UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One) ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended 2018 or | |||
☐ | ||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210)821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or emerging growth company. See definition of "accelerated“accelerated filer," "large” “large accelerated filer," "smaller” “smaller reporting company"company” and "emerging“emerging growth company"company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | [X] | Accelerated filer | [ ] | ||||||
Non-accelerated filer | [ ] | (Do not check if a smaller reporting company) | Smaller reporting company | ||||||
[ ] | |||||||||
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 Rule12b-2 of the Exchange Act).
Yes [ ] No [X]
At OctoberJuly 31, 2017,2018, there were 6,1397,262 million common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC. | ||||||||||||||||
CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||||
Dollars in millions except per share amounts | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Operating Revenues | ||||||||||||||||
Service | $ | 36,378 | $ | 37,272 | $ | 109,372 | $ | 111,515 | ||||||||
Equipment | 3,290 | 3,618 | 9,498 | 10,430 | ||||||||||||
Total operating revenues | 39,668 | 40,890 | 118,870 | 121,945 | ||||||||||||
Operating Expenses | ||||||||||||||||
Cost of services and sales | ||||||||||||||||
Equipment | 4,191 | 4,455 | 12,177 | 13,090 | ||||||||||||
Broadcast, programming and operations | 5,284 | 4,909 | 15,156 | 14,239 | ||||||||||||
Other cost of services (exclusive of depreciation and amortization shown separately below) | 9,431 | 9,526 | 27,714 | 28,436 | ||||||||||||
Selling, general and administrative | 8,317 | 9,013 | 24,917 | 26,363 | ||||||||||||
Depreciation and amortization | 6,042 | 6,579 | 18,316 | 19,718 | ||||||||||||
Total operating expenses | 33,265 | 34,482 | 98,280 | 101,846 | ||||||||||||
Operating Income | 6,403 | 6,408 | 20,590 | 20,099 | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Interest expense | (1,686 | ) | (1,224 | ) | (4,374 | ) | (3,689 | ) | ||||||||
Equity in net income (loss) of affiliates | 11 | 16 | (148 | ) | 57 | |||||||||||
Other income (expense) – net | 246 | (7 | ) | 354 | 154 | |||||||||||
Total other income (expense) | (1,429 | ) | (1,215 | ) | (4,168 | ) | (3,478 | ) | ||||||||
Income Before Income Taxes | 4,974 | 5,193 | 16,422 | 16,621 | ||||||||||||
Income tax expense | 1,851 | 1,775 | 5,711 | 5,803 | ||||||||||||
Net Income | 3,123 | 3,418 | 10,711 | 10,818 | ||||||||||||
Less: Net Income Attributable to Noncontrolling Interest | (94 | ) | (90 | ) | (298 | ) | (279 | ) | ||||||||
Net Income Attributable to AT&T | $ | 3,029 | $ | 3,328 | $ | 10,413 | $ | 10,539 | ||||||||
Basic Earnings Per Share Attributable to AT&T | $ | 0.49 | $ | 0.54 | $ | 1.69 | $ | 1.70 | ||||||||
Diluted Earnings Per Share Attributable to AT&T | $ | 0.49 | $ | 0.54 | $ | 1.69 | $ | 1.70 | ||||||||
Weighted Average Number of Common Shares Outstanding – Basic (in millions) | 6,162 | 6,168 | 6,164 | 6,171 | ||||||||||||
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions) | 6,182 | 6,189 | 6,184 | 6,191 | ||||||||||||
Dividends Declared Per Common Share | $ | 0.49 | $ | 0.48 | $ | 1.47 | $ | 1.44 | ||||||||
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, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 3,123 | $ | 3,418 | $ | 10,711 | $ | 10,818 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency: | ||||||||||||||||
Foreign currency translation adjustment (includes $10, $21, $6 and $21 attributable to noncontrolling interest), net of taxes of $74, $(91), $580 and $35 | 151 | (225 | ) | 490 | (51 | ) | ||||||||||
Available-for-sale securities: | ||||||||||||||||
Net unrealized gains (losses), net of taxes of $28, $28, $72 and $15 | 45 | 46 | 128 | 25 | ||||||||||||
Reclassification adjustment included in net income, net of taxes of $(50), $(3), $(54) and $(3) | (79 | ) | (5 | ) | (86 | ) | (5 | ) | ||||||||
Cash flow hedges: | ||||||||||||||||
Net unrealized gains (losses), net of taxes of $178, $240, $(94) and $99 | 330 | 446 | (174 | ) | 183 | |||||||||||
Reclassification adjustment included in net income, net of taxes of $5, $5, $15 and $15 | 10 | 10 | 29 | 29 | ||||||||||||
Defined benefit postretirement plans: | ||||||||||||||||
Net prior service credit arising during period, net of taxes of $0, $0, $594 and $0 | - | - | 969 | - | ||||||||||||
Amortization of net prior service credit included in net income, net of taxes of $(157), $(131), $(447) and $(393) | (256 | ) | (215 | ) | (731 | ) | (644 | ) | ||||||||
Other comprehensive income (loss) | 201 | 57 | 625 | (463 | ) | |||||||||||
Total comprehensive income | 3,324 | 3,475 | 11,336 | 10,355 | ||||||||||||
Less: Total comprehensive income attributable to noncontrolling interest | (104 | ) | (111 | ) | (304 | ) | (300 | ) | ||||||||
Total Comprehensive Income Attributable to AT&T | $ | 3,220 | $ | 3,364 | $ | 11,032 | $ | 10,055 | ||||||||
See Notes to Consolidated Financial Statements. |
AT&T INC. | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
Dollars in millions except per share amounts | ||||||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Assets | (Unaudited) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 48,499 | $ | 5,788 | ||||
Accounts receivable - net of allowances for doubtful accounts of $741 and $661 | 15,876 | 16,794 | ||||||
Prepaid expenses | 1,258 | 1,555 | ||||||
Other current assets | 10,724 | 14,232 | ||||||
Total current assets | 76,357 | 38,369 | ||||||
Property, plant and equipment | 326,240 | 319,648 | ||||||
Less: accumulated depreciation and amortization | (199,778 | ) | (194,749 | ) | ||||
Property, Plant and Equipment – Net | 126,462 | 124,899 | ||||||
Goodwill | 105,668 | 105,207 | ||||||
Licenses | 96,071 | 94,176 | ||||||
Customer Lists and Relationships – Net | 11,573 | 14,243 | ||||||
Other Intangible Assets – Net | 7,775 | 8,441 | ||||||
Investments in Equity Affiliates | 1,627 | 1,674 | ||||||
Other Assets | 18,332 | 16,812 | ||||||
Total Assets | $ | 443,865 | $ | 403,821 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Debt maturing within one year | $ | 8,551 | $ | 9,832 | ||||
Accounts payable and accrued liabilities | 28,928 | 31,138 | ||||||
Advanced billing and customer deposits | 4,503 | 4,519 | ||||||
Accrued taxes | 2,703 | 2,079 | ||||||
Dividends payable | 3,008 | 3,008 | ||||||
Total current liabilities | 47,693 | 50,576 | ||||||
Long-Term Debt | 154,728 | 113,681 | ||||||
Deferred Credits and Other Noncurrent Liabilities | ||||||||
Deferred income taxes | 64,381 | 60,128 | ||||||
Postemployment benefit obligation | 31,231 | 33,578 | ||||||
Other noncurrent liabilities | 19,723 | 21,748 | ||||||
Total deferred credits and other noncurrent liabilities | 115,335 | 115,454 | ||||||
Stockholders' Equity | ||||||||
Common stock ($1 par value, $14,000,000,000 authorized at September 30, 2017 and December 31, 2016: issued 6,495,231,088 at September 30, 2017 and December 31, 2016) | 6,495 | 6,495 | ||||||
Additional paid-in capital | 89,527 | 89,604 | ||||||
Retained earnings | 36,074 | 34,734 | ||||||
Treasury stock (355,897,357 at September 30, 2017 and 356,237,141 at December 31, 2016, at cost) | (12,716 | ) | (12,659 | ) | ||||
Accumulated other comprehensive income | 5,580 | 4,961 | ||||||
Noncontrolling interest | 1,149 | 975 | ||||||
Total stockholders' equity | 126,109 | 124,110 | ||||||
Total Liabilities and Stockholders' Equity | $ | 443,865 | $ | 403,821 | ||||
See Notes to Consolidated Financial Statements. |
AT&T INC. | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
Dollars in millions | ||||||||
(Unaudited) | ||||||||
Nine months ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Operating Activities | ||||||||
Net income | $ | 10,711 | $ | 10,818 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 18,316 | 19,718 | ||||||
Undistributed loss (earnings) from investments in equity affiliates | 171 | (22 | ) | |||||
Provision for uncollectible accounts | 1,216 | 1,036 | ||||||
Deferred income tax expense | 3,254 | 3,011 | ||||||
Net loss (gain) from sale of investments, net of impairments | (114 | ) | (88 | ) | ||||
Actuarial loss (gain) on pension and postretirement benefits | (259 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (652 | ) | (1,108 | ) | ||||
Other current assets | (106 | ) | 1,805 | |||||
Accounts payable and other accrued liabilities | (1,437 | ) | (1,173 | ) | ||||
Equipment installment receivables and related sales | 1,116 | 207 | ||||||
Deferred fulfillment costs | (1,102 | ) | (1,883 | ) | ||||
Retirement benefit funding | (420 | ) | (770 | ) | ||||
Other - net | (1,420 | ) | (2,349 | ) | ||||
Total adjustments | 18,563 | 18,384 | ||||||
Net Cash Provided by Operating Activities | 29,274 | 29,202 | ||||||
Investing Activities | ||||||||
Capital expenditures: | ||||||||
Purchase of property and equipment | (15,756 | ) | (15,283 | ) | ||||
Interest during construction | (718 | ) | (669 | ) | ||||
Acquisitions, net of cash acquired | 1,154 | (2,922 | ) | |||||
Dispositions | 56 | 184 | ||||||
(Purchases) sales of securities, net | (2 | ) | 501 | |||||
Net Cash Used in Investing Activities | (15,266 | ) | (18,189 | ) | ||||
Financing Activities | ||||||||
Issuance of long-term debt | 46,761 | 10,140 | ||||||
Repayment of long-term debt | (10,309 | ) | (10,688 | ) | ||||
Purchase of treasury stock | (460 | ) | (444 | ) | ||||
Issuance of treasury stock | 26 | 137 | ||||||
Dividends paid | (9,030 | ) | (8,850 | ) | ||||
Other | 1,715 | (534 | ) | |||||
Net Cash Provided by (Used in) Financing Activities | 28,703 | (10,239 | ) | |||||
Net increase in cash and cash equivalents | 42,711 | 774 | ||||||
Cash and cash equivalents beginning of year | 5,788 | 5,121 | ||||||
Cash and Cash Equivalents End of Period | $ | 48,499 | $ | 5,895 | ||||
Cash paid during the nine months ended September 30 for: | ||||||||
Interest | $ | 5,031 | $ | 4,430 | ||||
Income taxes, net of refunds | $ | 1,861 | $ | 3,166 | ||||
See Notes to Consolidated Financial Statements. |
AT&T INC. | ||||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY | ||||||||
Dollars and shares in millions except per share amounts | ||||||||
(Unaudited) | ||||||||
September 30, 2017 | ||||||||
Shares | Amount | |||||||
Common Stock | ||||||||
Balance at beginning of year | 6,495 | $ | 6,495 | |||||
Issuance of stock | - | - | ||||||
Balance at end of period | 6,495 | $ | 6,495 | |||||
Additional Paid-In Capital | ||||||||
Balance at beginning of year | $ | 89,604 | ||||||
Issuance of treasury stock | 4 | |||||||
Share-based payments | (81 | ) | ||||||
Balance at end of period | $ | 89,527 | ||||||
Retained Earnings | ||||||||
Balance at beginning of year | $ | 34,734 | ||||||
Net income attributable to AT&T ($1.69 per diluted share) | 10,413 | |||||||
Dividends to stockholders ($1.47 per share) | (9,075 | ) | ||||||
Other | 2 | |||||||
Balance at end of period | $ | 36,074 | ||||||
Treasury Stock | ||||||||
Balance at beginning of year | (356 | ) | $ | (12,659 | ) | |||
Repurchase and acquisition of common stock | (14 | ) | (530 | ) | ||||
Issuance of treasury stock | 14 | 473 | ||||||
Balance at end of period | (356 | ) | $ | (12,716 | ) | |||
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax | ||||||||
Balance at beginning of year | $ | 4,961 | ||||||
Other comprehensive income attributable to AT&T | 619 | |||||||
Balance at end of period | $ | 5,580 | ||||||
Noncontrolling Interest | ||||||||
Balance at beginning of year | $ | 975 | ||||||
Net income attributable to noncontrolling interest | 298 | |||||||
Distributions | (270 | ) | ||||||
Acquisition of noncontrolling interest | 140 | |||||||
Translation adjustments attributable to noncontrolling interest, net of taxes | 6 | |||||||
Balance at end of period | $ | 1,149 | ||||||
Total Stockholders' Equity at beginning of year | $ | 124,110 | ||||||
Total Stockholders' Equity at end of period | $ | 126,109 | ||||||
See Notes to Consolidated Financial Statements. |
AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
As Adjusted | As Adjusted | |||||||||||||||
Operating Revenues | ||||||||||||||||
Service | $ | 33,773 | $ | 36,538 | $ | 67,419 | $ | 72,994 | ||||||||
Equipment | 4,080 | 3,299 | 8,472 | 6,208 | ||||||||||||
Media | 1,133 | - | 1,133 | - | ||||||||||||
Total operating revenues | 38,986 | 39,837 | 77,024 | 79,202 | ||||||||||||
Operating Expenses | ||||||||||||||||
Cost of revenues | ||||||||||||||||
Equipment | 4,377 | 4,138 | 9,225 | 7,986 | ||||||||||||
Broadcast, programming and operations | 5,449 | 4,898 | 10,615 | 9,872 | ||||||||||||
Other cost of revenues (exclusive of depreciation and amortization shown separately below) | 7,632 | 9,569 | 15,564 | 18,857 | ||||||||||||
Selling, general and administrative | 8,684 | 8,559 | 16,581 | 17,331 | ||||||||||||
Depreciation and amortization | 6,378 | 6,147 | 12,372 | 12,274 | ||||||||||||
Total operating expenses | 32,520 | 33,311 | 64,357 | 66,320 | ||||||||||||
Operating Income | 6,466 | 6,526 | 12,667 | 12,882 | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Interest expense | (2,023 | ) | (1,395 | ) | (3,794 | ) | (2,688 | ) | ||||||||
Equity in net income (loss) of affiliates | (16 | ) | 14 | (7 | ) | (159 | ) | |||||||||
Other income (expense) – net | 2,353 | 925 | 4,055 | 1,413 | ||||||||||||
Total other income (expense) | 314 | (456 | ) | 254 | (1,434 | ) | ||||||||||
Income Before Income Taxes | 6,780 | 6,070 | 12,921 | 11,448 | ||||||||||||
Income tax expense | 1,532 | 2,056 | 2,914 | 3,860 | ||||||||||||
Net Income | 5,248 | 4,014 | 10,007 | 7,588 | ||||||||||||
Less: Net Income Attributable to Noncontrolling Interest | (116 | ) | (99 | ) | (213 | ) | (204 | ) | ||||||||
Net Income Attributable to AT&T | $ | 5,132 | $ | 3,915 | $ | 9,794 | $ | 7,384 | ||||||||
Basic Earnings Per Share Attributable to AT&T | $ | 0.81 | $ | 0.63 | $ | 1.56 | $ | 1.19 | ||||||||
Diluted Earnings Per Share Attributable to AT&T | $ | 0.81 | $ | 0.63 | $ | 1.56 | $ | 1.19 | ||||||||
Weighted Average Number of Common Shares Outstanding – Basic (in millions) | 6,351 | 6,165 | 6,257 | 6,166 | ||||||||||||
Weighted Average Number of Common Shares | 6,374 | 6,184 | 6,277 | 6,185 | ||||||||||||
Dividends Declared Per Common Share | $ | 0.50 | $ | 0.49 | $ | 1.00 | $ | 0.98 | ||||||||
See Notes to Consolidated Financial Statements.
2
AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 5,248 | $ | 4,014 | $ | 10,007 | $ | 7,588 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency: | ||||||||||||||||
Translation adjustment (includes $(32), $(10), $(30) and $(4) | (918 | ) | (33 | ) | (810 | ) | 339 | |||||||||
Available-for-sale securities: | ||||||||||||||||
Net unrealized gains (losses), net of taxes of $0, $29, $(4) and $44 | - | 50 | (12 | ) | 83 | |||||||||||
Reclassification adjustment included in net income, net of taxes of $0, $(7), $0 and $(4) | - | (12 | ) | - | (7 | ) | ||||||||||
Cash flow hedges: | ||||||||||||||||
Net unrealized gains (losses), net of taxes of $(112), $(279), $68 and $(272) | (421 | ) | (517 | ) | 253 | (504 | ) | |||||||||
Reclassification adjustment included in net income, net of taxes of $3, $5, $6 and $10 | 11 | 9 | 23 | 19 | ||||||||||||
Defined benefit postretirement plans: | ||||||||||||||||
Net prior service (cost) credit arising during period, net of taxes of $(12), $594, $173 and $594 | (37 | ) | 969 | 530 | 969 | |||||||||||
Amortization of net prior service credit included in net income, net of taxes of $(109), $(151), $(214) and $(290) | (334 | ) | (247 | ) | (657 | ) | (475 | ) | ||||||||
Other comprehensive income (loss) | (1,699 | ) | 219 | (673 | ) | 424 | ||||||||||
Total comprehensive income | 3,549 | 4,233 | 9,334 | 8,012 | ||||||||||||
Less: Total comprehensive income attributable to noncontrolling interest | (84 | ) | (89 | ) | (183 | ) | (200 | ) | ||||||||
Total Comprehensive Income Attributable to AT&T | $ | 3,465 | $ | 4,144 | $ | 9,151 | $ | 7,812 | ||||||||
See Notes to Consolidated Financial Statements.
