarily due to foreign exchange rates, as well as lower volumes and store traffic related to COVID-19.

Equipment revenues decreased in the third quarter and for the first nine months of 2020, primarily due to changes in foreign exchange rates. The decrease for the first nine months also includes lower equipment sales volumes related to COVID-19.

Operations and support expenses decreased in the third quarter and for the first nine months of 2020, primarily due to changes in foreign exchange rates. The decrease for the first nine months also includes lower equipment sales. Approximately 7% of Mexico expenses are U.S. dollar based, with the remainder in the local currency.

Depreciation and amortization expense increased in the third quarter and for the first nine months of 2020, primarily due to the amortization of spectrum licenses and higher in-service assets. These increases were partially offset by changes in foreign exchange rates.

Operating income increased in the third quarter and first nine months of 2020. Our Mexico operating income margin in the third quarter increased from (25.0)% in 2019 to (22.2)% in 2020, and for the first nine months increased from (28.2)% in 2019 to (25.2)% in 2020. Our Mexico EBITDA margin in the third quarter increased from (7.9)% in 2019 to (3.0)% in 2020, and for the first nine months increased from (10.5)% in 2019 to (4.8)% in 2020.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

SUPPLEMENTAL TOTAL ADVERTISING REVENUE INFORMATION

As a supplemental presentation, we are providing a view of total advertising revenues generated by AT&T. See revenue categories tables in Note 5 for a reconciliation.


Total Advertising Revenues
	Third Quarter						Nine-Month Period
	2020		2019		Percent Change		2020		2019		Percent Change
Operating Revenues
Turner	$	1,077	$	913	18.0	%	$	2,830	$	3,440	(17.7)	%
Xandr	497		504		(1.4)		1,348		1,415		(4.7)
Entertainment Group	408		421		(3.1)		1,115		1,170		(4.7)
Other	105		106		(0.9)		278		281		(1.1)
Eliminations	(408)		(421)		3.1		(1,115)		(1,170)		4.7
Total Advertising Revenues	$	1,679	$	1,523	10.2	%	$	4,456	$	5,136	(13.2)	%

SUPPLEMENTAL COMMUNICATIONS OPERATING INFORMATION

As a supplemental presentation to our Communications segment operating results, we are providing a view of our AT&T Business Solutions results which includes both wireless and wireline operations. This combined view presents a complete profile of the entire business customer relationship and underscores the importance of mobile solutions to serving our business customers. Results have been recast to conform to the current period's classification of consumer and business wireless subscribers. See “Discussion and Reconciliation of Non-GAAP Measure” for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.


Business Solutions Results
	Third Quarter						Nine-Month Period
	2020		2019		Percent Change		2020		2019		Percent Change

Operating revenues
Wireless service	$	1,951	$	1,888	3.3	%	$	5,784	$	5,546	4.3	%
Strategic and managed services	3,967		3,900		1.7		11,789		11,513		2.4
Legacy voice and data services	2,031		2,252		(9.8)		6,227		6,973		(10.7)
Other service and equipment	342		351		(2.6)		1,030		1,102		(6.5)
Wireless equipment	662		692		(4.3)		1,957		1,899		3.1
Total Operating Revenues	8,953		9,083		(1.4)		26,787		27,033		(0.9)

Operating expenses
Operations and support	5,508		5,645		(2.4)		16,642		16,771		(0.8)
Depreciation and amortization	1,650		1,573		4.9		4,912		4,643		5.8
Total Operating Expenses	7,158		7,218		(0.8)		21,554		21,414		0.7
Operating Income	1,795		1,865		(3.8)		5,233		5,619		(6.9)
Equity in Net Income (Loss) of Affiliates	—		—		—		—		—		—
Operating Contribution	$	1,795	$	1,865	(3.8)	%	$	5,233	$	5,619	(6.9)	%

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

OTHER BUSINESS MATTERS

Spectrum Auction In March 2020, we were the winning bidder of high-frequency 37/39 GHz licenses in FCC Auction 103 covering an average of 786 MHz nationwide for approximately $2,400. Prior to the auction, we exchanged the 39 GHz licenses with a book value of approximately $300 that were previously acquired through FiberTower Corporation for vouchers to be applied against the winning bids and recorded a $900 gain in the first quarter of 2020. These vouchers yielded a value of approximately $1,200 which was applied toward our $2,400 gross bids. We made our final payment of approximately $950 for the Auction 103 payment in April 2020.The FCC granted the licenses in June 2020.

Labor Contracts As of September 30, 2020, we employed approximately 235,000 persons. Approximately 40% of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the collective bargaining agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.

•A contract covering approximately 7,000 Mobility employees expired in February 2020. In March 2020, a new 4-year contract was ratified by employees and will expire in February 2024.

•A contract covering approximately 13,000 wireline employees in our West region expired in April 2020. In May 2020, a new 4-year contract was ratified by employees and will expire in April 2024.

•A contract covering approximately 14,000 employees in the Southwest region scheduled to expire in April 2021 was extended four years and will now expire in April 2025.

Pension Diversification In 2013, we made a voluntary contribution of 320 million Series A Cumulative Perpetual Preferred Membership Interests in Mobility II (Mobility preferred interests), the primary holding company for our wireless business, to the trust used to pay pension benefits under certain of our qualified pension plans. Since their contribution, the Mobility preferred interests are plan assets under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and have been recognized as such in the plan’s separate financial statements. On September 28, 2020, the trust, through the independent investment manager/fiduciary, sold 106.7 million of these interests to unrelated third parties. The aggregate purchase price was $2,885, which includes accrued distributions through the date of sale.

COMPETITIVE AND REGULATORY ENVIRONMENT

Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Nonetheless, over the ensuing two decades, the FCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. More recently, the FCC has pursued a more deregulatory agenda, eliminating a variety of antiquated and unnecessary regulations and streamlining its processes in a number of areas. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.

Communications Segment

Internet The FCC currently classifies fixed and mobile consumer broadband services as information services, subject to light-touch regulation. The D.C. Circuit upheld the FCC’s current classification, although it remanded three discrete issues to the FCC for further consideration. No party sought Supreme Court review of the D.C. Circuit’s decision, so that decision is final.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

Some states have adopted legislation or issued executive orders that would reimpose net neutrality rules repealed by the FCC. Suits have been filed concerning such laws in two states. In October 2016, the FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called “edge” providers such as Google and Facebook. In April 2017, the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act.

Privacy-related legislation has been considered or adopted in a number of states. Legislative and regulatory action and ballot initiatives could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. Effective as of January 1, 2020, a California state law gives consumers the right to know what personal information is being collected about them, and whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives California consumers the right to opt out of the sale of personal information.

Wireless The industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of “small cell” equipment and therefore increase the need for local permitting processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede the deployment of infrastructure used to provide telecommunications and broadband services, including small cell equipment. In March, August and September 2018, the FCC adopted orders to streamline federal and local wireless infrastructure review processes in order to facilitate deployment of next-generation wireless facilities. Specifically, the FCC’s March 2018 Order streamlined historical, tribal, and environmental review requirements for wireless infrastructure, including the exclusion of most small cell facilities from such review. The Order was appealed and in August 2019, the D.C. Circuit Court of Appeals vacated the FCC’s finding that most small cell facilities are excluded from review, but otherwise upheld the FCC’s Order. The FCC’s August and September 2018 Orders simplified the regulations for attaching telecommunications equipment to utility poles and clarified when local government right-of-way access and use restrictions can be preempted because they unlawfully prohibit the provision of telecommunications services. Those orders were appealed to the 9th Circuit Court of Appeals, which in August 2020 largely upheld the FCC Orders. In addition to the FCC’s actions, to date, 28 states and Puerto Rico have adopted legislation to facilitate small cell deployment.

In December 2018, we introduced the nation’s first commercial mobile 5G service. In July 2020, we announced nationwide 5G coverage. We anticipate the introduction of 5G handsets and devices will contribute to a renewed interest in equipment upgrades.