3
AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Assets | (Unaudited) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 13,523 | $ | 50,498 | ||||
Accounts receivable - net of allowances for doubtful accounts of $804 and $663 | 25,492 | 16,522 | ||||||
Prepaid expenses | 1,966 | 1,369 | ||||||
Other current assets | 14,305 | 10,757 | ||||||
Total current assets | 55,286 | 79,146 | ||||||
Noncurrent Inventories and Theatrical Film and Television Production Costs | 5,849 | - | ||||||
Property, plant and equipment | 324,889 | 313,499 | ||||||
Less: accumulated depreciation and amortization | (195,333 | ) | (188,277 | ) | ||||
Property, Plant and Equipment – Net | 129,556 | 125,222 | ||||||
Goodwill | 142,607 | 105,449 | ||||||
Licenses | 96,802 | 96,136 | ||||||
Trademarks and Trade Names – Net | 24,440 | 7,021 | ||||||
Distribution Networks – Net | 17,403 | - | ||||||
Other Intangible Assets – Net | 30,800 | 11,119 | ||||||
Investments in and Advances to Equity Affiliates | 8,007 | 1,560 | ||||||
Other Assets | 23,941 | 18,444 | ||||||
Total Assets | $ | 534,691 | $ | 444,097 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Debt maturing within one year | $ | 21,672 | $ | 38,374 | ||||
Accounts payable and accrued liabilities | 35,488 | 34,470 | ||||||
Advanced billing and customer deposits | 5,914 | 4,213 | ||||||
Accrued taxes | 1,889 | 1,262 | ||||||
Dividends payable | 3,630 | 3,070 | ||||||
Total current liabilities | 68,593 | 81,389 | ||||||
Long-Term Debt | 168,495 | 125,972 | ||||||
Deferred Credits and Other Noncurrent Liabilities | ||||||||
Deferred income taxes | 59,665 | 43,207 | ||||||
Postemployment benefit obligation | 28,791 | 31,775 | ||||||
Other noncurrent liabilities | 25,017 | 19,747 | ||||||
Total deferred credits and other noncurrent liabilities | 113,473 | 94,729 | ||||||
Stockholders’ Equity | ||||||||
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2018 and December 31, 2017: issued 7,620,748,598 at June 30, 2018 and 6,495,231,088 at December 31, 2017) | 7,621 | 6,495 | ||||||
Additionalpaid-in capital | 125,960 | 89,563 | ||||||
Retained earnings | 56,555 | 50,500 | ||||||
Treasury stock (360,993,619 at June 30, 2018 and 355,806,544 at December 31, 2017, at cost) | (12,872 | ) | (12,714 | ) | ||||
Accumulated other comprehensive income | 5,716 | 7,017 | ||||||
Noncontrolling interest | 1,150 | 1,146 | ||||||
Total stockholders’ equity | 184,130 | 142,007 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 534,691 | $ | 444,097 | ||||
See Notes to Consolidated Financial Statements.
4
AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
Six months ended June 30, | ||||||||
2018 | 2017 | |||||||
As Adjusted | ||||||||
Operating Activities | ||||||||
Net income | $ | 10,007 | $ | 7,588 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 12,372 | 12,274 | ||||||
Amortization of television and film costs | 168 | - | ||||||
Undistributed earnings from investments in equity affiliates | 235 | 167 | ||||||
Provision for uncollectible accounts | 808 | 795 | ||||||
Deferred income tax expense | 2,032 | 964 | ||||||
Net (gain) loss from investments, net of impairments | (29 | ) | 12 | |||||
Actuarial (gain) loss on pension and postretirement benefits | (2,726 | ) | (259 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 233 | 119 | ||||||
Other current assets, inventories and theatrical film and television production costs | 1,039 | 470 | ||||||
Accounts payable and other accrued liabilities | (3,890 | ) | (2,761 | ) | ||||
Equipment installment receivables and related sales | 490 | 525 | ||||||
Deferred customer contract acquisition and fulfillment costs | (1,725 | ) | (796 | ) | ||||
Retirement benefit funding | (280 | ) | (280 | ) | ||||
Other – net | 442 | (1,148 | ) | |||||
Total adjustments | 9,169 | 10,082 | ||||||
Net Cash Provided by Operating Activities | 19,176 | 17,670 | ||||||
Investing Activities | ||||||||
Capital expenditures: | ||||||||
Purchase of property and equipment | (10,959 | ) | (10,750 | ) | ||||
Interest during construction | (267 | ) | (473 | ) | ||||
Acquisitions, net of cash acquired | (40,715 | ) | 1,224 | |||||
Dispositions | 59 | 51 | ||||||
(Purchases) sales of securities, net | (218 | ) | 169 | |||||
Advances to and investments in equity affiliates, net | (1,035 | ) | - | |||||
Cash collections of deferred purchase price | 500 | 382 | ||||||
Net Cash Used in Investing Activities | (52,635 | ) | (9,397 | ) | ||||
Financing Activities | ||||||||
Net change in short-term borrowings with original maturities of three months or less | 2,227 | (2 | ) | |||||
Issuance of other short-term borrowings | 4,839 | - | ||||||
Issuance of long-term debt | 26,478 | 24,115 | ||||||
Repayment of long-term debt | (29,447 | ) | (6,118 | ) | ||||
Purchase of treasury stock | (564 | ) | (458 | ) | ||||
Issuance of treasury stock | 12 | 24 | ||||||
Dividends paid | (6,144 | ) | (6,021 | ) | ||||
Other | (1,121 | ) | 77 | |||||
Net Cash (Used in) Provided by Financing Activities | (3,720 | ) | 11,617 | |||||
Net (decrease) increase in cash and cash equivalents and restricted cash | (37,179 | ) | 19,890 | |||||
Cash and cash equivalents and restricted cash beginning of year | 50,932 | 5,935 | ||||||
Cash and Cash Equivalents and Restricted Cash End of Period | $ | 13,753 | $ | 25,825 | ||||
See Notes to Consolidated Financial Statements.
5
AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
June 30, 2018 | ||||||||
Shares | Amount | |||||||
Common Stock | ||||||||
Balance at beginning of year | 6,495 | $ | 6,495 | |||||
Issuance of stock | 1,126 | 1,126 | ||||||
Balance at end of period | 7,621 | $ | 7,621 | |||||
AdditionalPaid-In Capital | ||||||||
Balance at beginning of year | $ | 89,563 | ||||||
Issuance of common stock | 35,473 | |||||||
Issuance of treasury stock | (4 | ) | ||||||
Share-based payments | 928 | |||||||
Balance at end of period | $ | 125,960 | ||||||
Retained Earnings | ||||||||
Balance at beginning of year | $ | 50,500 | ||||||
Net income attributable to AT&T ($1.56 per diluted share) | 9,794 | |||||||
Dividends to stockholders ($1.00 per share) | (6,739 | ) | ||||||
Cumulative effect of accounting changes | 3,000 | |||||||
Balance at end of period | $ | 56,555 | ||||||
Treasury Stock | ||||||||
Balance at beginning of year | (356 | ) | $ | (12,714 | ) | |||
Repurchase and acquisition of common stock | (18 | ) | (607 | ) | ||||
Issuance of treasury stock | 13 | 449 | ||||||
Balance at end of period | (361 | ) | $ | (12,872 | ) | |||
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax | ||||||||
Balance at beginning of year | $ | 7,017 | ||||||
Other comprehensive income attributable to AT&T | (643 | ) | ||||||
Amounts reclassified to retained earnings | (658 | ) | ||||||
Balance at end of period | $ | 5,716 | ||||||
Noncontrolling Interest | ||||||||
Balance at beginning of year | $ | 1,146 | ||||||
Net income attributable to noncontrolling interest | 213 | |||||||
Contributions | 8 | |||||||
Distributions | (223 | ) | ||||||
Acquisition of noncontrolling interest | 1 | |||||||
Translation adjustments attributable to noncontrolling interest, net of taxes | (30 | ) | ||||||
Cumulative effect of accounting changes | 35 | |||||||
Balance at end of period | $ | 1,150 | ||||||
Total Stockholders’ Equity at beginning of year | $ | 142,007 | ||||||
Total Stockholders’ Equity at end of period | $ | 184,130 | ||||||
See Notes to Consolidated Financial Statements.
6
AT&T INC.
JUNE 30, 2017
For ease of reading, AT&T Inc. is referred to as "we," "AT&T"“we,” “AT&T” or the "Company"“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 communicationstelecommunications, media and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally.technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form10-K for the year ended December 31, 2016.2017. The results for the interim periods are not necessarily indicative of those for the full year.
In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation
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. The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates,All significant intercompany transactions are eliminated in the consolidation process. Investments in unconsolidatedless than majority-owned subsidiaries and partnerships where we 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'investees’ other comprehensive income (OCI) items, including cumulative translation adjustments.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates.
Tax ReformThe Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax rate from 35% to 21% and required companies to pay aone-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. Recognizing the late enactment of the Act and complexity of accurately accounting for its impact, the Securities and Exchange Commission (SEC) in Staff Accounting Bulletin (SAB) 118 provided guidance that allows registrants to provide a reasonable estimate of the impact to their financial statements and adjust the reported impact in a measurement period not to exceed one year. We included the estimated impact of the Act in our financial results at or for the period ended December 31, 2017 and did not record any adjustments thereto during the first six months of 2018. Our future results could include additional adjustments, and those adjustments could be material.
Customer Fulfillment Costs During the second quarter of 2018, we updated our analysis of economic lives of customer relationships. As of April 1, 2018, we extended the amortization period to 58 months to better reflect the estimated economic lives of our entertainment group customers. This change in accounting estimate decreased other cost of revenues and impacted net income $126, or $0.02 per diluted share, in the second quarter of 2018.
Recently Adopted Accounting Standards
Revenue Recognition As of January 1, 2017,2018, we adopted Accounting Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU 2016-16), with modified retrospective application, resulting in our recognition of an immaterial adjustment to retained earnings. Under ASU 2016-16, we recognize the income tax effects of intercompany sales or transfers of assets other than inventory (e.g., intellectual property or property, plant and equipment) during the period of intercompany sale or transfer instead of the period of either sale or transfer to a third party or recognition of depreciation or impairment.
7
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Pension and Other Postretirement Benefits As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2017-07, "Compensation “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost"Cost” (ASU2017-07), which changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue. We are no longer allowed to present service costs within our operating expenses but presentinterest, estimated return on assets and amortization of prior service credits and other components of our net periodic benefit cost in "otherour consolidated operating expenses, but rather are required to include those amounts in “other income (expense) – net"net” in our consolidated statements of income. We continue to present service costs with the associated compensation costs within our operating expenses. As a practical expedient, we used the amounts disclosed as the estimated basis for applying the retrospective presentation requirement.
The following table presents our results under our historical method and as adjusted to reflect ASU2017-07 (presentation ofbenefit cost):
Pension and Postretirement Benefits | ||||||||||||||||||||||||
Historical Accounting Method | Effect of Adoption of ASU 2017-07 | As Adjusted | ||||||||||||||||||||||
For the three months ended June 30, 2018 | ||||||||||||||||||||||||
Consolidated Statements of Income | ||||||||||||||||||||||||
Other cost of revenues | $ | 7,068 | $ | 564 | $ | 7,632 | ||||||||||||||||||
Selling, general and administrative expenses | 6,896 | 1,788 | 8,684 | |||||||||||||||||||||
Operating Income | 8,818 | (2,352 | ) | 6,466 | ||||||||||||||||||||
Other Income (Expense) – net | 1 | 2,352 | 2,353 | |||||||||||||||||||||
Net Income | 5,248 | - | 5,248 | |||||||||||||||||||||
For the three months ended June 30, 2017 | ||||||||||||||||||||||||
Consolidated Statements of Income | ||||||||||||||||||||||||
Other cost of revenues | $ | 9,218 | $ | 351 | $ | 9,569 | ||||||||||||||||||
Selling, general and administrative expenses | 8,113 | 446 | 8,559 | |||||||||||||||||||||
Operating Income | 7,323 | (797 | ) | 6,526 | ||||||||||||||||||||
Other Income (Expense) – net | 128 | 797 | 925 | |||||||||||||||||||||
Net Income | 4,014 | - | 4,014 | |||||||||||||||||||||
For the six months ended June 30, 2018 | ||||||||||||||||||||||||
Consolidated Statements of Income | ||||||||||||||||||||||||
Other cost of revenues | $ | 14,639 | $ | 925 | $ | 15,564 | ||||||||||||||||||
Selling, general and administrative expenses | 13,652 | 2,929 | 16,581 | |||||||||||||||||||||
Operating Income | 16,521 | (3,854 | ) | 12,667 | ||||||||||||||||||||
Other Income (Expense) – net | 201 | 3,854 | 4,055 | |||||||||||||||||||||
Net Income | 10,007 | - | 10,007 | |||||||||||||||||||||
For the six months ended June 30, 2017 | ||||||||||||||||||||||||
Consolidated Statements of Income | ||||||||||||||||||||||||
Other cost of revenues | $ | 18,283 | $ | 574 | $ | 18,857 | ||||||||||||||||||
Selling, general and administrative expenses | 16,600 | 731 | 17,331 | |||||||||||||||||||||
Operating Income | 14,187 | (1,305 | ) | 12,882 | ||||||||||||||||||||
Other Income (Expense) – net | 108 | 1,305 | 1,413 | |||||||||||||||||||||
Net Income | 7,588 | - | 7,588 | |||||||||||||||||||||
8
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Cash Flows As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU2016-15). Under ASU2016-15, we continue to recognize cash receipts on owned equipment installment receivables as cash flows from operations. However, cash receipts on the deferred purchase price described in Note 9 are now required to be classified as cash flows from investing activities instead of cash flows from operating activities.
As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash,” (ASU2016-18). The primary impact of ASU2016-18 was to require us to include restricted cash in our reconciliation of beginning and ending cash and cash equivalents (restricted and unrestricted) on the face of the statements of cash flows. (See Note 11)
The following table presents our results under our historical method and as adjusted to reflect ASU2016-15 (cash receipts on deferred purchase price) and ASU2016-18 (restricted cash):
Cash Flows | ||||||||||||||||||||||||
Historical Accounting Method | Effect of Adoption of ASU 2016-15 | Effect of Adoption of ASU 2016-18 | As Adjusted | |||||||||||||||||||||
For the six months ended June 30, 2018 | ||||||||||||||||||||||||
Consolidated Statements of Cash Flows | ||||||||||||||||||||||||
Equipment installment receivables and related sales | $ | 990 | $ | (500 | ) | $ | - | $ | 490 | |||||||||||||||
Other – net | 431 | - | 11 | 442 | ||||||||||||||||||||
Cash Provided by (Used in) Operating Activities | 19,665 | (500 | ) | 11 | 19,176 | |||||||||||||||||||
(Purchases) sales of securities – net | 4 | - | (222 | ) | (218 | ) | ||||||||||||||||||
Cash collections of deferred purchase price | - | 500 | - | 500 | ||||||||||||||||||||
Cash (Used in) Provided by Investing Activities | (52,913 | ) | 500 | (222 | ) | (52,635 | ) | |||||||||||||||||
Change in cash and cash equivalents and restricted cash | $ | (36,968 | ) | $ | - | $ | (211 | ) | $ | (37,179 | ) | |||||||||||||
For the six months ended June 30, 2017 | ||||||||||||||||||||||||
Consolidated Statements of Cash Flows | ||||||||||||||||||||||||
Changes in other current assets | $ | 471 | $ | - | $ | (1 | ) | $ | 470 | |||||||||||||||
Equipment installment receivables and related sales | 907 | (382 | ) | - | 525 | |||||||||||||||||||
Other – net | (1,041 | ) | - | (107 | ) | (1,148 | ) | |||||||||||||||||
Cash Provided by (Used in) Operating Activities | 18,160 | (382 | ) | (108 | ) | 17,670 | ||||||||||||||||||
(Purchases) sales of securities – net | - | - | 169 | 169 | ||||||||||||||||||||
Cash collections of deferred purchase price | - | 382 | - | 382 | ||||||||||||||||||||
Cash (Used in) Provided by Investing Activities | (9,948 | ) | 382 | 169 | (9,397 | ) | ||||||||||||||||||
Change in cash and cash equivalents and restricted cash | $ | 19,829 | $ | - | $ | 61 | $ | 19,890 | ||||||||||||||||
Financial Instruments As of January 1, 2018, we adopted ASUNo. 2016-01, “Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU2016-01), which requires us to prospectively record changes in the fair value of our equity investments, except for those accounted for under the equity method, in net income instead of in accumulated other comprehensive income. As of January 1, 2018, we recorded an increase of $658 in retained earnings for the cumulative effect of the adoption of ASU2016-01, with an offset to accumulated other comprehensive income (accumulated OCI).
9
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
New Accounting Standards and Accounting Standards Not Yet Adopted
Leases In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842),” as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASC 842 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding“right-of-use” assets. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP. In July 2018, the FASB amended ASC 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. Through the same amendment, the FASB will allow lessors the option to make a policy election to treat lease and nonlease components as a single lease component under certain conditions. ASC 842 is effective for annual reporting periods beginning after December 15, 2017. See Note 5 for2018, subject to early adoption.
Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition of lease expense appears similar to our components of net periodic benefit cost.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, is shown in the table below:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Numerators | ||||||||||||||||||||||||||||||||
Numerator for basic earnings per share: | ||||||||||||||||||||||||||||||||
Net Income | $ | 5,248 | $ | 4,014 | $ | 10,007 | $ | 7,588 | ||||||||||||||||||||||||
Less: Net income attributable to noncontrolling interest | (116 | ) | (99 | ) | (213 | ) | (204 | ) | ||||||||||||||||||||||||
Net Income attributable to AT&T | 5,132 | 3,915 | 9,794 | 7,384 | ||||||||||||||||||||||||||||
Dilutive potential common shares: | ||||||||||||||||||||||||||||||||
Share-based payment | 4 | 2 | 9 | 6 | ||||||||||||||||||||||||||||
Numerator for diluted earnings per share | $ | 5,136 | $ | 3,917 | $ | 9,803 | $ | 7,390 | ||||||||||||||||||||||||
Denominators (000,000) | ||||||||||||||||||||||||||||||||
Denominator for basic earnings per share: | ||||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding | 6,351 | 6,165 | 6,257 | 6,166 | ||||||||||||||||||||||||||||
Dilutive potential common shares: | ||||||||||||||||||||||||||||||||
Share-based payment (in shares) | 23 | 19 | 20 | 19 | ||||||||||||||||||||||||||||
Denominator for diluted earnings per share | 6,374 | 6,184 | 6,277 | 6,185 | ||||||||||||||||||||||||||||
Basic earnings per share attributable to AT&T | $ | 0.81 | $ | 0.63 | $ | 1.56 | $ | 1.19 | ||||||||||||||||||||||||
Diluted earnings per share attributable to AT&T | $ | 0.81 | $ | 0.63 | $ | 1.56 | $ | 1.19 | ||||||||||||||||||||||||
10
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerators | ||||||||||||||||
Numerator for basic earnings per share: | ||||||||||||||||
Net Income | $ | 3,123 | $ | 3,418 | $ | 10,711 | $ | 10,818 | ||||||||
Less: Net income attributable to noncontrolling interest | (94 | ) | (90 | ) | (298 | ) | (279 | ) | ||||||||
Net Income attributable to AT&T | 3,029 | 3,328 | 10,413 | 10,539 | ||||||||||||
Dilutive potential common shares: | ||||||||||||||||
Share-based payment | 3 | 3 | 9 | 9 | ||||||||||||
Numerator for diluted earnings per share | $ | 3,032 | $ | 3,331 | $ | 10,422 | $ | 10,548 | ||||||||
Denominators (000,000) | ||||||||||||||||
Denominator for basic earnings per share: | ||||||||||||||||
Weighted average number of common shares outstanding | 6,162 | 6,168 | 6,164 | 6,171 | ||||||||||||
Dilutive potential common shares: | ||||||||||||||||
Share-based payment (in shares) | 20 | 21 | 20 | 20 | ||||||||||||
Denominator for diluted earnings per share | 6,182 | 6,189 | 6,184 | 6,191 | ||||||||||||
Basic earnings per share attributable to AT&T | $ | 0.49 | $ | 0.54 | $ | 1.69 | $ | 1.70 | ||||||||
Diluted earnings per share attributable to AT&T | $ | 0.49 | $ | 0.54 | $ | 1.69 | $ | 1.70 |
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ContinuedDollars in millions except per share amounts
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI)OCI are presented below. All amounts are net of tax and exclude noncontrolling interest.
Foreign Currency Translation Adjustment | Net Unrealized Gains (Losses) onAvailable- for-Sale Securities | Net Unrealized Gains (Losses) on Cash Flow Hedges | Defined Benefit Postretirement Plans | Accumulated Other Comprehensive Income | ||||||||||||||||
Balance as of December 31, 2017 | $ | (2,054) | $ | 660 | $ | 1,402 | $ | 7,009 | $ | 7,017 | ||||||||||
Other comprehensive income (loss) before reclassifications | (780) | (12 | ) | 253 | 530 | (9 | ) | |||||||||||||
Amounts reclassified from accumulated OCI | - 1 | - | 1 | 23 | 2 | (657 | )3 | (634 | ) | |||||||||||
Net other comprehensive income (loss) | (780) | (12 | ) | 276 | (127 | ) | (643 | ) | ||||||||||||
Amounts reclassified to retained earnings | - | (658 | )4 | - | - | (658 | ) | |||||||||||||
Balance as of June 30, 2018 | $ | (2,834) | $ | (10 | ) | $ | 1,678 | $ | 6,882 | $ | 5,716 | |||||||||
Foreign Currency Translation Adjustment | Net Unrealized Gains (Losses) onAvailable- for-Sale Securities | Net Unrealized Gains (Losses) on Cash Flow Hedges | Defined Benefit Postretirement Plans | Accumulated Other Comprehensive Income | ||||||||||||||||
Balance as of December 31, 2016 | $ | (1,995 | ) | $ | 541 | $ | 744 | $ | 5,671 | $ | 4,961 | |||||||||
Other comprehensive income (loss) before reclassifications | 343 | 83 | (504 | ) | 969 | 891 | ||||||||||||||
Amounts reclassified from accumulated OCI | - | 1 | (7 | )1 | 19 | 2 | (475 | )3 | (463 | ) | ||||||||||
Net other comprehensive income (loss) | 343 | 76 | (485 | ) | 494 | 428 | ||||||||||||||
Balance as of June 30, 2017 | $ | (1,652 | ) | $ | 617 | $ | 259 | $ | 6,165 | $ | 5,389 | |||||||||
1 | (Gains) losses are included in Other income (expense) – net in the consolidated statements of income. |
2 | (Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7). |
3 | The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the consolidated statements of income (see Note 6). |
4 | With the adoption of ASU2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings (see Note 1). |
11
Foreign Currency Translation Adjustment | Net Unrealized Gains (Losses) on Available-for-Sale Securities | Net Unrealized Gains (Losses) on Cash Flow Hedges | Defined Benefit Postretirement Plans | Accumulated Other Comprehensive Income | |||||||||||
Balance as of December 31, 2016 | $ | (1,995) | $ | 541 | $ | 744 | $ | 5,671 | $ | 4,961 | |||||
Other comprehensive income (loss) before reclassifications | 484 | 128 | (174) | 969 | 1,407 | ||||||||||
Amounts reclassified from accumulated OCI | - | 1 | (86) | 1 | 29 | 2 | (731) | 3 | (788) | ||||||
Net other comprehensive income (loss) | 484 | 42 | (145) | 238 | 619 | ||||||||||
Balance as of September 30, 2017 | $ | (1,511) | $ | 583 | $ | 599 | $ | 5,909 | $ | 5,580 | |||||
Foreign Currency Translation Adjustment | Net Unrealized Gains (Losses) on Available-for-Sale Securities | Net Unrealized Gains (Losses) on Cash Flow Hedges | Defined Benefit Postretirement Plans | Accumulated Other Comprehensive Income | |||||||||||
Balance as of December 31, 2015 | $ | (1,198) | $ | 484 | $ | 16 | $ | 6,032 | $ | 5,334 | |||||
Other comprehensive income (loss) before reclassifications | (72) | 25 | 183 | - | 136 | ||||||||||
Amounts reclassified from accumulated OCI | - | 1 | (5) | 1 | 29 | 2 | (644) | 3 | (620) | ||||||
Net other comprehensive income (loss) | (72) | 20 | 212 | (644) | (484) | ||||||||||
Balance as of September 30, 2016 | $ | (1,270) | $ | 504 | $ | 228 | $ | 5,388 | $ | 4,850 | |||||
1 | (Gains) losses are included in Other income (expense) - net in the consolidated statements of income. | ||||||||||||||
2 | (Gains) losses are included in Interest expense in the consolidated statements of income (see Note 6). | ||||||||||||||
3 | The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5). |
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on Segment 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 fourfive reportable segments: (1) Consumer Mobility, (2) Business Solutions, (2)(3) Entertainment Group, (3) Consumer Mobility(4) International, and (4) International.
We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment 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 segment operating performance. EBITDA does not give effect
To most effectively implement our strategies for 2018, effective January 1, 2018, we retrospectively realigned certain responsibilities and operations within our reportable segments. The most significant of these changes is to report individual wireless accounts with employer discounts in our Consumer Mobility segment, instead of our Business Solutions segment. As a result of these realignments, $19,686 of goodwill from the Business Solutions segment was reallocated to the Consumer Mobility segment. Our reported segment results include the impact for the adoption of recent accounting standards, which affects the comparability between 2018 and 2017 (see Note 5).
With our acquisition of WarnerMedia, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset (see Note 8). For consolidated reporting, all amortization ofpre-acquisition released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we will continue to report the historic content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historic content production cost amortization reported in the segment results was $189 for the16-day period ended June 30, 2018, $98 of which was forpre-acquisition released programming.
TheConsumer Mobility segmentprovides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We provide voice and data services, including high-speed internet over wireless devices.
TheBusiness Solutionssegment provides services to business customers, including multinational companies;companies and governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans.customers. We provide advancedIP-based services including Virtual Private Networks (VPN); Ethernet-related productsproducts; FlexWare, a service that relies on Software Defined Networking and Network Function Virtualization to provide application-based routing, and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete communications solution to our business customers.
TheEntertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network and our satellite technology.
TheConsumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our network to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.
TheWarnerMediasegment provides global media and entertainment services through television networks and film, using its brands to create, package and deliver high-quality content worldwide. The segment consists of Turner, HBO and Warner Bros. businesses.
12
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Corporate and Other items reconcile our segment results to consolidated operating income and income before income taxes, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.
Corporate, which consists of: (1) operations that are no longer integral to our operations or which we no longer actively market, (2) corporate support functions and operations, (3) impacts of |
• | Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, |
Certain significant items which consists of (1) |
• | Eliminations, which remove transactions involving dealings between AT&T companies, including content licensing with WarnerMedia. |
Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.
Our domestic communications business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our shared asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.
13
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ContinuedDollars in millions except per share amounts
For the three months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Operations | EBITDA | Depreciation | Operating | Equity in Net Affiliates | Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | $ | 14,869 | $ | 8,085 | $ | 6,784 | $ | 1,806 | $ | 4,978 | $ | - | $ | 4,978 | ||||||||||||||||||||||||||||||||||||||||||
Business Solutions | 9,063 | 5,616 | 3,447 | 1,487 | 1,960 | 1 | 1,961 | |||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment Group | 11,650 | 8,852 | 2,798 | 1,346 | 1,452 | (20 | ) | 1,432 | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 1,951 | 1,803 | 148 | 313 | (165 | ) | 15 | (150 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
WarnerMedia | 1,275 | 794 | 481 | 30 | 451 | (6 | ) | 445 | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment Total | 38,808 | 25,150 | 13,658 | 4,982 | 8,676 | $ | (10 | ) | $ | 8,666 | ||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 319 | 660 | (341 | ) | 118 | (459 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition-related items | - | 321 | (321 | ) | 1,278 | (1,599 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Certain significant items | - | 152 | (152 | ) | - | (152 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Eliminations | (141 | ) | (141 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
AT&T Inc. | $ | 38,986 | $ | 26,142 | $ | 12,844 | $ | 6,378 | $ | 6,466 | ||||||||||||||||||||||||||||||||||||||||||||||
For the six months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Operations | EBITDA | Depreciation | Operating | Equity in Net Affiliates | Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | $ | 29,855 | $ | 16,609 | $ | 13,246 | $ | 3,613 | $ | 9,633 | $ | - | $ | 9,633 | ||||||||||||||||||||||||||||||||||||||||||
Business Solutions | 18,179 | 11,210 | 6,969 | 2,945 | 4,024 | - | 4,024 | |||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment Group | 23,227 | 17,791 | 5,436 | 2,658 | 2,778 | (11 | ) | 2,767 | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 3,976 | 3,607 | 369 | 645 | (276 | ) | 15 | (261 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
WarnerMedia | 1,275 | 794 | 481 | 30 | 451 | (6 | ) | 445 | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment Total | 76,512 | 50,011 | 26,501 | 9,891 | 16,610 | $ | (2 | ) | $ | 16,608 | ||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 653 | 1,395 | (742 | ) | 141 | (883 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition-related items | - | 388 | (388 | ) | 2,340 | (2,728 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Certain significant items | - | 332 | (332 | ) | - | (332 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Eliminations | (141 | ) | (141 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
AT&T Inc. | $ | 77,024 | $ | 51,985 | $ | 25,039 | $ | 12,372 | $ | 12,667 | ||||||||||||||||||||||||||||||||||||||||||||||
14
For the three months ended September 30, 2017 | ||||||||||||||||||||||||||||
Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) of Affiliates | Segment Contribution | ||||||||||||||||||||||
Business Solutions | $ | 17,061 | $ | 10,233 | $ | 6,828 | $ | 2,325 | $ | 4,503 | $ | - | $ | 4,503 | ||||||||||||||
Entertainment Group | 12,648 | 9,953 | 2,695 | 1,379 | 1,316 | (6 | ) | 1,310 | ||||||||||||||||||||
Consumer Mobility | 7,748 | 4,551 | 3,197 | 877 | 2,320 | - | 2,320 | |||||||||||||||||||||
International | 2,099 | 1,937 | 162 | 304 | (142 | ) | 17 | (125 | ) | |||||||||||||||||||
Segment Total | 39,556 | 26,674 | 12,882 | 4,885 | 7,997 | $ | 11 | $ | 8,008 | |||||||||||||||||||
Corporate and Other | 201 | 89 | 112 | 21 | 91 | |||||||||||||||||||||||
Acquisition-related items | - | 134 | (134 | ) | 1,136 | (1,270 | ) | |||||||||||||||||||||
Certain significant items | (89 | ) | 326 | (415 | ) | - | (415 | ) | ||||||||||||||||||||
AT&T Inc. | $ | 39,668 | $ | 27,223 | $ | 12,445 | $ | 6,042 | $ | 6,403 |
For the nine months ended September 30, 2017 | ||||||||||||||||||||||||||||
Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) of Affiliates | Segment Contribution | ||||||||||||||||||||||
Business Solutions | $ | 51,016 | $ | 30,722 | $ | 20,294 | $ | 6,972 | $ | 13,322 | $ | - | $ | 13,322 | ||||||||||||||
Entertainment Group | 37,953 | 29,112 | 8,841 | 4,256 | 4,585 | (23 | ) | 4,562 | ||||||||||||||||||||
Consumer Mobility | 23,279 | 13,599 | 9,680 | 2,621 | 7,059 | - | 7,059 | |||||||||||||||||||||
International | 6,054 | 5,468 | 586 | 905 | (319 | ) | 62 | (257 | ) | |||||||||||||||||||
Segment Total | 118,302 | 78,901 | 39,401 | 14,754 | 24,647 | $ | 39 | $ | 24,686 | |||||||||||||||||||
Corporate and Other | 657 | 397 | 260 | 54 | 206 | |||||||||||||||||||||||
Acquisition-related items | - | 622 | (622 | ) | 3,508 | (4,130 | ) | |||||||||||||||||||||
Certain significant items | (89 | ) | 44 | (133 | ) | - | (133 | ) | ||||||||||||||||||||
AT&T Inc. | $ | 118,870 | $ | 79,964 | $ | 38,906 | $ | 18,316 | $ | 20,590 |
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ContinuedDollars in millions except per share amounts
For the three months ended June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) Affiliates | Segment Contribution | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | $ | 15,091 | $ | 8,636 | $ | 6,455 | $ | 1,716 | $ | 4,739 | $ | - | $ | 4,739 | ||||||||||||||||||||||||||||||||||||||||||
Business Solutions | 9,667 | 6,053 | 3,614 | 1,483 | 2,131 | - | 2,131 | |||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment Group | 12,661 | 9,561 | 3,100 | 1,458 | 1,642 | (12 | ) | 1,630 | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 2,026 | 1,772 | 254 | 311 | (57 | ) | 25 | (32 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Segment Total | 39,445 | 26,022 | 13,423 | 4,968 | 8,455 | $ | 13 | $ | 8,468 | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 392 | 766 | (374 | ) | 9 | (383 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition-related items | - | 281 | (281 | ) | 1,170 | (1,451 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Certain significant items | - | 95 | (95 | ) | - | (95 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
AT&T Inc. | $ | 39,837 | $ | 27,164 | $ | 12,673 | $ | 6,147 | $ | 6,526 | ||||||||||||||||||||||||||||||||||||||||||||||
For the six months ended June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) of Affiliates | Segment Contribution | ||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | $ | 29,897 | $ | 17,196 | $ | 12,701 | $ | 3,432 | $ | 9,269 | $ | - | $ | 9,269 | ||||||||||||||||||||||||||||||||||||||||||
Business Solutions | 19,288 | 12,051 | 7,237 | 2,943 | 4,294 | - | 4,294 | |||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment Group | 25,262 | 19,166 | 6,096 | 2,878 | 3,218 | (18 | ) | 3,200 | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 3,955 | 3,531 | 424 | 601 | (177 | ) | 45 | (132 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Segment Total | 78,402 | 51,944 | 26,458 | 9,854 | 16,604 | $ | 27 | $ | 16,631 | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 800 | 1,637 | (837 | ) | 48 | (885 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition-related items | - | 488 | (488 | ) | 2,372 | (2,860 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Certain significant items | - | (23 | ) | 23 | - | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||
AT&T Inc. | $ | 79,202 | $ | 54,046 | $ | 25,156 | $ | 12,274 | $ | 12,882 | ||||||||||||||||||||||||||||||||||||||||||||||
15
For the three months ended September 30, 2016 | ||||||||||||||||||||||||||||
Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) of Affiliates | Segment Contribution | ||||||||||||||||||||||
Business Solutions | $ | 17,767 | $ | 10,925 | $ | 6,842 | $ | 2,539 | $ | 4,303 | $ | - | $ | 4,303 | ||||||||||||||
Entertainment Group | 12,720 | 9,728 | 2,992 | 1,504 | 1,488 | - | 1,488 | |||||||||||||||||||||
Consumer Mobility | 8,267 | 4,751 | 3,516 | 944 | 2,572 | - | 2,572 | |||||||||||||||||||||
International | 1,879 | 1,640 | 239 | 293 | (54 | ) | 1 | (53 | ) | |||||||||||||||||||
Segment Total | 40,633 | 27,044 | 13,589 | 5,280 | 8,309 | $ | 1 | $ | 8,310 | |||||||||||||||||||
Corporate and Other | 270 | 270 | - | 17 | (17 | ) | ||||||||||||||||||||||
Acquisition-related items | - | 290 | (290 | ) | 1,282 | (1,572 | ) | |||||||||||||||||||||
Certain significant items | (13 | ) | 299 | (312 | ) | - | (312 | ) | ||||||||||||||||||||
AT&T Inc. | $ | 40,890 | $ | 27,903 | $ | 12,987 | $ | 6,579 | $ | 6,408 |
For the nine months ended September 30, 2016 | ||||||||||||||||||||||||||||
Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) of Affiliates | Segment Contribution | ||||||||||||||||||||||
Business Solutions | $ | 52,955 | $ | 32,584 | $ | 20,371 | $ | 7,568 | $ | 12,803 | $ | - | $ | 12,803 | ||||||||||||||
Entertainment Group | 38,089 | 28,875 | 9,214 | 4,481 | 4,733 | 1 | 4,734 | |||||||||||||||||||||
Consumer Mobility | 24,781 | 14,343 | 10,438 | 2,798 | 7,640 | - | 7,640 | |||||||||||||||||||||
International | 5,374 | 4,951 | 423 | 868 | (445 | ) | 24 | (421 | ) | |||||||||||||||||||
Segment Total | 121,199 | 80,753 | 40,446 | 15,715 | 24,731 | $ | 25 | $ | 24,756 | |||||||||||||||||||
Corporate and Other | 759 | 940 | (181 | ) | 54 | (235 | ) | |||||||||||||||||||||
Acquisition-related items | - | 818 | (818 | ) | 3,949 | (4,767 | ) | |||||||||||||||||||||
Certain significant items | (13 | ) | (383 | ) | 370 | - | 370 | |||||||||||||||||||||
AT&T Inc. | $ | 121,945 | $ | 82,128 | $ | 39,817 | $ | 19,718 | $ | 20,099 |
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ContinuedDollars in millions except per share amounts
The following table is a reconciliation of Segment Contribution to “Income Before Income Taxes” reported on our consolidated statements of income.