LIQUIDITY AND CAPITAL RESOURCES

We had $9,758 in “Cash and cash equivalents” available at September 30, 2020. “Cash and cash equivalents” included cash of $2,222 and money market funds and other cash equivalents of $7,536. Approximately $2,031 of our “Cash and cash equivalents” were held by our foreign entities in accounts predominantly outside of the U.S. and may be subject to restrictions on repatriation.

The Company's liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the first nine months of 2020. We will continue to monitor impacts on the COVID-19 pandemic on our liquidity and capital resources.

“Cash and cash equivalents” decreased $2,372 since December 31, 2019. In the first nine months of 2020, cash inflows were primarily provided by the cash receipts from operations, including cash from our sale and transfer of our receivables to third parties, the issuances of commercial paper and long-term debt and the issuances of cumulative preferred stock and cumulative preferred interests in a subsidiary. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, debt repayments, funding capital expenditures and vendor financing payments, dividends to stockholders, share repurchases, and spectrum acquisitions.

Cash Provided by or Used in Operating Activities

During the first nine months of 2020, cash provided by operating activities was $33,048, compared to $36,725 for the first nine months of 2019, impacted by the timing of working capital payments.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

We actively manage the timing of our supplier payments for operating items to optimize the use of our cash. Among other things, we seek to make payments on 90-day or greater terms, while providing the suppliers with access to bank facilities that permit earlier payments at their cost. In addition, for payments to a key supplier, as part of our working capital initiatives, we have arrangements that allow us to extend payment terms up to 90 days at an additional cost to us (referred to as supplier financing). The net impact of supplier financing was to decrease cash from operating activities $1,051 and $345 for the nine months ended September 30, 2020 and 2019, respectively. All supplier financing payments are due within one year.

Cash Used in or Provided by Investing Activities

For the first nine months of 2020, cash used in investing activities totaled $13,726, and consisted primarily of $13,283 (including interest during construction) for capital expenditures, final payment of approximately $950 for wireless spectrum licenses won in Auction 103, and $141 for acquiring the remaining interest in HBO LAG. During the third quarter, we also received approximately $400 from corporate owned life insurance investments.

For capital improvements, we have negotiated favorable vendor payment terms of 120 days or more (referred to as vendor financing) with some of our vendors, which are excluded from capital expenditures and reported as financing activities. For the first nine months of 2020, vendor financing payments were $1,965, compared to $2,601 for the first nine months of 2019. Capital expenditures in the first nine months of 2020 were $13,283, and when including $1,965 cash paid for vendor financing and excluding $143 of FirstNet reimbursements, gross capital investment was $15,391 ($3,156 lower than the prior-year comparable period).

The vast majority of our capital expenditures are spent on our networks, including product development and related support systems. During the first nine months, we placed $3,148 of equipment in service under vendor financing arrangements (compared to $1,917 in the prior-year comparable period) and approximately $940 of assets related to the FirstNet build (compared to $850 in the prior-year comparable period). We expect to receive approximately $1,400 in reimbursement from the government by year-end for the completion of certain task orders. The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements.

Cash Provided by or Used in Financing Activities

For the first nine months of 2020, cash used in financing activities totaled $21,768 and was comprised of debt issuances and repayments, issuances of preferred stock and preferred interests in a subsidiary, payments of dividends, and share repurchases.

During the first nine months of 2020, debt issuances included proceeds of $9,440 in short-term borrowings (including approximately $3,950 of commercial paper) and $31,987 of net proceeds from long-term debt. Borrowing activity included the following issuances:

Issued and redeemed in 2020:

•March draw of $750 on a private financing agreement (repaid in the second quarter).

•April draw of $5,500 on a term loan credit agreement with certain commercial banks and Bank of America, N.A., as lead agent (repaid in the second quarter).

Issued and outstanding in 2020:

•February issuance of $2,995 of 4.000% global notes due 2049.

•March borrowings of $665 from loan programs with export agencies of foreign governments to support network equipment purchases in those countries.

•May issuances totaling $12,500 in global notes, comprised of $2,500 of 2.300% global notes due 2027, $3,000 of 2.750% global notes due 2031, $2,500 of 3.500% global notes due 2041, $3,000 of 3.650% global notes due 2051 and $1,500 of 3.850% global notes due 2060.

•May issuances totaling €3,000 million in global notes (approximately $3,281 at issuance), comprised of €1,750 million of 1.600% global notes due 2028, €750 million of 2.050% global notes due 2032 and €500 million of 2.600% global notes due 2038.

•June issuance of $1,050 of 3.750% global notes due 2050.

•August issuances totaling $11,000 in global notes, comprised of $2,250 of 1.650% global notes due 2028, $2,500 of 2.250% global notes due 2032, $2,500 of 3.100% global notes due 2043, $2,250 of 3.300% global notes due 2052 and $1,500 of 3.500% global notes due 2061.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

During the first nine months of 2020, repayments of debt included $7,710 of short-term borrowings (including $2,210 of commercial paper) and $37,583 of long-term debt. Repayments included:

Notes redeemed at maturity:

•$800 of AT&T floating-rate notes in the first quarter.

•$687 of AT&T floating-rate notes in the second quarter.

•€2,250 of AT&T floating-rate notes in the third quarter (approximately $2,637 at maturity).

Notes redeemed or repurchased prior to maturity:

•$2,619 of 4.600% AT&T global notes with original maturity in 2045, in the first quarter.

•$2,750 of 2.450% AT&T global notes with original maturity in 2020, in the second quarter

•$1,000 of annual put reset securities issued by BellSouth, in the second quarter.

•$683 of 4.600% AT&T global notes with original maturity in 2021, in the second quarter.

•$1,695 of 2.800% AT&T global notes with original maturity in 2021, in the second quarter.

•$853 of 4.450% AT&T global notes with original maturity in 2021, in the second quarter.

•$1,172 of 3.875% AT&T global notes with original maturity in 2021, in the second quarter.

•$1,430 of 5.500% AT&T global notes with original maturity in 2047, in the second quarter.

•$1,457 of 3.000% AT&T global notes with original maturity in 2022, in the third quarter.

•$1,250 of 3.200% AT&T global notes with original maturity in 2022, in the third quarter.

•$1,012 of 3.800% AT&T global notes with original maturity in 2022, in the third quarter.

•$422 of 4.000% AT&T global notes with original maturity in 2022, in the third quarter.

•$60 of 3.800% DIRECTV senior notes with original maturity in 2022, in the third quarter.

•$63 of 4.00% Warner Media, LLC notes with original maturity in 2022, in the third quarter.

•$11,384 of AT&T global notes and subsidiary notes that were tendered for cash in the third quarter. The notes had floating and fixed interest rates. The fixed rates ranged from 3.400% to 7.850% and original maturities ranging from 2021 to 2025.

•$53 of 3.400% Warner Media, LLC notes with original maturity in 2022, in the third quarter.

•$177 of 3.400% AT&T global notes with original maturity in 2022, in the third quarter.

•$928 of 3.600% AT&T global notes with original maturity in 2023, in the third quarter.

Credit facilities repaid and other borrowings:

•$750 of borrowings under a private financing agreement, in the first quarter.

•$750 of borrowings under a private financing agreement, in the second quarter.

•$5,500 under our April 2020 term loan credit agreement with certain commercial banks and Bank of America, in the second quarter.

•$1,300 under our term loan credit agreement with Bank of America, in the second quarter.

•$500 under our term loan credit agreement with Bank of Communications Co., in the second quarter.

•R$3,381 of Sky Serviços de Banda Larga Ltda. floating-rate loan in the third quarter (approximately $1,000 when issued in April 2018 and $638 at redemption due to strengthening of the U.S. dollar against Brazilian real).

During the third quarter of 2020, we also exchanged $17,677 of AT&T and subsidiary notes, with interest rates ranging from 4.35% to 8.75% and original maturities ranging from 2031 to 2058 for $1,459 of cash and $21,500 of three new series of AT&T global notes, with interest rates ranging from 3.50% to 3.65% and maturities ranging from 2053 to 2059.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.1% as of September 30, 2020 and 4.4% as of December 31, 2019. We had $155,218 of total notes and debentures outstanding at September 30, 2020, which included Euro, British pound sterling, Canadian dollar, Swiss franc, Australian dollar, Brazilian real, and Mexican peso denominated debt that totaled approximately $43,347.