Three months ended | Six months ended | |||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Consumer Mobility | $ | 4,978 | $ | 4,739 | $ | 9,633 | $ | 9,269 | ||||||||||||||||||||
Business Solutions | 1,961 | 2,131 | 4,024 | 4,294 | ||||||||||||||||||||||||
Entertainment Group | 1,432 | 1,630 | 2,767 | 3,200 | ||||||||||||||||||||||||
International | (150 | ) | (32 | ) | (261 | ) | (132 | ) | ||||||||||||||||||||
WarnerMedia | 445 | - | 445 | - | ||||||||||||||||||||||||
Segment Contribution | 8,666 | 8,468 | 16,608 | 16,631 | ||||||||||||||||||||||||
Reconciling Items: | ||||||||||||||||||||||||||||
Corporate and Other | (459 | ) | (383 | ) | (883 | ) | (885 | ) | ||||||||||||||||||||
Merger and integration items | (321 | ) | (281 | ) | (388 | ) | (488 | ) | ||||||||||||||||||||
Amortization of intangibles acquired | (1,278 | ) | (1,170 | ) | (2,340 | ) | (2,372 | ) | ||||||||||||||||||||
Employee separation charges | (133 | ) | (60 | ) | (184 | ) | (60 | ) | ||||||||||||||||||||
Gain on wireless spectrum transactions | - | 63 | - | 181 | ||||||||||||||||||||||||
Natural disaster items | - | - | (104 | ) | - | |||||||||||||||||||||||
Foreign currency devaluation | (19 | ) | (98 | ) | (44 | ) | (98 | ) | ||||||||||||||||||||
Segment equity in net income of affiliates | 10 | (13 | ) | 2 | (27 | ) | ||||||||||||||||||||||
AT&T Operating Income | 6,466 | 6,526 | 12,667 | 12,882 | ||||||||||||||||||||||||
Interest Expense | 2,023 | 1,395 | 3,794 | 2,688 | ||||||||||||||||||||||||
Equity in net income (loss) of affiliates | (16 | ) | 14 | (7 | ) | (159 | ) | |||||||||||||||||||||
Other income (expense) - Net | 2,353 | 925 | 4,055 | 1,413 | ||||||||||||||||||||||||
Income Before Income Taxes | $ | 6,780 | $ | 6,070 | $ | 12,921 | $ | 11,448 | ||||||||||||||||||||
NOTE 5. REVENUE RECOGNITION
As of January 1, 2018, we adopted FASB ASU2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606). With our adoption of ASC 606, we made a policy election to record certain regulatory fees, primarily Universal Service Fund (USF) fees, on a net basis. See the Notes to the Consolidated Financial Statements of our 2017 Annual Report on Form10-K for additional information regarding our policies prior to adoption of ASC 606.
When implementing ASC 606, we utilized the practical expedient allowing us to reflect the aggregate effect of all contract modifications occurring before the beginning of the earliest period presented when allocating the transaction price to performance obligations.
Service and Equipment Revenues
Our products and services are offered to customers in service-only contracts and in contracts that bundle equipment used to access the services and/or with other service offerings. Service revenue is recognized when services are provided, based upon either usage (e.g., minutes of traffic/bytes of data processed) or period of time (e.g., monthly service fees). We record the sale of equipment when title has passed and the products are accepted by the customer. Some contracts have fixed terms and others are cancellable on a short-term basis (i.e.,month-to-month arrangements).
Revenues from transactions between us and our customers are recorded net of regulatory fees and taxes. Cash incentives given to customers are recorded as a reduction of revenue. Nonrefundable, upfront service activation and setup fees associated with service arrangements are deferred and recognized over the associated service contract period or customer life. We record the sale of equipment and services to customers as gross revenue when we are the principal in the arrangement and net of the associated costs incurred when we act as an agent in the arrangement.
16
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Our contracts allow for customers to frequently modify their arrangement, without incurring penalties in many cases. When a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be treated as a new contract or if it should be considered a change of the existing contract. We generally do not have significant impacts from contract modifications.
Service-Only Contracts and Standalone Equipment Sales
Revenue is recognized as service is provided or when control has transferred. For devices sold through indirect channels (e.g., national dealers), revenue is recognized when the dealer accepts the device, not upon activation.
Arrangements with Multiple Performance Obligations
Revenue recognized from fixed term contracts that bundle services and/or equipment are allocated based on the standalone selling price of all required performance obligations of the contract (i.e., each item included in the bundle). Promotional discounts are attributed to each required component of the arrangement, resulting in recognition over the contract term. Standalone selling prices are determined by assessing prices paid for service-only contracts (e.g., arrangements where customers bring their own devices) and standalone device pricing.
We offer the majority of our customers the option to purchase certain wireless devices in installments over a specified period of time, and, in many cases, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. For customers that elect these equipment installment payment programs, at the point of sale, we recognize revenue for the entire amount of revenue allocated to the customer receivable net of fair value of thetrade-in right guarantee. The difference between the revenue recognized and the consideration received is recorded as a note receivable when the devices are not discounted and our right to consideration is unconditional. 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.
Less commonly, we offer certain customers highly discounted devices when they enter into a minimum service agreement term. For these contracts, we recognize equipment revenue at the point of sale based on a standalone selling price allocation. The difference between the revenue recognized and the cash received is recorded as a contract asset that will amortize over the contract term.
For contracts that require the use of certain equipment in order to receive service (e.g., AT&TU-verse® and DIRECTV linear video services), we allocate the total transaction price to service if the equipment does not meet the criteria to be a distinct performance obligation.
Media Revenues
Media revenues are primarily derived from content production and distribution (i.e., content revenue), providing programming to distributors that have contracted to receive and distribute this programming to their subscribers (i.e., subscription revenue) and the sale of advertising on our networks and digital properties and the digital properties we manage and/or operate for others (i.e., advertising revenue).
17
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Disaggregation of Revenue
The following tables set forth disaggregated reported revenue by category:
For the three months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | Business Solutions | Entertainment Group | International | WarnerMedia | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Wireless service | $ | 11,853 | $ | 1,829 | $ | - | $ | 417 | $ | - | $ | - | $ | 14,099 | ||||||||||||||||||||||||||||||||||||||||||
Video entertainment | - | - | 8,331 | 1,254 | - | - | 9,585 | |||||||||||||||||||||||||||||||||||||||||||||||||
Strategic services | - | 3,039 | - | - | - | - | 3,039 | |||||||||||||||||||||||||||||||||||||||||||||||||
High-speed internet | - | - | 1,981 | - | - | - | 1,981 | |||||||||||||||||||||||||||||||||||||||||||||||||
Legacy voice and data | - | 2,723 | 785 | - | - | - | 3,508 | |||||||||||||||||||||||||||||||||||||||||||||||||
Content | - | - | - | - | 487 | - | 487 | |||||||||||||||||||||||||||||||||||||||||||||||||
Subscription | - | - | - | - | 591 | - | 591 | |||||||||||||||||||||||||||||||||||||||||||||||||
Advertising | - | - | - | - | 208 | - | 208 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other media revenues | - | - | - | - | 51 | (1 | ) | 50 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other service | - | 691 | 550 | - | - | 320 | 1,561 | |||||||||||||||||||||||||||||||||||||||||||||||||
Wireless equipment | 3,016 | 584 | - | 280 | - | - | 3,880 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other equipment | - | 197 | 3 | - | - | - | 200 | |||||||||||||||||||||||||||||||||||||||||||||||||
Eliminations | - | - | - | - | (62 | ) | (141 | ) | (203 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Total Operating Revenues | $ | 14,869 | $ | 9,063 | $ | 11,650 | $ | 1,951 | $ | 1,275 | $ | 178 | $ | 38,986 | ||||||||||||||||||||||||||||||||||||||||||
18
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the six months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | Business Solutions | Entertainment Group | International | WarnerMedia | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Wireless service | $ | 23,465 | $ | 3,620 | $ | - | $ | 821 | $ | - | $ | - | $ | 27,906 | ||||||||||||||||||||||||||||||||||||||||||
Video entertainment | - | - | 16,690 | 2,608 | - | - | 19,298 | |||||||||||||||||||||||||||||||||||||||||||||||||
Strategic services | - | 6,109 | - | - | - | - | 6,109 | |||||||||||||||||||||||||||||||||||||||||||||||||
High-speed internet | - | - | 3,859 | - | - | - | 3,859 | |||||||||||||||||||||||||||||||||||||||||||||||||
Legacy voice and data | - | 5,561 | 1,604 | - | - | - | 7,165 | |||||||||||||||||||||||||||||||||||||||||||||||||
Content | - | - | - | - | 487 | - | 487 | |||||||||||||||||||||||||||||||||||||||||||||||||
Subscription | - | - | - | - | 591 | - | 591 | |||||||||||||||||||||||||||||||||||||||||||||||||
Advertising | - | - | - | - | 208 | - | 208 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other media revenues | - | - | - | - | 51 | (1 | ) | 50 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other service | - | 1,360 | 1,069 | - | - | 653 | 3,082 | |||||||||||||||||||||||||||||||||||||||||||||||||
Wireless equipment | 6,390 | 1,162 | - | 547 | - | - | 8,099 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other equipment | - | 367 | 5 | - | - | 1 | 373 | |||||||||||||||||||||||||||||||||||||||||||||||||
Eliminations | - | - | - | - | (62 | ) | (141 | ) | (203 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Total Operating Revenues | $ | 29,855 | $ | 18,179 | $ | 23,227 | $ | 3,976 | $ | 1,275 | $ | 512 | $ | 77,024 | ||||||||||||||||||||||||||||||||||||||||||
19
The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income. | ||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Business Solutions | $ | 4,503 | $ | 4,303 | $ | 13,322 | $ | 12,803 | ||||||||
Entertainment Group | 1,310 | 1,488 | 4,562 | 4,734 | ||||||||||||
Consumer Mobility | 2,320 | 2,572 | 7,059 | 7,640 | ||||||||||||
International | (125 | ) | (53 | ) | (257 | ) | (421 | ) | ||||||||
Segment Contribution | 8,008 | 8,310 | 24,686 | 24,756 | ||||||||||||
Reconciling Items: | ||||||||||||||||
Corporate and Other | 91 | (17 | ) | 206 | (235 | ) | ||||||||||
Merger and integration charges | (134 | ) | (290 | ) | (622 | ) | (818 | ) | ||||||||
Amortization of intangibles acquired | (1,136 | ) | (1,282 | ) | (3,508 | ) | (3,949 | ) | ||||||||
Actuarial gain (loss) | - | - | 259 | - | ||||||||||||
Employee separation costs | (208 | ) | (260 | ) | (268 | ) | (314 | ) | ||||||||
Gain (loss) on wireless spectrum transactions | - | (22 | ) | 181 | 714 | |||||||||||
Natural disaster costs and revenue credits | (207 | ) | (30 | ) | (207 | ) | (30 | ) | ||||||||
Venezuela devaluation | - | - | (98 | ) | - | |||||||||||
Segment equity in net (income) loss of affiliates | (11 | ) | (1 | ) | (39 | ) | (25 | ) | ||||||||
AT&T Operating Income | 6,403 | 6,408 | 20,590 | 20,099 | ||||||||||||
Interest expense | 1,686 | 1,224 | 4,374 | 3,689 | ||||||||||||
Equity in net income (loss) of affiliates | 11 | 16 | (148 | ) | 57 | |||||||||||
Other income (expense) - net | 246 | (7 | ) | 354 | 154 | |||||||||||
Income Before Income Taxes | $ | 4,974 | $ | 5,193 | $ | 16,422 | $ | 16,621 |
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from two to five years. Costs to fulfill customer contracts are deferred and amortized over periods ranging generally from four to five years, reflecting the estimated economic lives of the respective customer relationships, subject to an assessment of the recoverability of such costs. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.
Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $2,764 and $11,017 as of June 30, 2018, respectively, of which $1,250 and $3,715 were included in Other current assets on our consolidated balance sheets. For the six months ended June 30, 2018, we amortized $595 and $1,889 of these costs, respectively.
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration (i.e., we must perform additional services or satisfy another performance obligation in order to bill and receive consideration). The contract asset will decrease as services are provided and billed. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Reductions in the contract liability will be recorded as we satisfy the performance obligations.
The following table presents contract assets and liabilities and revenue recorded at or for the period ended June 30, 2018:
June 30, | ||||
2018 | ||||
Contract asset | $ | 1,906 | ||
Contract liability | 6,853 | |||
Beginning of period contract liability recorded as customer contract revenue during the period | 3,839 | |||
Our consolidated balance sheet at June 30, 2018 included approximately $1,257 for the current portion of our contract asset in “Other current assets” and $5,723 for the current portion of our contract liability in “Advanced billings and customer deposits.”
20
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
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 includenon-recurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year, which are primarily prepaid wireless, video and residential internet agreements.
Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $41,838, of which we expect to recognize approximately 80% over the next two years, with the balance recognized thereafter.
The aggregate amount of transaction price allocated to remaining performance obligations included $13,623 related to WarnerMedia operations, which relates to the licensing of theatrical and television content that will be made available to customers at some point in the future. It excludes advertising and subscription arrangements that have an expected contract duration of one year or less.
Comparative Results
Prior to 2018, revenue recognized from contracts that bundle services and equipment was limited to the lesser of the amount allocated based on the relative selling price of the equipment and service already delivered or the consideration received from the customer for the equipment and service already delivered. Our prior accounting also separately recognized regulatory fees as operating revenue when received and as an expense when incurred. Sales commissions were previously expensed as incurred.
21
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table presents our reported results under ASC 606 and our pro forma results using the historical accounting method:
For the three months ended June 30, 2018 | As Reported | Historical Accounting Method | ||||||
Consolidated Statements of Income: | ||||||||
Service Revenues | $ | 33,773 | $ | 35,163 | ||||
Equipment Revenues | 4,080 | 3,611 | ||||||
Media Revenues | 1,133 | 1,135 | ||||||
Total Operating Revenues | 38,986 | 39,909 | ||||||
Other cost of revenue | 7,632 | 8,535 | ||||||
Selling, general and administrative expenses | 8,684 | 9,267 | ||||||
Total Operating Expenses | 32,520 | 34,006 | ||||||
Operating income | 6,466 | 5,903 | ||||||
Income before income taxes | 6,780 | 6,217 | ||||||
Income tax expense | 1,532 | 1,394 | ||||||
Net income | 5,248 | 4,823 | ||||||
Net income attributable to AT&T | 5,132 | 4,713 | ||||||
Basic Earnings per Share Attributable to AT&T | $ | 0.81 | $ | 0.74 | ||||
Diluted Earnings per Share Attributable to AT&T | $ | 0.81 | $ | 0.74 | ||||
For the six months ended June 30, 2018 | ||||||||
Consolidated Statements of Income: | ||||||||
Service Revenues | $ | 67,419 | $ | 70,232 | ||||
Equipment Revenues | 8,472 | 7,472 | ||||||
Media Revenues | 1,133 | 1,135 | ||||||
Total Operating Revenues | 77,024 | 78,839 | ||||||
Other cost of revenue | 15,564 | 17,396 | ||||||
Selling, general and administrative expenses | 16,581 | 17,764 | ||||||
Total Operating Expenses | 64,357 | 67,372 | ||||||
Operating income | 12,667 | 11,467 | ||||||
Income before income taxes | 12,921 | 11,721 | ||||||
Income tax expense | 2,914 | 2,620 | ||||||
Net income | 10,007 | 9,101 | ||||||
Net income attributable to AT&T | 9,794 | 8,900 | ||||||
Basic Earnings per Share Attributable to AT&T | $ | 1.56 | $ | 1.42 | ||||
Diluted Earnings per Share Attributable to AT&T | $ | 1.56 | $ | 1.42 | ||||
At June 30, 2018 | ||||||||
Consolidated Balance Sheets: | ||||||||
Other current assets | 14,305 | 11,961 | ||||||
Other Assets | 23,941 | 21,983 | ||||||
Accounts payable and accrued liabilities | 35,488 | 35,667 | ||||||
Advanced billings and customer deposits | 5,914 | 5,978 | ||||||
Deferred income taxes | 59,665 | 58,585 | ||||||
Other noncurrent liabilities | 25,017 | 24,832 | ||||||
Retained earnings | 56,555 | 53,313 | ||||||
Accumulated other comprehensive income | 5,716 | 5,723 | ||||||
Noncontrolling interest | 1,150 | 1,103 | ||||||
22
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 5.6. 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.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, (Mobility II), the primary holding company for our domestic wireless business, to the pension trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $9,354$8,829 at SeptemberJune 30, 2017.2018. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and accounted for as contributions. Mobility IIWe distributed $420$280 to the trust during the ninesix months ended SeptemberJune 30, 2017.2018. So long as thosewe make the distributions, are made, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan'splan’s separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.