At September 30, 2020, we had $5,898 of debt maturing within one year, consisting of $1,754 of commercial paper borrowings and $4,144 of long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:

•An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the remainder of the zero-coupon note (issued for principal of $500 in 2007 and partially exchanged in the 2017 debt exchange offers) is held to maturity, the redemption amount will be $592.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

For the first nine months of 2020, we paid $1,965 of cash under our vendor financing program, compared to $2,601 in the first nine months of 2019. Total vendor financing payables included in our September 30, 2020 consolidated balance sheet were approximately $3,252, with $1,474 due within one year (in “Accounts payable and accrued liabilities”) and the remainder predominantly due within two to three years (in “Other noncurrent liabilities”).

Financing activities in the first nine months of 2020 also included $1,979 from the September issuance of preferred interests in a subsidiary and $3,869 for the February issuance of Series B and Series C preferred stock (see Note 11).

We repurchased approximately 142 million shares of common stock, predominantly in the first quarter, and completed the share repurchase authorization approved by the Board of Directors in 2013. In March 2020, we cancelled an accelerated share repurchase agreement that was planned for the second quarter and other repurchases to maintain flexibility and focus on continued investment in serving our customers, taking care of our employees and enhancing our network, including 5G. At September 30, 2020, we had approximately 178 million shares remaining from our share repurchase authorizations approved by the Board of Directors in 2014.

We paid dividends on common and preferred shares of $11,215 during the first nine months of 2020, compared with $11,162 for the first nine months of 2019. Dividends were higher in 2020, primarily due to dividend payments to preferred stockholders and the increase in our quarterly dividend on common stock approved by our Board of Directors in December 2019, partially offset by fewer shares outstanding.

Dividends on common stock declared by our Board of Directors totaled $1.56 per share in the first nine months of 2020 and $1.53 per share for the first nine months of 2019. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

Credit Facilities

The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.

We use credit facilities as a tool in managing our liquidity status. In December 2018, we amended our five-year revolving credit agreement (the “Amended and Restated Credit Agreement”) and concurrently entered into a new five-year agreement (the “Five Year Credit Agreement”) such that we now have two $7,500 revolving credit agreements totaling $15,000. The Amended and Restated Credit Agreement terminates on December 11, 2021 and the Five Year Credit Agreement terminates on December 11, 2023. No amounts were outstanding under either agreement as of September 30, 2020.

In September 2019, we entered into and drew on a $1,300 term loan credit agreement containing (i) a 1.25 year $400 facility due in 2020 (BAML Tranche A Facility), (ii) a 2.25 year $400 facility due in 2021 (BAML Tranche B Facility), and (iii) a 3.25 year $500 facility due in 2022 (BAML Tranche C Facility), with Bank of America, N.A., as agent. These facilities were repaid and terminated in the second quarter of 2020.

On April 6, 2020, we entered into and drew on a $5,500 Term Loan Credit Agreement (Term Loan) with 11 commercial banks and Bank of America, N.A. as lead agent. We repaid and terminated the Term Loan in May 2020.

We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases as well as a commercial paper program.

Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of September 30, 2020, we were in compliance with the covenants for our credit facilities.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

Collateral Arrangements

During 2019 and 2020, we amended collateral arrangements with counterparties to require cash collateral posting by AT&T only when derivative market values exceed certain thresholds. Under these arrangements, which cover over 90% of our approximate $43,000 derivative portfolio, counterparties are still required to post collateral. During the first nine months of 2020, we deposited approximately $320 of cash collateral, on a net basis. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 7)

Other

Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At September 30, 2020, our debt ratio was 44.9%, compared to 45.9% at September 30, 2019 and 44.7% at December 31, 2019. Our net debt ratio was 42.1% at September 30, 2020, compared to 44.1% at September 30, 2019 and 41.4% at December 31, 2019. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments and debt acquired in business combinations. In October 2020, with the sale of our stake in Central European Media Enterprises Ltd. (CME), we received relief from a debt guarantee originally covering approximately $1,100 that was reduced to $600 by September 30, 2020.

During the first nine months of 2020, we have received $428 from the disposition of assets, and when combined with working capital monetization initiatives, which include the sale of receivables, total cash received from monetization efforts, net of $1,062 of spectrum acquisitions, was approximately $400. In October 2020, we completed the sale of our stake in CME for approximately $1,100 (see Note 8). We plan to continue to explore similar opportunities in the remainder of 2020.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts

DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE

We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.

Business Solutions Reconciliation

We provide a supplemental discussion of our Business Solutions operations that is calculated by combining our Mobility and Business Wireline business units, and then adjusting to remove non-business operations. The following table presents a reconciliation of our supplemental Business Solutions results. Results have been recast to conform to the current period's classification.


	Three Months Ended
	September 30, 2020								September 30, 2019
	Mobility		Business Wireline		Adjustments1		Business Solutions		Mobility		Business Wireline		Adjustments1		Business Solutions
Operating Revenues
Wireless service	$	13,883	$	—	$	(11,932)	$	1,951	$	13,930	$	—	$	(12,042)	$	1,888
Strategic and managed services	—		3,967		—		3,967		—		3,900		—		3,900
Legacy voice and data services	—		2,031		—		2,031		—		2,252		—		2,252
Other service and equipment	—		342		—		342		—		351		—		351
Wireless equipment	4,011		—		(3,349)		662		3,771		—		(3,079)		692
Total Operating Revenues	17,894		6,340		(15,281)		8,953		17,701		6,503		(15,121)		9,083

Operating Expenses
Operations and support	10,182		3,833		(8,507)		5,508		9,948		4,022		(8,325)		5,645
EBITDA	7,712		2,507		(6,774)		3,445		7,753		2,481		(6,796)		3,438
Depreciation and amortization	2,021		1,329		(1,700)		1,650		2,011		1,271		(1,709)		1,573
Total Operating Expenses	12,203		5,162		(10,207)		7,158		11,959		5,293		(10,034)		7,218
Operating Income	5,691		1,178		(5,074)		1,795		5,742		1,210		(5,087)		1,865
Equity in net income (loss) of affiliates	—		—		—		—		—		—		—		—
Operating Contribution	$	5,691	$	1,178	$	(5,074)	$	1,795	$	5,742	$	1,210	$	(5,087)	$	1,865
1Non-business wireless reported in the Communications segment under the Mobility business unit.

AT&T INC.

SEPTEMBER 30, 2020

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

Dollars in millions except per share amounts


	Nine- Months Ended
	September 30, 2020								September 30, 2019
	Mobility		Business Wireline		Adjustments1		Business Solutions		Mobility		Business Wireline		Adjustments1		Business Solutions
Operating Revenues
Wireless service	$	41,520	$	—	$	(35,736)	$	5,784	$	41,383	$	—	$	(35,837)	$	5,546
Strategic and managed services	—		11,789		—		11,789		—		11,513		—		11,513
Legacy voice and data services	—		6,227		—		6,227		—		6,973		—		6,973
Other service and equipment	—		1,030		—		1,030		—		1,102		—		1,102
Wireless equipment	10,925		—		(8,968)		1,957		10,973		—		(9,074)		1,899
Total Operating Revenues	52,445		19,046		(44,704)		26,787		52,356		19,588		(44,911)		27,033

Operating Expenses
Operations and support	29,083		11,563		(24,004)		16,642		29,511		12,029		(24,769)		16,771
EBITDA	23,362		7,483		(20,700)		10,145		22,845		7,559		(20,142)		10,262
Depreciation and amortization	6,078		3,948		(5,114)		4,912		6,027		3,735		(5,119)		4,643
Total Operating Expenses	35,161		15,511		(29,118)		21,554		35,538		15,764		(29,888)		21,414
Operating Income	17,284		3,535		(15,586)		5,233		16,818		3,824		(15,023)		5,619
Equity in net income (loss) of affiliates	—		—		—		—		—		—		—		—
Operating Contribution	$	17,284	$	3,535	$	(15,586)	$	5,233	$	16,818	$	3,824	$	(15,023)	$	5,619
1Non-business wireless reported in the Communications segment under the Mobility business unit.