We recognize actuarial gains and losses on pension and postretirement plan assets in our operatingconsolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. During the secondfirst quarter of 2017,2018, a substantive plan change involving the frequency of considering potentialfuture health reimbursement account credit increases was communicated to our retirees. ThisDuring the second quarter of 2018, a written plan change triggeredinvolving the ability of certain participants of the pension plan to receive their benefit in a remeasurement oflump-sum amount upon retirement was communicated to our postretirement obligations andemployees. These plan changes resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by $1,563.$752, and increasing our liability by $50 in the first and second quarters of 2018, respectively. Such credits amortize through earnings over a period approximating the average service period to full eligibility. UponThese plan changes also triggered a remeasurement of our adoptionpostretirement and pension benefit obligations, resulting in an actuarial gain of ASU 2017-07,$930 in the amortizationfirst quarter and $1,796 in the second quarter of these prior service credits will be recorded2018. As a result of the plan changes and remeasurements, our pension and postretirement benefit obligation decreased $1,746 and $1,682, respectively.
23
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in other income (expense) – net.
The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portionThe service cost component of thesenet periodic pension cost (benefit) is recorded in operating expenses is capitalizedin the consolidated statements of income while the remaining components are recorded in other income (expense) – net. Service costs are eligible for capitalization as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included with Corporate and Other (see Note 4).
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Pension cost: | ||||||||||||||||
Service cost – benefits earned during the period | $ | 282 | $ | 278 | $ | 846 | $ | 834 | ||||||||
Interest cost on projected benefit obligation | 484 | 495 | 1,452 | 1,485 | ||||||||||||
Expected return on assets | (783 | ) | (778 | ) | (2,350 | ) | (2,336 | ) | ||||||||
Amortization of prior service credit | (31 | ) | (26 | ) | (93 | ) | (77 | ) | ||||||||
Net pension (credit) cost | $ | (48 | ) | $ | (31 | ) | $ | (145 | ) | $ | (94 | ) | ||||
Postretirement cost: | ||||||||||||||||
Service cost – benefits earned during the period | $ | 32 | $ | 48 | $ | 107 | $ | 144 | ||||||||
Interest cost on accumulated postretirement benefit obligation | 193 | 243 | 617 | 729 | ||||||||||||
Expected return on assets | (81 | ) | (88 | ) | (240 | ) | (266 | ) | ||||||||
Amortization of prior service credit | (382 | ) | (320 | ) | (1,084 | ) | (958 | ) | ||||||||
Actuarial (gain) loss | - | - | (259 | ) | - | |||||||||||
Net postretirement (credit) cost | $ | (238 | ) | $ | (117 | ) | $ | (859 | ) | $ | (351 | ) | ||||
Combined net pension and postretirement (credit) cost | $ | (286 | ) | $ | (148 | ) | $ | (1,004 | ) | $ | (445 | ) |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Pension cost: | ||||||||||||||||
Service cost – benefits earned during the period | $ | 284 | $ | 282 | $ | 575 | $ | 564 | ||||||||
Interest cost on projected benefit obligation | 504 | 484 | 991 | 968 | ||||||||||||
Expected return on assets | (755) | (784) | (1,515) | (1,567) | ||||||||||||
Amortization of prior service credit | (29) | (31) | (59) | (62) | ||||||||||||
Actuarial (gain) loss | (1,796) | - | (1,796) | - | ||||||||||||
Net pension (credit) cost | $ | (1,792) | $ | (49) | $ | (1,804) | $ | (97) | ||||||||
Postretirement cost: | ||||||||||||||||
Service cost – benefits earned during the period | $ | 26 | $ | 34 | $ | 55 | $ | 75 | ||||||||
Interest cost on accumulated postretirement benefit obligation | 195 | 202 | 386 | 424 | ||||||||||||
Expected return on assets | (75) | (79) | (152) | (159) | ||||||||||||
Amortization of prior service credit | (413) | (366) | (810) | (702) | ||||||||||||
Actuarial (gain) loss | - | (259) | (930) | (259) | ||||||||||||
Net postretirement (credit) cost | $ | (267) | $ | (468) | $ | (1,451) | $ | (621) | ||||||||
Combined net pension and postretirement (credit) cost | $ | (2,059) | $ | (517) | $ | (3,255) | $ | (718) | ||||||||
As part of our first- and second-quarter 2017 remeasurement,2018 remeasurements, we decreasedmodified the weighted-average discount rate used to measure our postretirement benefit obligationobligations increasing the rate to 4.10%. for the postretirement obligation and to 4.30% for the pension obligation. The discount rate in effect for determining postretirement service and interest costs after remeasurement is 4.50%4.30% and 3.30%3.70%, respectively.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the thirdsecond quarter ended 20172018 and 2016,2017, net supplemental pension benefits costs not included in the table above were $22$21 and $23. For the first ninesix months of 20172018 and 2016,2017, net supplemental pension benefit costs were $67$42 and $70.$45.
24
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ContinuedDollars in millions except per share amounts
NOTE 6.7. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access. |
Level 2 | Inputs to the valuation methodology include: |
● Quoted prices for similar assets and liabilities in active markets. |
● Quoted prices for identical or similar assets or liabilities in inactive markets. |
● Inputs other than quoted market prices that are observable for the asset or liability. |
● Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
● Fair value is often based on developed models in which there are few, if any, external observations. |
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. 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, 2016.
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, 2017 | December 31, 2016 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Notes and debentures 1 | $ | 162,450 | $ | 171,025 | $ | 122,381 | $ | 128,726 | ||||||||
Bank borrowings | 2 | 2 | 4 | 4 | ||||||||||||
Investment securities | 2,565 | 2,565 | 2,587 | 2,587 | ||||||||||||
1 Includes credit agreement borrowings. |
June 30, 2018 | December 31, 2017 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Notes and debentures1 | $ | 180,209 | $ | 182,732 | $ | 162,526 | $ | 171,938 | ||||||||
Commercial paper | 8,139 | 8,139 | - | - | ||||||||||||
Bank borrowings | 15 | 15 | 2 | 2 | ||||||||||||
Investment securities2 | 3,511 | 3,511 | 2,447 | 2,447 | ||||||||||||
1Includes credit agreement borrowings.
2 Excludes investments accounted for under the equity method.
The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
25
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ContinuedDollars in millions except per share amounts
Following is the fair value leveling for available-for-saleinvestment securities that are measured at fair value and derivatives as of SeptemberJune 30, 20172018 and December 31, 2016:
September 30, 2017 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Available-for-Sale Securities | ||||||||||||||||
Domestic equities | $ | 1,274 | $ | - | $ | - | $ | 1,274 | ||||||||
International equities | 380 | - | - | 380 | ||||||||||||
Fixed income bonds | - | 659 | - | 659 | ||||||||||||
Asset Derivatives 1 | ||||||||||||||||
Interest rate swaps | - | 45 | - | 45 | ||||||||||||
Cross-currency swaps | - | 967 | - | 967 | ||||||||||||
Liability Derivatives 1 | ||||||||||||||||
Interest rate swaps | - | (34 | ) | - | (34 | ) | ||||||||||
Cross-currency swaps | - | (1,809 | ) | - | (1,809 | ) | ||||||||||
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of | ||||||||||||||||
interest rate swaps, "Other current assets" in our consolidated balance sheets. |
December 31, 2016 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Available-for-Sale Securities | ||||||||||||||||
Domestic equities | $ | 1,215 | $ | - | $ | - | $ | 1,215 | ||||||||
International equities | 594 | - | - | 594 | ||||||||||||
Fixed income bonds | - | 508 | - | 508 | ||||||||||||
Asset Derivatives 1 | ||||||||||||||||
Interest rate swaps | - | 79 | - | 79 | ||||||||||||
Cross-currency swaps | - | 89 | - | 89 | ||||||||||||
Liability Derivatives 1 | ||||||||||||||||
Interest rate swaps | - | (14 | ) | - | (14 | ) | ||||||||||
Cross-currency swaps | - | (3,867 | ) | - | (3,867 | ) | ||||||||||
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of | ||||||||||||||||
interest rate swaps, "Other current assets" in our consolidated balance sheets. |
June 30, 2018 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Equity Securities | ||||||||||||||||
Domestic equities | $ | 1,252 | $ | - | $ | - | $ | 1,252 | ||||||||
International equities | 304 | - | - | 304 | ||||||||||||
Fixed income equities | 149 | - | - | 149 | ||||||||||||
Available-for-Sale Debt Securities | - | 890 | - | 890 | ||||||||||||
Asset Derivatives | ||||||||||||||||
Cross-currency swaps | - | 1,216 | - | 1,216 | ||||||||||||
Foreign exchange contracts | - | 55 | - | 55 | ||||||||||||
Liability Derivatives | ||||||||||||||||
Interest rate swaps | - | (89) | - | (89) | ||||||||||||
Cross-currency swaps | - | (1,506) | - | (1,506) | ||||||||||||
December 31, 2017 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Equity Securities | ||||||||||||||||
Domestic equities | $ | 1,142 | $ | - | $ | - | $ | 1,142 | ||||||||
International equities | 321 | - | - | 321 | ||||||||||||
Fixed income equities | - | 152 | - | 152 | ||||||||||||
Available-for-Sale Debt Securities | - | 581 | - | 581 | ||||||||||||
Asset Derivatives | ||||||||||||||||
Interest rate swaps | - | 17 | - | 17 | ||||||||||||
Cross-currency swaps | - | 1,753 | - | 1,753 | ||||||||||||
Liability Derivatives | ||||||||||||||||
Interest rate swaps | - | (31) | - | (31) | ||||||||||||
Cross-currency swaps | - | (1,290) | - | (1,290) | ||||||||||||
Investment Securities
Our investment securities include equities, fixed income bondsboth equity and other securities.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 available-for-saleinvestment securities wasare 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. Realized
Upon the adoption of ASU2016-01, we reclassified $658 of such unrealized gains and losses on equity securities to retained earnings and beginning in 2018, gains and losses, both realized and unrealized, on equity securities measured at fair value are included in "Other“Other income (expense) – net"net” in the consolidated statements of income using the specific identification method. Unrealized
26
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The components comprising total gains and losses net of tax, on available-for-saleequity securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basisas follows:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Total gains (losses) recognized on equity securities | $ | 21 | $ | 14 | $ | 8 | $ | 103 | ||||||||
Gains (Losses) recognized on equity securities sold | (3 | ) | - | 49 | 11 | |||||||||||
Unrealized gains (losses) recognized on equity securities held at end of period | 24 | 14 | (41 | ) | 92 | |||||||||||
Debt securities of the investment. Fixed income investments of $509$34 have maturities of less than one year, $33$136 within one to three years, $32$117 within three to five years and $85$603 for five or more years.
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“Other current assets"assets” and our investment securities are recorded in "Other Assets"“Other Assets” on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.
Fair Value Hedging
We designate ourfixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In theCash Flow Hedging
We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc 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 rate to a fixed U.S. dollar denominated interest rate.Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other“Other income (expense) – net"net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016,2017, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
27
AT&T INC.
JUNE 30, 2018
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, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other“Other income (expense) – net"net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $59$60 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other“Other income (expense) – net"net” in the consolidated statements of income. In the ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016,2017, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
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. AtFollowing are the notional amounts of our outstanding derivative positions:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Interest rate swaps | $ | 10,775 | $ | 9,650 | ||||
Cross-currency swaps | 38,694 | 29,642 | ||||||
Total | $ | 49,469 | $ | 39,292 |
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 | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest rate swaps (Interest expense): | ||||||||||||||||
Gain (Loss) on interest rate swaps | $ | (3 | ) | $ | (54 | ) | $ | (51 | ) | $ | 17 | |||||
Gain (Loss) on long-term debt | 3 | 54 | 51 | (17 | ) |
June 30, 2018 | December 31, 2017 | |||||||
Interest rate swaps | $ | 7,333 | $ | 9,833 | ||||
Cross-currency swaps | 36,092 | 38,694 | ||||||
Foreign exchange contracts | 2,399 | - | ||||||
Total | $ | 45,824 | $ | 48,527 | ||||
Following are the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income |
| |||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Fair Value Hedging Relationships | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Interest rate swaps (Interest expense): | ||||||||||||||||
Gain (Loss) on interest rate swaps | $ | (9) | $ | (23) | $ | (62) | $ | (48) | ||||||||
Gain (Loss) on long-term debt | 9 | 23 | 62 | 48 | ||||||||||||
In addition, the net swap settlements that accrued and settled in the quarter ended SeptemberJune 30 were offset against interest expense.
28
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Cash Flow Hedging Relationships | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Cross-currency swaps: | ||||||||||||||||
Gain (Loss) recognized in accumulated OCI | $ | 429 | $ | 686 | $ | (268 | ) | $ | 282 | |||||||
Interest rate locks: | ||||||||||||||||
Gain (Loss) recognized in accumulated OCI | 79 | - | - | - | ||||||||||||
Interest income (expense) reclassified from accumulated OCI into income | (15 | ) | (15 | ) | (44 | ) | (44 | ) |
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Cash Flow Hedging Relationships | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Cross-currency swaps: | ||||||||||||||||
Gain (Loss) recognized in accumulated OCI | $ | (533) | $ | (717) | $ | 321 | $ | (697) | ||||||||
Interest rate locks: | ||||||||||||||||
Gain (Loss) recognized in accumulated OCI | - | (79) | - | (79) | ||||||||||||
Interest income (expense) reclassified from accumulated OCI into income | (14) | (14) | (29) | (29) | ||||||||||||
NOTE 7.8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Time Warner Inc. On October 22, 2016,June 14, 2018, we entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per sharecompleted our acquisition of Time Warner, common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at September 30, 2017, the total transaction value is approximately $105,834. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash.
Under the merger agreement, each share of Time Warner stock was approvedexchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to trusts consolidated by AT&T, share-based payment arrangements and fractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to Time Warner shareholders, giving them an approximate 16% stake in the combined company. Based on February 15, 2017. The transaction has been approved by all requisite foreign jurisdictionsour $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and remains subject to review by$42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,114. On July 12, 2018, the U.S. Department of Justice.Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we will continue to vigorously defend our legal position in the appellate court.
Our second-quarter 2018 operating results include the results of Time Warner following the acquisition date. The transaction is expected to close before year-end 2017. If the Merger is terminated as a result of reaching the termination date (and at that time one or morefair values of the conditions relatingassets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to certain regulatory approvals have not been satisfied)value the intangible assets, consisting primarily of distribution network, released TV and film content,in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or there is a final, non-appealable order preventingreplacement cost for the transaction relatingproperty, less an allowance for loss in value due to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would be obligated to paydepreciation. Our June 30, 2018, consolidated balance sheet includes the assets and liabilities of Time Warner, $500. On October 20, 2017, to facilitate obtaining final regulatory approval required to close the merger, AT&T and Time Warner elected to extend the October 22, 2017 termination date of the agreement for a short period of time.
29
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ContinuedDollars in millions except per share amounts
Assets acquired | ||||
Cash | $ | 1,655 | ||
Accounts receivable | 9,166 | |||
All other current assets | 3,405 | |||
Noncurrent inventory and theatrical film and television production costs | 5,778 | |||
Property, plant and equipment | 4,699 | |||
Intangible assets subject to amortization | ||||
Distribution network | 17,480 | |||
Released television and film content | 11,322 | |||
Trademarks and trade names | 18,100 | |||
Other | 10,290 | |||
Investments and other assets | 9,669 | |||
Goodwill | 38,102 | |||
Total assets acquired | 129,666 | |||
Liabilities assumed | ||||
Current liabilities, excluding current portion of long-term debt | 8,513 | |||
Long-term debt | 22,846 | |||
Other noncurrent liabilities | 19,192 | |||
Total liabilities assumed | 50,551 | |||
Net assets acquired | 79,115 | |||
Noncontrolling interest | (1 | ) | ||
Aggregate value of consideration paid | $ | 79,114 | ||
These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecordedpre-acquisition contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units any changes in goodwill should be recorded.
Excluded from the table above are commitments of approximately $35,000 for future purchases primarily related to network programming obligations, including contracts to license sports programming.
Due to the proximity of the closing of this acquisition to the end of the quarter, we were not able to provide the requisite combined pro forma financial information.
Held-for-Sale
In June 2018, we entered into an agreement to sell 31 of our data centers to Brookfield Infrastructure Partners (Brookfield) for $1,100. We expect the transaction to close within the next six to eight months, subject to customary closing conditions.
We appliedheld-for-sale treatment to the assets associated with the data centers to be sold, which primarily consist of net property, plant and equipment of approximately $279 and goodwill of $236. These assets are included in “Other current assets,” on our June 30, 2018 consolidated balance sheet.
30
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 8.9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a specified period of up to 30 monthstime and, in many cases, once certain conditions are met, they have the rightmay be eligible to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied.paid or settled. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, gross equipment installment receivables of $4,176$5,853 and $5,665$6,079 were included on our consolidated balance sheets, of which $2,485$3,781 and $3,425$3,340 are notes receivable that are included in "Accounts“Accounts receivable - net."
In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, 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 Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. Since inception,As of June 30, 2018, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $4,019.
The following table sets forth a summary of equipment installment receivables sold during the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Gross receivables sold | $ | 1,619 | $ | 1,485 | $ | 6,217 | $ | 5,812 | ||||||||
Net receivables sold 1 | 1,478 | 1,336 | 5,698 | 5,263 | ||||||||||||
Cash proceeds received | 1,292 | 891 | 4,139 | 3,538 | ||||||||||||
Deferred purchase price recorded | 285 | 463 | 1,767 | 1,745 | ||||||||||||
Guarantee obligation recorded | 65 | - | 139 | - | ||||||||||||
1 Receivables net of allowance, imputed interest and trade-in right guarantees. |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Gross receivables sold | $ | 1,906 | $ | 1,752 | $ | 4,916 | $ | 4,598 | ||||||||
Net receivables sold1 | 1,811 | 1,599 | 4,606 | 4,220 | ||||||||||||
Cash proceeds received | 1,532 | 1,415 | 3,927 | 2,847 | ||||||||||||
Deferred purchase price recorded | 307 | 293 | 826 | 1,482 | ||||||||||||
Guarantee obligation recorded | 72 | 74 | 195 | 74 | ||||||||||||
|
1 Receivables net of allowance, imputed interest andtrade-in right guarantees.
The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of devicetrade-ins. The estimated value of the devicetrade-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 6)7).