AT&T INC.

SEPTEMBER 30, 2020

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

At September 30, 2020, we had no interest rate swaps.

We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $42,969 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(3,922) at September 30, 2020. We had no rate locks at September 30, 2020.

We have foreign exchange contracts with a U.S. dollar notional value of $204 to provide currency at a fixed rate to hedge a portion of the exchange risk involved in foreign currency-denominated transactions. These foreign exchange contracts include fair value hedges, cash flow hedges and economic (nonqualifying) hedges with a total net fair value of $10 at September 30, 2020.

We have designated €1,450 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of our subsidiaries. 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.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of September 30, 2020. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of September 30, 2020.

There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Due to the COVID-19 pandemic, most of our corporate employees are working remotely. We continue to monitor and assess the COVID-19 situation on our internal control over financial reporting to address any potential impact on their design and operating effectiveness.

AT&T INC.

SEPTEMBER 30, 2020

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:

•The severity, magnitude and duration of the COVID-19 pandemic and containment, mitigation and other measures taken in response, including the potential impacts of these matters on our business and operations.

•Our inability to predict the extent to which the COVID-19 pandemic and related impacts will continue to impact our business operations, financial performance and results of operations.

•Adverse economic, political and/or capital access changes in the markets served by us or in countries in which we have significant investments and/or operations, including the impact on customer demand and our ability and our suppliers’ ability to access financial markets at favorable rates and terms.

•Increases in our benefit plans’ costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation or repeal of healthcare legislation, regulations or related court decisions.

•The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) and legislative efforts involving issues that are important to our business, including, without limitation, pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure, including the withdrawal of legacy TDM-based services; universal service; broadband deployment; wireless equipment siting regulations and, in particular, siting for 5G service; E911 services; competition policy; privacy; net neutrality; multichannel video programming distributor services and equipment; content licensing and copyright protection; availability of new spectrum on fair and balanced terms; and wireless and satellite license awards and renewals.

•Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.

•Potential changes to the electromagnetic spectrum currently used for broadcast television and satellite distribution being considered by the FCC could negatively impact WarnerMedia’s ability to deliver linear network feeds of its domestic cable networks to its affiliates, and in some cases, WarnerMedia’s ability to produce high-value news and entertainment programming on location.

•U.S. and foreign laws and regulations regarding intellectual property rights protection and privacy, personal data protection and user consent are complex and rapidly evolving and could result in adverse impacts to our business plans, increased costs, or claims against us that may harm our reputation.

•The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including non-regulation of comparable alternative technologies and/or government-owned or subsidized networks.

•Disruption in our supply chain for a number of reasons, including, difficulties in obtaining export licenses for certain technology, inability to secure component parts, general business disruption, natural disasters, safety issues, economic and political instability and public health emergencies.

•The continued development and delivery of attractive and profitable wireless, video and broadband offerings and devices, and, in particular, the success of our new HBO Max platform; the extent to which regulatory and build-out requirements apply to our offerings; our ability to match speeds offered by our competitors and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

•Our ability to generate advertising revenue from attractive video content, especially from WarnerMedia, in the face of unpredictable and rapidly evolving public viewing habits and legal restrictions on the use of personal data.

•The availability and cost and our ability to adequately fund additional wireless spectrum and network upgrades; and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.

•Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.

•The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.

AT&T INC.

SEPTEMBER 30, 2020

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS - continued

•The impact from major equipment or software failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions including flooding and hurricanes, natural disasters including earthquakes and forest fires, pandemics, energy shortages, wars or terrorist attacks.

•The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.

•Our ability to successfully integrate our WarnerMedia operations, including the ability to manage various businesses in widely dispersed business locations and with decentralized management.

•Changes in our corporate strategies, such as changing network-related requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.

•The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general.

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.

AT&T INC.

SEPTEMBER 30, 2020

PART II – OTHER INFORMATION

Dollars in millions except per share amounts

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed.

Our business is subject to risks arising from the recent outbreak of the COVID-19 virus.

The COVID-19 pandemic and resulting mitigation measures have caused, and may continue to cause, a negative effect on our operating results. To date, mitigation measures have caused sports leagues to suspend certain operations as the cancellation of many sporting events, including the NCAA tournament, which has adversely affected our advertising revenues, may result in contract disputes concerning carriage rights and has caused us to incur expenses relating to certain of these sporting events notwithstanding their cancellation. The closure, or the avoidance, of theaters, and the interruptions in movie production and other programming caused by COVID-19, are expected to impact the timing of revenues and may cause a loss of revenue to our Warner Media business over the long term. The number of subscribers to traditional linear programming in the U.S. has been declining in recent years, a trend that the current pandemic has accelerated, which has negatively affected subscription revenues, and this trend is expected to continue. If the mitigating measures or the associated effects are prolonged, we expect business customers in industries most significantly impacted will continue to reduce or terminate services, having a negative effect on the performance of our Business Wireline business unit. Further, concerns over the COVID-19 pandemic could again result in the prolonged closure of many of our retail stores and deter customers from accessing our stores even as the mitigation measures subside. These pandemic concerns may also result in continued impact to our customers’ ability to pay for our products and services. We may also continue to see significant impact on roaming revenues due to a downturn in international travel. The COVID-19 pandemic has caused and could further cause reduced staffing levels at our call centers and field operations resulting in delays in service. Further reductions in staffing levels could further limit our ability to provide services, adversely impacting our competitive position. We may also incur significantly higher expenses attributable to infrastructure investments required to meet higher network utilization from more customers consuming bandwidth from changes in work from home trends; extended cancellation periods; and increased labor costs if the COVID-19 pandemic continues for an extended period.

The COVID-19 pandemic and mitigation measures have caused, and may continue to cause, adverse impacts on global economic conditions and consumer confidence and spending, which affect demand for our products and services. The extent to which the COVID-19 pandemic impacts our business results of operations, cash flows and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our financial or operational results, but the impact could be material.

AT&T INC.

SEPTEMBER 30, 2020

PART II – OTHER INFORMATION - CONTINUED

Dollars in millions except per share amounts

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


	(a)	(b)		(c)	(d)
Period	Total Number of Shares (or Units) Purchased1, 2, 3	Average Price Paid Per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs1	Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs
July 1, 2020 - July 31, 2020	47,279	$	29.99	—	177,942,230
August 1, 2020 - August 31, 2020	24,431	29.90		—	177,942,230
September 1, 2020 - September 30, 2020	581,107	28.42		—	177,942,230
Total	652,817	$	28.59	—

1In March 2014, our Board of Directors approved an authorization to repurchase up to 300 million shares of our common stock. The authorization has no expiration date.

2Of the shares repurchased, 93,333 shares were acquired through the withholding of taxes on the vesting of restricted stock and performance shares or in respect of the exercise price of options.

3Of the shares repurchased, 559,484 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit Association (VEBA) trusts.

Item 6. Exhibits

The following exhibits are filed or incorporated by reference as a part of this report:


Exhibit
Number						Exhibit Description
10.1						Fifth Amended and Restated Limited Liability Company Agreement of AT&T Mobility II LLC
10.2						First Amendment t o Amended and Restated Registration Rights Agreement
10.3						AT&T Inc. Health Plan
31						Rule 13a-14(a)/15d-14(a) Certifications
						31.1 Certification of Principal Executive Officer
						31.2 Certification of Principal Financial Officer
32						Section 1350 Certifications
101						The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104						The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, (formatted as Inline XBRL and contained in Exhibit 101).

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						AT&T Inc.

November 5, 2020						/s/ John J. Stephens
						John J. Stephens
						Senior Executive Vice President
						and Chief Financial Officer