31
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ContinuedDollars in millions except per share amounts
The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price and cash during the three months and ninesix months ended SeptemberJune 30, 20172018 and 2016:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Fair value of repurchased receivables | $ | 567 | $ | 749 | $ | 1,281 | $ | 1,281 | ||||||||
Carrying value of deferred purchase price | 507 | 722 | 1,147 | 1,261 | ||||||||||||
Gain (loss) on repurchases 1 | $ | 60 | $ | 27 | $ | 134 | $ | 20 | ||||||||
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income. |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Fair value of repurchased receivables | $ | 1,481 | $ | 337 | $ | 1,481 | $ | 714 | ||||||||
Carrying value of deferred purchase price | 1,393 | 301 | 1,393 | 640 | ||||||||||||
Gain (loss) on repurchases1 | $ | 88 | $ | 36 | $ | 88 | $ | 74 | ||||||||
|
1 These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income.
At SeptemberJune 30, 20172018 and December 31, 2016,2017, our deferred purchase price receivable was $3,170$1,686 and $3,090,$2,749, respectively, of which $2,023$813 and $1,606$1,781 are included in "Other“Other current assets"assets” on our consolidated balance sheets, with the remainder in "Other“Other Assets."” The guarantee obligation at June 30, 2018 and December 31, 2017 was $362 and $204, respectively, of which $111 and $55 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.
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets"“Total Assets” reported on our consolidated balance sheets. We reflect thecash receipts on owned equipment installment receivables as cash flows related to the arrangement as operating activitiesfrom operations in our consolidated statements of cash flows becauseflows. With the retrospective adoption of ASU2016-15 in 2018 (see Note 1), cash received from the Purchasers upon both the sale of the receivables and the collection ofreceipts on the deferred purchase price are now classified as cash flows from investing activities instead of cash flows from operating activities for all periods presented.
The outstanding portfolio of installment receivables derecognized from our consolidated balance sheets, but which we continue to service, was $7,564 and $7,446 at June 30, 2018 and December 31, 2017.
32
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 10. INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS
Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value and include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. The amount of capitalized film and television production costs recognized as broadcast, programming and operations expenses for a given period is not subject to significant interest rate risk.
The following table sets forth a summarysummarizes inventories and theatrical film and television production costs as of equipment installment receivables that were sold to Purchasers and are no longer considered our assets.June 30, 2018:
June 30, 2018 | ||||
Inventories: | ||||
Programming costs, less amortization1 | $ | 4,252 | ||
Other inventory, primarily DVD andBlu-ray Discs | 154 | |||
Total inventories | 4,406 | |||
Less: current portion of inventory | (2,313 | ) | ||
Total noncurrent inventories | 2,093 | |||
Theatrical film production costs:2 | ||||
Released, less amortization | 6 | |||
Completed and not released | 49 | |||
In production | 1,249 | |||
Development andpre-production | 171 | |||
Television production costs:2 | ||||
Released, less amortization | 168 | |||
Completed and not released | 534 | |||
In production | 1,556 | |||
Development andpre-production | 23 | |||
Total theatrical film and television production costs | 3,756 | |||
Total noncurrent inventories and theatrical film and television production costs | $ | 5,849 | ||
1 | Includes the costs of certain programming rights, primarily sports, for which payments have been made prior to the related rights being received. |
2 | Does not include $11,150 of acquired film and television library intangible assets as of June 30, 2018, which are included in “Other Intangible Assets – Net” on our consolidated balance sheet. |
33
2017 | ||||
Outstanding derecognized receivables at January 1, | $ | 7,232 | ||
Gross receivables sold | 6,217 | |||
Collections on cash purchase price | (3,556 | ) | ||
Collections on deferred purchase price | (665 | ) | ||
Trade ins and other | (295 | ) | ||
Fair value of repurchased receivables | (1,281 | ) | ||
Outstanding derecognized receivables at September 30, | $ | 7,652 |
AT&T INC.
JUNE 30, 20172018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 11. ADDITIONAL FINANCIAL INFORMATION
Cash and Cash Flow
We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments. The following summarizes cash and cash equivalents and restricted cash balances contained on our consolidated balance sheets:
June 30, | December 31, | |||||||||||||||||||
Cash and Cash Equivalents and Restricted Cash | 2018 | 2017 | 2017 | 2016 | ||||||||||||||||
Cash and cash equivalents | $ | 13,523 | $ | 25,617 | $ | 50,498 | $ | 5,788 | ||||||||||||
Restricted cash in Other current assets | 12 | 6 | 6 | 7 | ||||||||||||||||
Restricted cash in Other Assets | 218 | 202 | 428 | 140 | ||||||||||||||||
Cash and cash equivalents and restricted cash | $ | 13,753 | $ | 25,825 | $ | 50,932 | $ | 5,935 | ||||||||||||
Six months ended | ||||||||||||||||||||
June 30, | ||||||||||||||||||||
Consolidated Statements of Cash Flows | 2018 | 2017 | ||||||||||||||||||
Cash paid (received) during the period for: | ||||||||||||||||||||
Interest | $ | 4,045 | $ | 3,095 | ||||||||||||||||
Income taxes, net of refunds | (757 | ) | 1,470 | |||||||||||||||||
Debt Transactions
As of June 30, 2018, our total long-term debt obligations totaled $190,167. During the first six months we completed the following debt activity:
● | For the purpose of providing financing in connection with our Time Warner acquisition, we drew the following on our lines of credit: $16,175 with JPMorgan Chase Bank, N.A., $2,500 with BNP Paribas and $2,250 with Bank of Nova Scotia. |
● | Issuance of approximately $1,500 three-year floating rate note and other borrowings totaling $2,100. |
● | Borrowings of approximately $7,900 of debt under our commercial paper program. |
● | Net borrowings of approximately $1,000 by subsidiaries in Latin America. |
● | Redemptions totaling approximately $4,550 for AT&T notes that matured prior to June 30, 2018. |
● | Redemption of $21,235 of AT&T notes issued in anticipation of the Time Warner acquisition that were subject to mandatory redemption. |
● | With the acquisition of Time Warner, we acquired $22,846 of debt, of which we repaid $2,000 for amounts outstanding under term credit agreements, $600 of notes and $765 of commercial paper borrowings. |
34
AT&T INC.
JUNE 30, 2018
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
RESULTS OF OPERATIONS
AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the communicationstelecommunications, media and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally.technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A referencenotes (“Notes”). We completed the acquisition of Time Warner Inc. (referred to a "Note" in this section refersas “Time Warner” or “WarnerMedia”) on June 14, 2018, and have included WarnerMedia results for the16-day period ended June 30, 2018. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from WarnerMedia prior to the accompanying Notesacquisition are excluded.
Consolidated ResultsIn the first quarter of 2018, we adopted new revenue accounting rules that significantly affect the comparability of our consolidated and segment operating results (see Note 5). As a supplement to Consolidated Financial Statements.
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||
Service | $ | 36,378 | $ | 37,272 | (2.4 | )% | $ | 109,372 | $ | 111,515 | (1.9 | )% | ||||||||||||
Equipment | 3,290 | 3,618 | (9.1 | ) | 9,498 | 10,430 | (8.9 | ) | ||||||||||||||||
Total Operating Revenues | 39,668 | 40,890 | (3.0 | ) | 118,870 | 121,945 | (2.5 | ) | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Cost of services and sales | ||||||||||||||||||||||||
Equipment | 4,191 | 4,455 | (5.9 | ) | 12,177 | 13,090 | (7.0 | ) | ||||||||||||||||
Broadcast, programming and operations | 5,284 | 4,909 | 7.6 | 15,156 | 14,239 | 6.4 | ||||||||||||||||||
Other cost of services | 9,431 | 9,526 | (1.0 | ) | 27,714 | 28,436 | (2.5 | ) | ||||||||||||||||
Selling, general and administrative | 8,317 | 9,013 | (7.7 | ) | 24,917 | 26,363 | (5.5 | ) | ||||||||||||||||
Depreciation and amortization | 6,042 | 6,579 | (8.2 | ) | 18,316 | 19,718 | (7.1 | ) | ||||||||||||||||
Total Operating Expenses | 33,265 | 34,482 | (3.5 | ) | 98,280 | 101,846 | (3.5 | ) | ||||||||||||||||
Operating Income | 6,403 | 6,408 | (0.1 | ) | 20,590 | 20,099 | 2.4 | |||||||||||||||||
Income Before Income Taxes | 4,974 | 5,193 | (4.2 | ) | 16,422 | 16,621 | (1.2 | ) | ||||||||||||||||
Net Income | 3,123 | 3,418 | (8.6 | ) | 10,711 | 10,818 | (1.0 | ) | ||||||||||||||||
Net Income Attributable to AT&T | $ | 3,029 | $ | 3,328 | (9.0 | )% | $ | 10,413 | $ | 10,539 | (1.2 | )% |
Second Quarter | Six-Month Period | |||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
2018 | 2017 | Change | 2018 | 2017 | Change | |||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||
Service | $ | 33,773 | $ | 36,538 | (7.6 | )% | $ | 67,419 | $ | 72,994 | (7.6 | )% | ||||||||||||
Equipment | 4,080 | 3,299 | 23.7 | 8,472 | 6,208 | 36.5 | ||||||||||||||||||
Media | 1,133 | - | - | 1,133 | - | - | ||||||||||||||||||
Total Operating Revenues | 38,986 | 39,837 | (2.1 | ) | 77,024 | 79,202 | (2.7 | ) | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||
Equipment | 4,377 | 4,138 | 5.8 | 9,225 | 7,986 | 15.5 | ||||||||||||||||||
Broadcast, programming and operations | 5,449 | 4,898 | 11.2 | 10,615 | 9,872 | 7.5 | ||||||||||||||||||
Other cost of revenues | 7,632 | 9,569 | (20.2 | ) | 15,564 | 18,857 | (17.5 | ) | ||||||||||||||||
Selling, general and administrative | 8,684 | 8,559 | 1.5 | 16,581 | 17,331 | (4.3 | ) | |||||||||||||||||
Depreciation and amortization | 6,378 | 6,147 | 3.8 | 12,372 | 12,274 | 0.8 | ||||||||||||||||||
Total Operating Expenses | 32,520 | 33,311 | (2.4 | ) | 64,357 | 66,320 | (3.0 | ) | ||||||||||||||||
Operating Income | 6,466 | 6,526 | (0.9 | ) | 12,667 | 12,882 | (1.7 | ) | ||||||||||||||||
Income Before Income Taxes | 6,780 | 6,070 | 11.7 | 12,921 | 11,448 | 12.9 | ||||||||||||||||||
Net Income | 5,248 | 4,014 | 30.7 | 10,007 | 7,588 | 31.9 | ||||||||||||||||||
Net Income Attributable to AT&T | $ | 5,132 | $ | 3,915 | 31.1 | % | $ | 9,794 | $ | 7,384 | 32.6 | % | ||||||||||||
Overview
Operating revenues
decreasedService
revenues decreasedEquipmentrevenues reflecting increased adoption of unlimited plans. Additionally, we waived $89 in service revenues for customers in areas affected by natural disasters during the third quarter of 2017. These were partially offset by increased revenues from strategic business services.
35
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Media revenues for the second quarter and operationsfirst six months were $1,133 and in each case are attributable to the16-day period since acquiring WarnerMedia.
Operatingexpenses increased $375, decreased $791, or 7.6%2.4%, in the thirdsecond quarter and $917,$1,963, or 6.4%3.0%, for the first ninesix months of 2017, reflecting2018.
Equipmentexpenses increased $239, or 5.8%, in the second quarter and $1,239, or 15.5%, for the first six months of 2018. The increases during the second quarter and the first six months were driven by an increase in the sale of higher-priced devices.
Broadcast, programming and operations expenses increased $551, or 11.2%, in the second quarter and $743, or 7.5%, for the first six months of 2018. Expense increases during the second quarter and first six months were due to annual content cost increases and additional programming costs, including programming and production costs associated with WarnerMedia for DIRECTV NOW.
Other cost of services revenuesexpenses decreased $95,$1,937, or 1.0%20.2%, in the thirdsecond quarter and $722,$3,293, or 2.5%17.5%, for the first ninesix months of 2017.2018. The decreases during the second quarter and first six months reflect our continued focus onadoption of new accounting rules, which included our policy election to record USF fees net. Also contributing to the decreases were lower expenses due to cost management and the utilization of automation and digitalization where appropriate, as well as lower Federal Universal Service Fund (USF) rates and fees. The decrease for the first nine months also includes an actuarial gain from the second-quarter 2017 remeasurement of our postretirement benefit obligation. These expense declines were partially offset by an increase in amortization of deferred customer fulfillment cost.
Selling, general and administrative
expensesDepreciation and amortization
expenseAmortization expense decreased $144,increased $108, or 11.2%9.2%, in the thirdsecond quarter and $440,decreased $32, or 11.1%1.3%, for the first ninesix months of 20172018. The increase in the second quarter was due to lowerthe amortization of intangibles associated with the previously mentioned acquisition. For thesix-month period, the decrease was due to amortization of intangibles for the customer lists associated with acquisitions.
Operatingincome
decreasedInterest expense
increasedEquity in net income (loss) of affiliates
decreased36
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Other income (expense) – netincreased $1,428 in the second quarter and $2,642 for the first six months. The increases were primarily due to actuarial gains of $1,796 and $2,726, resulting from remeasurement of our pension and postretirement benefit obligations and increased interest income of $94 and $258, partially offset by premiums on the redemption of debt of $226 in the second quarter of 2018.
Income taxesdecreased $524, or 25.5%, in the second quarter of 2018 and decreased $946, or 24.5%, for the first six months of 2018. Our effective tax benefits relatedrate was 22.6% in the second quarter and for the first six months of 2018, as compared to 33.9% for the second quarter and 33.7% for the first six months of 2017. The stand-alone effective tax rate of WarnerMedia was 20.3% for the16-day period ended June 30, 2018. The decreases in income tax expense and our effective tax rates for the second quarter and the first six months of 2018 were primarily due to the restructuringDecember 2017 enactment of a portionU.S. corporate tax reform, which reduced the federal tax rate from 35% to 21%. Partially offsetting the decreased tax rates was higher earnings in the second quarter and first six months of 2018. We continue to expect our wireless business offset by state-level legislation changes.
Selected Financial and Operating Data | ||||||||
September 30, | ||||||||
Subscribers and connections in (000s) | 2017 | 2016 | ||||||
Domestic wireless subscribers | 138,826 | 133,338 | ||||||
Mexican wireless subscribers | 13,779 | 10,698 | ||||||
North American wireless subscribers | 152,605 | 144,036 | ||||||
North American branded subscribers | 106,098 | 100,821 | ||||||
North American branded net additions | 2,782 | 3,881 | ||||||
Domestic satellite and over-the-top video subscribers | 21,392 | 20,777 | ||||||
AT&T U-verse® (U-verse) video subscribers | 3,718 | 4,544 | ||||||
Latin America satellite video subscribers 1 | 13,490 | 12,476 | ||||||
Total video subscribers | 38,600 | 37,797 | ||||||
Total domestic broadband connections | 15,715 | 15,618 | ||||||
Network access lines in service | 12,249 | 14,603 | ||||||
U-verse VoIP connections | 5,774 | 5,707 | ||||||
Debt ratio 2 | 56.4 | % | 50.1 | % | ||||
Net debt ratio 3 | 39.7 | % | 47.8 | % | ||||
Ratio of earnings to fixed charges 4 | 3.55 | 3.91 | ||||||
Number of AT&T employees | 256,800 | 273,140 |
Selected Financial and Operating Data | ||||||||
June 30, | ||||||||
Subscribers and connections in (000s) | 2018 | 2017 | ||||||
Domestic wireless subscribers | 146,889 | 136,102 | ||||||
Mexican wireless subscribers | 16,398 | 13,082 | ||||||
North American wireless subscribers | 163,287 | 149,184 | ||||||
North American branded subscribers | 109,806 | 104,022 | ||||||
North American branded net additions | 2,138 | 1,639 | ||||||
Domestic satellite video subscribers | 19,984 | 20,856 | ||||||
AT&TU-verse®(U-verse) video subscribers | 3,680 | 3,853 | ||||||
DIRECTV NOW video subscribers | 1,809 | 491 | ||||||
Latin America satellite video subscribers1 | 13,713 | 13,622 | ||||||
Total video subscribers | 39,186 | 38,822 | ||||||
Total domestic broadband connections | 15,772 | 15,686 | ||||||
Network access lines in service | 10,832 | 12,791 | ||||||
U-verse VoIP connections | 5,449 | 5,853 | ||||||
Debt ratio2 | 50.8% | 53.3% | ||||||
Net debt ratio3 | 47.2% | 43.8% | ||||||
Ratio of earnings to fixed charges4 | 3.64 | 3.84 | ||||||
Number of AT&T employees | 273,210 | 260,480 | ||||||
1 | Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. At March 31, 2018. SKY Mexico had 8.0 million subscribers. |
2 | Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and do not consider cash available to pay down debt. See our “Liquidity and Capital Resources” section for discussion. |
3 | Net debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders’ equity). |
4 | See Exhibit 12. |
37
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of our International segment equity investmentsFinancial Condition and Results of Operations - Continued
Dollars in SKY Mexico, in which we own a 41.3% stake. At June 30, 2017, SKY Mexico had 8.0 million subscribers.
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment 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. We have fourfive reportable segments: (1) Consumer Mobility, (2) Business Solutions, (2)(3) Entertainment Group (3) Consumer Mobility(4) International, and (4) International.
We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment 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.
To most effectively implement our strategies for 2018, effective January 1, 2018, we retrospectively realigned certain responsibilities and operations within our reportable segments. The most significant of these changes was to report individual wireless accounts with employer discounts in our Consumer Mobility segment, instead of our Business Solutions segment.
With our acquisition of WarnerMedia, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset. For consolidated reporting, all amortization of24pre-acquisition
TheConsumer Mobility segmentprovides nationwide wireless service to consumers, wholesale and Analysis of Financial Conditionresale wireless subscribers located in the United States or in U.S. territories. We provide voice and Results of Operations - Continued
TheBusiness Solutions segment provides services to business customers, including multinational companies;companies and governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans.customers. We provide advancedIP-based services including Virtual Private Networks (VPN); Ethernet-related productsproducts; FlexWare, a service that relies on Software Defined Networking and Network Function Virtualization to provide application-based routing, and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete integrated communications solution to our business customers.
TheEntertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network and our satellite technology.
TheConsumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.
TheWarnerMediasegment provides global media and consistentertainment services through television networks and film, using its brands to create, package and deliver high-quality content worldwide. The segment consists of our wirelessTurner, Home Box Office (HBO) and wired networks as well as an international satellite fleet.Warner Bros. businesses.
38
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Our domestic communications business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our shared asset base. ThereforeTherefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment. In expectation of the close of our acquisition of Time Warner, we are beginning to realign our operations and strategies. We are pushingpush down administrative activities into the business units to better manage costs and serve our customers.
Consumer Mobility
Segment Results
Second Quarter | Six-Month Period | |||||||||||||||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Service | $ | 11,853 | $ | 12,467 | (4.9 | )% | $ | 23,465 | $ | 24,932 | (5.9 | )% | ||||||||||||
Equipment | 3,016 | 2,624 | 14.9 | 6,390 | 4,965 | 28.7 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Revenues | 14,869 | 15,091 | (1.5 | ) | 29,855 | 29,897 | (0.1 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 8,085 | 8,636 | (6.4 | ) | 16,609 | 17,196 | (3.4 | ) | ||||||||||||||||
Depreciation and amortization | 1,806 | 1,716 | 5.2 | 3,613 | 3,432 | 5.3 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Expenses | 9,891 | 10,352 | (4.5 | ) | 20,222 | 20,628 | (2.0 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Segment Operating Income | 4,978 | 4,739 | 5.0 | 9,633 | 9,269 | 3.9 | ||||||||||||||||||
Equity in Net Income of Affiliates | - | - | - | - | - | - | ||||||||||||||||||
|
| |||||||||||||||||||||||
Segment Contribution | $ | 4,978 | $ | 4,739 | 5.0 | % | $ | 9,633 | $ | 9,269 | 3.9 | % | ||||||||||||
The following tables highlight other key measures of performance for the Consumer Mobility segment:
June 30, | Percent | |||||||||||
(in 000s) | 2018 | 2017 | Change | |||||||||
Consumer Mobility Subscribers | ||||||||||||
Postpaid | 65,326 | 65,570 | (0.4 | )% | ||||||||
Prepaid | 15,376 | 14,187 | 8.4 | |||||||||
Branded | 80,702 | 79,757 | 1.2 | |||||||||
Reseller | 8,484 | 10,182 | (16.7 | ) | ||||||||
Total Consumer Mobility Subscribers | 89,186 | 89,939 | (0.8 | )% | ||||||||
Second Quarter | Six-Month Period | |||||||||||||||||||||||
(in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Consumer Mobility Net Additions1 | ||||||||||||||||||||||||
Postpaid | (49 | ) | (28 | ) | (75.0 | )% | (113 | ) | (310 | ) | 63.5 | % | ||||||||||||
Prepaid | 356 | 267 | 33.3 | 548 | 549 | (0.2 | ) | |||||||||||||||||
Branded Net Additions | 307 | 239 | 28.5 | 435 | 239 | 82.0 | ||||||||||||||||||
Reseller | (451 | ) | (364 | ) | (23.9 | ) | (841 | ) | (951 | ) | 11.6 | |||||||||||||
Consumer Mobility Net Subscriber Additions | (144 | ) | (125 | ) | (15.2 | )% | (406 | ) | (712 | ) | 43.0 | % | ||||||||||||
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
Operating Revenuesdecreased $222, or 1.5%, in the second quarter and $42, or 0.1%, for the first six months of 2018. The decreases were due to lower service revenues resulting from customers choosing unlimited plans and the impact of newly adopted accounting rules, which include our policy election to record USF fees on a net basis. Lower service revenues were partially offset by higher equipment revenues.
39
Business Solutions | ||||||||||||||||||||||||
Segment Results | ||||||||||||||||||||||||
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
2017 | 2016 | Percent Change | 2017 | 2016 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Wireless service | $ | 8,034 | $ | 8,050 | (0.2 | )% | $ | 23,969 | $ | 23,868 | 0.4 | % | ||||||||||||
Fixed strategic services | 3,087 | 2,913 | 6.0 | 9,089 | 8,469 | 7.3 | ||||||||||||||||||
Legacy voice and data services | 3,434 | 4,042 | (15.0 | ) | 10,572 | 12,577 | (15.9 | ) | ||||||||||||||||
Other service and equipment | 852 | 886 | (3.8 | ) | 2,513 | 2,619 | (4.0 | ) | ||||||||||||||||
Wireless equipment | 1,654 | 1,876 | (11.8 | ) | 4,873 | 5,422 | (10.1 | ) | ||||||||||||||||
Total Segment Operating Revenues | 17,061 | 17,767 | (4.0 | ) | 51,016 | 52,955 | (3.7 | ) | ||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 10,233 | 10,925 | (6.3 | ) | 30,722 | 32,584 | (5.7 | ) | ||||||||||||||||
Depreciation and amortization | 2,325 | 2,539 | (8.4 | ) | 6,972 | 7,568 | (7.9 | ) | ||||||||||||||||
Total Segment Operating Expenses | 12,558 | 13,464 | (6.7 | ) | 37,694 | 40,152 | (6.1 | ) | ||||||||||||||||
Segment Operating Income | 4,503 | 4,303 | 4.6 | 13,322 | 12,803 | 4.1 | ||||||||||||||||||
Equity in Net Income of Affiliates | - | - | - | - | - | - | ||||||||||||||||||
Segment Contribution | $ | 4,503 | $ | 4,303 | 4.6 | % | $ | 13,322 | $ | 12,803 | 4.1 | % |
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Servicerevenue decreased $614, or 4.9%, in the second quarter and $1,467, or 5.9%, for the first six months of 2018. The decreases were largely due to our adoption of a new accounting standard that included our policy election to no longer include USF fees in revenues which resulted in less revenue being allocated to the service component of bundled contracts. Also contributing to the decrease was the impact of customers continuing to shift to discounted monthly service charges under our unlimited plans, partially offset by higher prepaid service revenues resulting from growth in Cricket and AT&T PREPAIDSM subscribers. Since our unlimited plans have now been in effect for a year, service revenues on a comparable basis should increase for the remainder of 2018.
Equipment revenue increased $392, or 14.9%, in the second quarter and $1,425, or 28.7%, for the first six months of 2018. The increases in equipment revenues resulted from the sale of higher-priced devices as well as the adoption of new accounting standards that contributed to higher revenue allocations from bundled contracts. Equipment revenue is unpredictable as customers are choosing to upgrade devices less frequently or bring their own devices.
Operations and supportexpenses decreased $551, or 6.4%, in the second quarter and $587, or 3.4%, for the first six months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.
Decreased operations and support expenses were primarily due to our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to the decrease were increased operational efficiencies, partially offset by increased equipment costs related to wireless equipment sales and upgrades.
Depreciation expense increased $90, or 5.2%, in the second quarter and $181, or 5.3%, for the first six months of 2018. The increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.
Operating income increased $239, or 5.0%, in the second quarter and $364, or 3.9%, for the first six months of 2018. Our Consumer Mobility segment operating income margin in the second quarter increased from 31.4% in 2017 to 33.5% in 2018, and for the first six months increased from 31.0% in 2017 to 32.3% in 2018. Our Consumer Mobility EBITDA margin in the second quarter increased from 42.8% in 2017 to 45.6% in 2018, and for the first six months increased from 42.5% in 2017 to 44.4% in 2018.
40
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Business Solutions
Segment Results
Second Quarter | Six-Month Period | |||||||||||||||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Wireless service | $ | 1,829 | $ | 2,004 | (8.7 | )% | $ | 3,620 | $ | 4,007 | (9.7) | % | ||||||||||||
Strategic services | 3,039 | 2,958 | 2.7 | 6,109 | 5,862 | 4.2 | ||||||||||||||||||
Legacy voice and data services | 2,723 | 3,423 | (20.4 | ) | 5,561 | 6,971 | (20.2) | |||||||||||||||||
Other service and equipment | 888 | 922 | (3.7 | ) | 1,727 | 1,800 | (4.1) | |||||||||||||||||
Wireless equipment | 584 | 360 | 62.2 | 1,162 | 648 | 79.3 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Revenues | 9,063 | 9,667 | (6.2 | ) | 18,179 | 19,288 | (5.7) | |||||||||||||||||
|
| |||||||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 5,616 | 6,053 | (7.2 | ) | 11,210 | 12,051 | (7.0) | |||||||||||||||||
Depreciation and amortization | 1,487 | 1,483 | 0.3 | 2,945 | 2,943 | 0.1 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Expenses | 7,103 | 7,536 | (5.7 | ) | 14,155 | 14,994 | (5.6) | |||||||||||||||||
|
| |||||||||||||||||||||||
Segment Operating Income | 1,960 | 2,131 | (8.0 | ) | 4,024 | 4,294 | (6.3) | |||||||||||||||||
Equity in Net Income of Affiliates | 1 | - | - | - | - | - | ||||||||||||||||||
|
| |||||||||||||||||||||||
Segment Contribution | $ | 1,961 | $ | 2,131 | (8.0 | )% | $ | 4,024 | $ | 4,294 | (6.3) | % | ||||||||||||
The following tables highlight other key measures of performance for the Business Solutions segment:
June 30, | Percent | |||||||||||||||||||||||
(in 000s) | 2018 | 2017 | Change | |||||||||||||||||||||
Business Wireless Subscribers | ||||||||||||||||||||||||
Postpaid | 12,046 | 11,432 | 5.4 | % | ||||||||||||||||||||
Prepaid 1 | 841 | - | - | |||||||||||||||||||||
Branded | 12,887 | 11,432 | 12.7 | |||||||||||||||||||||
Reseller | 98 | 73 | 34.2 | |||||||||||||||||||||
Connected devices1,2 | 44,718 | 34,658 | 29.0 | |||||||||||||||||||||
Total Business Wireless Subscribers | 57,703 | 46,163 | 25.0 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Business IP Broadband Connections | 1,017 | 992 | 2.5 | % | ||||||||||||||||||||
1 | Beginning in the third quarter of 2017, we began reporting prepaid Internet of Things (IoT) connections, which primarily consist of connected cars, as a component of prepaid subscribers instead of connected devices. |
2 | Includes data-centric devices such as session-based tablets and automobile systems. Excludes postpaid tablets. |
41
September 30, | Percent | |||||||||||
(in 000s) | 2017 | 2016 | Change | |||||||||
Business Wireless Subscribers | ||||||||||||
Postpaid/Branded | 51,412 | 50,014 | 2.8 | % | ||||||||
Reseller | 77 | 58 | 32.8 | |||||||||
Connected devices 1 | 35,909 | 29,355 | 22.3 | |||||||||
Total Business Wireless Subscribers | 87,398 | 79,427 | 10.0 | |||||||||
Business IP Broadband Connections | 1,017 | 963 | 5.6 | % | ||||||||
1 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes postpaid tablets. |
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
(in 000s) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
Business Wireless Net Additions 1, 4 | ||||||||||||||||||||||||
Postpaid/Branded | 15 | 191 | (92.1 | )% | (74 | ) | 509 | - | % | |||||||||||||||
Reseller | 2 | 1 | - | 3 | (34 | ) | - | |||||||||||||||||
Connected devices 2 | 2,292 | 1,290 | 77.7 | 7,015 | 4,067 | 72.5 | ||||||||||||||||||
Business Wireless Net Subscriber Additions | 2,309 | 1,482 | 55.8 | 6,944 | 4,542 | 52.9 | ||||||||||||||||||
Business Wireless Postpaid Churn 1, 3, 4 | 1.01 | % | 0.97 | % | 4 BP | 1.02 | % | 0.97 | % | 5 BP | ||||||||||||||
Business IP Broadband Net Additions | 25 | 15 | 66.7 | % | 41 | 52 | (21.2 | )% | ||||||||||||||||
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period. | ||||||||||||||||||||||||
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. | ||||||||||||||||||||||||
Excludes postpaid tablets. | ||||||||||||||||||||||||
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number | ||||||||||||||||||||||||
of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for | ||||||||||||||||||||||||
each month of that period. | ||||||||||||||||||||||||
4 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers. |
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Second Quarter | Six-Month Period | |||||||||||||||||||||||
(in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Business Wireless Net Additions 1 | ||||||||||||||||||||||||
Postpaid | 122 | 171 | (28.7 | )% | 235 | 259 | (9.3 | )% | ||||||||||||||||
Prepaid 2 | 97 | - | - | 146 | - | - | ||||||||||||||||||
Branded | 219 | 171 | 28.1 | 381 | 259 | 47.1 | ||||||||||||||||||
Reseller | 7 | (4 | ) | - | 9 | 1 | - | |||||||||||||||||
Connected devices3 | 2,982 | 2,256 | 32.2 | 5,710 | 4,828 | 18.3 | ||||||||||||||||||
Business Wireless Net SubscriberAdditions | 3,208 | 2,423 | 32.4 | 6,100 | 5,088 | 19.9 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Business IP Broadband Net Additions | (4 | ) | 12 | - | % | (8 | ) | 16 | - | % | ||||||||||||||
1 | Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period. |
2 | Beginning in the third quarter of 2017, we began reporting prepaid IoT connections, which primarily consist of connected cars, as a component of prepaid subscribers instead of connected devices. |
3 | Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. |
Operating Revenues
decreasedWireless service
revenues decreasedAt SeptemberJune 30, 2017,2018, we served 87.457.7 million subscribers, an increase of 10.0%25.0% from the prior year. Postpaid subscribers increased 2.8% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 22.3%29.0% from the prior year reflecting growth inyear. Connected devices include our connected car business and other data centric devices that utilizeconnect to the network to connect and control physical devices usingrely on embedded computing systems and/or software, commonly called the Internet of Things (IoT).
Strategic services
revenues increasedLegacy wired voice and data service
revenues decreasedWireless equipment
revenues42
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in device upgrades reflecting a change in customer buying habits.
Operations and support
expenses decreasedDecreased operations and support expenses infor the thirdsecond quarter and first ninesix months were primarily due to lower equipment salesour adoption of new accounting rules, resulting in commission deferrals and wireless upgrade transactions, which decreased equipment costs by $336 and $732, andnetting of USF fees in 2018. Also contributing to declines were our ongoing efforts to automate and digitize our support activities, improved results $146partially offset by higher costs from our implementation of FirstNet and $543, respectively. Ashigher equipment costs from increased sales of September 30, 2017, approximately 45% of our network functions have been moved to software-based systems. Expense reductions also reflect lower administrative costs, contributing to a reduction in expenses of $49 and $213, and fewer traffic compensation andhigher-priced wireless interconnect costs, resulting in declines of $44 and $155, respectively, in access and interconnect costs. Lower selling and wireless commission costs also contributed to decreased expenses for the first nine months.
Depreciation
expenseOperating income
Entertainment Group
Segment Results
Second Quarter | Six-Month Period | |||||||||||||||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Video entertainment | $ | 8,331 | $ | 9,153 | (9.0 | )% | $ | 16,690 | $ | 18,173 | (8.2 | )% | ||||||||||||
High-speed internet | 1,981 | 1,927 | 2.8 | 3,859 | 3,868 | (0.2 | ) | |||||||||||||||||
Legacy voice and data services | 785 | 981 | (20.0 | ) | 1,604 | 2,012 | (20.3 | ) | ||||||||||||||||
Other service and equipment | 553 | 600 | (7.8 | ) | 1,074 | 1,209 | (11.2 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Revenues | 11,650 | 12,661 | (8.0 | ) | 23,227 | 25,262 | (8.1 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 8,852 | 9,561 | (7.4 | ) | 17,791 | 19,166 | (7.2 | ) | ||||||||||||||||
Depreciation and amortization | 1,346 | 1,458 | (7.7 | ) | 2,658 | 2,878 | (7.6 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Expenses | 10,198 | 11,019 | (7.5 | ) | 20,449 | 22,044 | (7.2 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Segment Operating Income | 1,452 | 1,642 | (11.6 | ) | 2,778 | 3,218 | (13.7 | ) | ||||||||||||||||
Equity in Net Income (Loss) of Affiliates | (20 | ) | (12 | ) | (66.7 | ) | (11 | ) | (18) | 38.9 | ||||||||||||||
|
| |||||||||||||||||||||||
Segment Contribution | $ | 1,432 | $ | 1,630 | (12.1 | )% | $ | 2,767 | $ | 3,200 | (13.5 | )% | ||||||||||||
43
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Entertainment Group | ||||||||||||||||||||||||
Segment Results | ||||||||||||||||||||||||
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
2017 | 2016 | Percent Change | 2017 | 2016 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Video entertainment | $ | 9,200 | $ | 9,026 | 1.9 | % | $ | 27,373 | $ | 26,893 | 1.8 | % | ||||||||||||
High-speed internet | 1,916 | 1,892 | 1.3 | 5,784 | 5,562 | 4.0 | ||||||||||||||||||
Legacy voice and data services | 949 | 1,168 | (18.8 | ) | 3,010 | 3,725 | (19.2 | ) | ||||||||||||||||
Other service and equipment | 583 | 634 | (8.0 | ) | 1,786 | 1,909 | (6.4 | ) | ||||||||||||||||
Total Segment Operating Revenues | 12,648 | 12,720 | (0.6 | ) | 37,953 | 38,089 | (0.4 | ) | ||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 9,953 | 9,728 | 2.3 | 29,112 | 28,875 | 0.8 | ||||||||||||||||||
Depreciation and amortization | 1,379 | 1,504 | (8.3 | ) | 4,256 | 4,481 | (5.0 | ) | ||||||||||||||||
Total Segment Operating Expenses | 11,332 | 11,232 | 0.9 | 33,368 | 33,356 | - | ||||||||||||||||||
Segment Operating Income | 1,316 | 1,488 | (11.6 | ) | 4,585 | 4,733 | (3.1 | ) | ||||||||||||||||
Equity in Net Income (Loss) of Affiliates | (6 | ) | - | - | (23 | ) | 1 | - | ||||||||||||||||
Segment Contribution | $ | 1,310 | $ | 1,488 | (12.0 | )% | $ | 4,562 | $ | 4,734 | (3.6 | )% |
The following tables highlight other key measures of performance for the Entertainment Group segment:
September 30, | Percent | |||||||||||
(in 000s) | 2017 | 2016 | Change | |||||||||
Video Connections | ||||||||||||
Satellite | 20,605 | 20,777 | (0.8 | )% | ||||||||
U-verse | 3,691 | 4,515 | (18.3 | ) | ||||||||
DIRECTV NOW 1 | 787 | - | - | |||||||||
Total Video Connections | 25,083 | 25,292 | (0.8 | ) | ||||||||
Broadband Connections | ||||||||||||
IP | 13,367 | 12,752 | 4.8 | |||||||||
DSL | 964 | 1,424 | (32.3 | ) | ||||||||
Total Broadband Connections | 14,331 | 14,176 | 1.1 | |||||||||
Retail Consumer Switched Access Lines | 4,996 | 6,155 | (18.8 | ) | ||||||||
U-verse Consumer VoIP Connections | 5,337 | 5,378 | (0.8 | ) | ||||||||
Total Retail Consumer Voice Connections | 10,333 | 11,533 | (10.4 | )% | ||||||||
1 Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial. |
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
(in 000s) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
Video Net Additions | ||||||||||||||||||||||||
Satellite 1 | (251 | ) | 323 | - | % | (407 | ) | 993 | - | % | ||||||||||||||
U-verse 1 | (134 | ) | (326 | ) | 58.9 | (562 | ) | (1,099 | ) | 48.9 | ||||||||||||||
DIRECTV NOW 2 | 296 | - | - | 520 | - | - | ||||||||||||||||||
Net Video Additions | (89 | ) | (3 | ) | - | (449 | ) | (106 | ) | - | ||||||||||||||
Broadband Net Additions | ||||||||||||||||||||||||
IP | 125 | 156 | (19.9 | ) | 479 | 396 | 21.0 | |||||||||||||||||
DSL | (96 | ) | (161 | ) | 40.4 | (327 | ) | (506 | ) | 35.4 | ||||||||||||||
Net Broadband Additions | 29 | (5 | ) | - | % | 152 | (110 | ) | - | % | ||||||||||||||
1 Includes disconnections for customers that migrated to DIRECTV NOW. | ||||||||||||||||||||||||
2 Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial. |
June 30, | Percent | |||||||||||||||||||||||
(in 000s) | 2018 | 2017 | Change | |||||||||||||||||||||
Video Connections | ||||||||||||||||||||||||
Satellite | 19,984 | 20,856 | (4.2 | )% | ||||||||||||||||||||
U-verse | 3,656 | 3,825 | (4.4 | ) | ||||||||||||||||||||
DIRECTV NOW1 | 1,809 | 491 | - | |||||||||||||||||||||
Total Video Connections | 25,449 | 25,172 | 1.1 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Broadband Connections | ||||||||||||||||||||||||
IP | 13,692 | 13,242 | 3.4 | |||||||||||||||||||||
DSL | 763 | 1,060 | (28.0 | ) | ||||||||||||||||||||
Total Broadband Connections | 14,455 | 14,302 | 1.1 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Retail Consumer Switched Access Lines | 4,333 | 5,257 | (17.6 | ) | ||||||||||||||||||||
U-verse Consumer VoIP Connections | 4,950 | 5,439 | (9.0 | ) | ||||||||||||||||||||
Total Retail Consumer Voice Connections | 9,283 | 10,696 | (13.2 | )% | ||||||||||||||||||||
1 | Consistent with industry practice, DIRECTV NOW includesover-the-top connections that are on a free-trial. |
Second Quarter | Six-Month Period | |||||||||||||||||||||||
(in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Video Net Additions | ||||||||||||||||||||||||
Satellite 1 | (286 | ) | (156 | ) | (83.3 | )% | (474 | ) | (156 | ) | - | % | ||||||||||||
U-verse 1 | 24 | (195 | ) | - | 25 | (428 | ) | - | ||||||||||||||||
DIRECTV NOW 2 | 342 | 152 | - | 654 | 224 | - | ||||||||||||||||||
Net Video Additions | 80 | (199 | ) | - | 205 | (360 | ) | - | ||||||||||||||||
Broadband Net Additions | ||||||||||||||||||||||||
IP | 76 | 112 | (32.1 | ) | 230 | 354 | (35.0 | ) | ||||||||||||||||
DSL | (53 | ) | (104 | ) | 49.0 | (125 | ) | (231 | ) | 45.9 | ||||||||||||||
Net Broadband Additions | 23 | 8 | - | % | 105 | 123 | (14.6 | )% | ||||||||||||||||
1 | Includes disconnections for customers that migrated to DIRECTV NOW. |
2 | Consistent with industry practice, DIRECTV NOW includesover-the-top connections that are on a free-trial. |
Operating revenuesdecreased $72,$1,011, or 0.6%8.0%, in the thirdsecond quarter and $136,$2,035, or 0.4%8.1%, for the first ninesix months of 2017, largely2018, primarily due to lower video and legacy service revenues, from legacy voice and data products, partially offset by growth in revenues from consumer IP broadband services.
As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite andU-verse subscribers. In November 2016, we launched DIRECTV NOW, our newest video streaming option that does not require either satellite orU-verse service (commonly calledover-the-top video service).
Video entertainment
revenues44
AT&T increased churn during the quarter, partially due to pricing increases associated with annual content cost increasesINC.
JUNE 30, 2018
Item 2. Management’s Discussion and involuntary churn.
Dollars in millions except per share and per subscriber amounts
High-speed internet
revenues increasedTo compete more effectively against other broadband providers, in the midst of ongoing declines in DSL subscribers, we continued to deploy ourall-fiber, high-speed wireline network, which has improved customer retention rates. We also expect our planned 5G national deployment to aid in our ability to provide more locations with competitive broadband speeds.
Legacy voice and data service
revenues decreasedOperations and support
expensesDecreased operations and support expenses in the third quarter and for the first nine months of 2017 were primarily dueimpacted by our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to annual content cost increases, a pay-per-view event, deferred customer fulfillment cost amortization, and video platform development costs. Partially offsetting these increases were the impact ofdecreases was our ongoing focus on cost efficiencies and merger synergies, as well aslower employee-related expenses resulting from workforce reductions, lower amortization of fulfillment cost deferrals due to a longer estimated economic life for our entertainment group customers (see Note 1) and lower marketing costs.
Depreciation
expense decreasedOperating income
decreased45
Consumer Mobility | ||||||||||||||||||||||||
Segment Results | ||||||||||||||||||||||||
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
2017 | 2016 | Percent Change | 2017 | 2016 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Service | $ | 6,507 | $ | 6,914 | (5.9 | )% | $ | 19,644 | $ | 20,805 | (5.6 | )% | ||||||||||||
Equipment | 1,241 | 1,353 | (8.3 | ) | 3,635 | 3,976 | (8.6 | ) | ||||||||||||||||
Total Segment Operating Revenues | 7,748 | 8,267 | (6.3 | ) | 23,279 | 24,781 | (6.1 | ) | ||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 4,551 | 4,751 | (4.2 | ) | 13,599 | 14,343 | (5.2 | ) | ||||||||||||||||
Depreciation and amortization | 877 | 944 | (7.1 | ) | 2,621 | 2,798 | (6.3 | ) | ||||||||||||||||
Total Segment Operating Expenses | 5,428 | 5,695 | (4.7 | ) | 16,220 | 17,141 | (5.4 | ) | ||||||||||||||||
Segment Operating Income | 2,320 | 2,572 | (9.8 | ) | 7,059 | 7,640 | (7.6 | ) | ||||||||||||||||
Equity in Net Income of Affiliates | - | - | - | - | - | - | ||||||||||||||||||
Segment Contribution | $ | 2,320 | $ | 2,572 | (9.8 | )% | $ | 7,059 | $ | 7,640 | (7.6 | )% |
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The following tables highlight other key measures of performance for the Consumer Mobility segment: | ||||||||||||
September 30, | Percent | |||||||||||
(in 000s) | 2017 | 2016 | Change | |||||||||
Consumer Mobility Subscribers | ||||||||||||
Postpaid | 26,003 | 27,374 | (5.0 | )% | ||||||||
Prepaid 2 | 15,136 | 13,035 | 16.1 | |||||||||
Branded | 41,139 | 40,409 | 1.8 | |||||||||
Reseller | 9,800 | 12,566 | (22.0 | ) | ||||||||
Connected devices 1, 2 | 489 | 936 | (47.8 | ) | ||||||||
Total Consumer Mobility Subscribers | 51,428 | 53,911 | (4.6 | )% | ||||||||
1 Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes | ||||||||||||
postpaid tablets. See (2) below. | ||||||||||||
2 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component of | ||||||||||||
prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543 subscribers that | ||||||||||||
were formerly included in connected devices. |
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
(in 000s) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
Consumer Mobility Net Additions 1, 4 | ||||||||||||||||||||||||
Postpaid | 102 | 21 | - | % | 127 | 89 | 42.7 | % | ||||||||||||||||
Prepaid 5 | 324 | 304 | 6.6 | 873 | 1,169 | (25.3 | ) | |||||||||||||||||
Branded Net Additions | 426 | 325 | 31.1 | 1,000 | 1,258 | (20.5 | ) | |||||||||||||||||
Reseller | (394 | ) | (316 | ) | (24.7 | ) | (1,345 | ) | (1,140 | ) | (18.0 | ) | ||||||||||||
Connected devices 2, 5 | (18 | ) | 41 | - | 87 | 14 | - | |||||||||||||||||
Consumer Mobility Net Subscriber Additions | 14 | 50 | (72.0 | )% | (258 | ) | 132 | - | % | |||||||||||||||
Total Churn 1, 3, 4 | 2.37 | % | 2.11 | % | 26 BP | 2.32 | % | 2.06 | % | 26 BP | ||||||||||||||
Postpaid Churn 1, 3, 4 | 1.17 | % | 1.19 | % | (2) BP | 1.16 | % | 1.17 | % | (1) BP | ||||||||||||||
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period. | ||||||||||||||||||||||||
2 Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes | ||||||||||||||||||||||||
postpaid tablets. See (5) below. | ||||||||||||||||||||||||
3 Calculated 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. | ||||||||||||||||||||||||
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of | ||||||||||||||||||||||||
period subscribers. | ||||||||||||||||||||||||
5 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component | ||||||||||||||||||||||||
of prepaid subscribers, resulting in 97 additional prepaid net adds in the quarter. Had we restated our prior periods, prepaid | ||||||||||||||||||||||||
net adds for the comparable periods would have been 381 in the third quarter of 2016, and 1,060 and 1,324 for the first nine months of , | ||||||||||||||||||||||||
2017 and 2016, respectively. |
International
Segment Results
Second Quarter | Six-Month Period | |||||||||||||||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Video entertainment | $ | 1,254 | $ | 1,361 | (7.9 | )% | $ | 2,608 | $ | 2,702 | (3.5 | )% | ||||||||||||
Wireless service | 417 | 535 | (22.1 | ) | 821 | 1,010 | (18.7 | ) | ||||||||||||||||
Wireless equipment | 280 | 130 | 115.4 | 547 | 243 | 125.1 | ||||||||||||||||||
Total Segment Operating Revenues | 1,951 | 2,026 | (3.7 | ) | 3,976 | 3,955 | 0.5 | |||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 1,803 | 1,772 | 1.7 | 3,607 | 3,531 | 2.2 | ||||||||||||||||||
Depreciation and amortization | 313 | 311 | 0.6 | 645 | 601 | 7.3 | ||||||||||||||||||
Total Segment Operating Expenses | 2,116 | 2,083 | 1.6 | 4,252 | 4,132 | 2.9 | ||||||||||||||||||
Segment Operating Income (Loss) | (165 | ) | (57 | ) | - | (276 | ) | (177 | ) | (55.9 | ) | |||||||||||||
Equity in Net Income (Loss) of Affiliates | 15 | 25 | (40.0 | ) | 15 | 45 | (66.7 | ) | ||||||||||||||||
Segment Contribution | $ | (150 | ) | $ | (32 | ) | - | % | $ | (261 | ) | $ | (132 | ) | (97.7 | )% | ||||||||
The following tables highlight other key measures of performance for the first nine months of 2017. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited plans, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.International segment:
June 30, | Percent | |||||||||||||||||||||||
(in 000s) | 2018 | 2017 | Change | |||||||||||||||||||||
Mexican Wireless Subscribers | ||||||||||||||||||||||||
Postpaid | 5,749 | 5,187 | 10.8 | % | ||||||||||||||||||||
Prepaid | 10,468 | 7,646 | 36.9 | |||||||||||||||||||||
Branded | 16,217 | 12,833 | 26.4 | |||||||||||||||||||||
Reseller | 181 | 249 | (27.3 | ) | ||||||||||||||||||||
Total Mexican Wireless Subscribers | 16,398 | 13,082 | 25.3 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Latin America Satellite Subscribers | ||||||||||||||||||||||||
Total Latin America Satellite Subscribers1 | 13,713 | 13,622 | 0.7 | % | ||||||||||||||||||||
1 | Excludes subscribers of our International segment equity investment in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 8.0 million subscribers at March 31, 2018 and December 31, 2017. |
46
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
International | ||||||||||||||||||||||||
Segment Results | ||||||||||||||||||||||||
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
2017 | 2016 | Percent Change | 2017 | 2016 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Video entertainment | $ | 1,363 | $ | 1,297 | 5.1 | % | $ | 4,065 | $ | 3,649 | 11.4 | % | ||||||||||||
Wireless service | 536 | 484 | 10.7 | 1,546 | 1,428 | 8.3 | ||||||||||||||||||
Wireless equipment | 200 | 98 | - | 443 | 297 | 49.2 | ||||||||||||||||||
Total Segment Operating Revenues | 2,099 | 1,879 | 11.7 | 6,054 | 5,374 | 12.7 | ||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 1,937 | 1,640 | 18.1 | 5,468 | 4,951 | 10.4 | ||||||||||||||||||
Depreciation and amortization | 304 | 293 | 3.8 | 905 | 868 | 4.3 | ||||||||||||||||||
Total Segment Operating Expenses | 2,241 | 1,933 | 15.9 | 6,373 | 5,819 | 9.5 | ||||||||||||||||||
Segment Operating Income (Loss) | (142 | ) | (54 | ) | - | (319 | ) | (445 | ) | 28.3 | ||||||||||||||
Equity in Net Income (Loss) of Affiliates | 17 | 1 | - | 62 | 24 | - | ||||||||||||||||||
Segment Contribution | $ | (125 | ) | $ | (53 | ) | - | % | $ | (257 | ) | $ | (421 | ) | 39.0 | % |
September 30, | Percent | |||||||||||
(in 000s) | 2017 | 2016 | Change | |||||||||
Mexican Wireless Subscribers | ||||||||||||
Postpaid | 5,316 | 4,733 | 12.3 | % | ||||||||
Prepaid | 8,231 | 5,665 | 45.3 | |||||||||
Branded | 13,547 | 10,398 | 30.3 | |||||||||
Reseller | 232 | 300 | (22.7 | ) | ||||||||
Total Mexican Wireless Subscribers | 13,779 | 10,698 | 28.8 | |||||||||
Latin America Satellite Subscribers | ||||||||||||
PanAmericana | 8,201 | 7,139 | 14.9 | |||||||||
SKY Brazil 1 | 5,289 | 5,337 | (0.9 | ) | ||||||||
Total Latin America Satellite Subscribers | 13,490 | 12,476 | 8.1 | % | ||||||||
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico | ||||||||||||
had 8.0 million subscribers at June 30, 2017 and 7.9 million subscribers at September 30, 2016. |
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
(in 000s) | 2017 | 2016 | Percent Change | 2017 | 2016 | Percent Change | ||||||||||||||||||
Mexican Wireless Net Additions | ||||||||||||||||||||||||
Postpaid | 129 | 163 | (20.9 | )% | 351 | 444 | (20.9 | )% | ||||||||||||||||
Prepaid | 585 | 606 | (3.5 | ) | 1,504 | 1,670 | (9.9 | ) | ||||||||||||||||
Branded Net Additions | 714 | 769 | (7.2 | ) | 1,855 | 2,114 | (12.3 | ) | ||||||||||||||||
Reseller | (17 | ) | (26 | ) | 34.6 | (49 | ) | (100 | ) | 51.0 | ||||||||||||||
Mexican Wireless Net Subscriber Additions | 697 | 743 | (6.2 | ) | 1,806 | 2,014 | (10.3 | ) | ||||||||||||||||
Latin America Satellite Net Additions 1 | ||||||||||||||||||||||||
PanAmericana | 98 | (36 | ) | - | 163 | 73 | - | |||||||||||||||||
SKY Brazil | (230 | ) | (12 | ) | - | (260 | ) | (107 | ) | - | ||||||||||||||
Latin America Satellite Net Subscriber Additions 2 | (132 | ) | (48 | ) | - | % | (97 | ) | (34 | ) | - | % | ||||||||||||
1 In 2017, we updated the methodology used to account for prepaid video connections, which were reflected in beginning of period | ||||||||||||||||||||||||
subscribers. | ||||||||||||||||||||||||
2 Excludes SKY Mexico net subscriber losses of 13 for the six months ended June 30, 2017 and additions of 519 for the six | ||||||||||||||||||||||||
months of June 30, 2016. |
Second Quarter | Six-Month Period | |||||||||||||||||||||||
(in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Mexican Wireless Net Additions | ||||||||||||||||||||||||
Postpaid | 142 | 92 | 54.3 | % | 251 | 222 | 13.1 | % | ||||||||||||||||
Prepaid | 611 | 402 | 52.0 | 1,070 | 919 | 16.4 | ||||||||||||||||||
Branded Net Additions | 753 | 494 | 52.4 | 1,321 | 1,141 | 15.8 | ||||||||||||||||||
Reseller | 3 | (18 | ) | - | (22 | ) | (32 | ) | 31.3 | |||||||||||||||
Mexican Wireless | 756 | 476 | 58.8 | 1,299 | 1,109 | 17.1 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Latin America Satellite Net Additions | ||||||||||||||||||||||||
Latin America Satellite | 140 | (56 | ) | - | % | 125 | 35 | - | % | |||||||||||||||
1 | Excludes SKY Mexico net subscriber losses of 92 and 18 for the quarter ended March 31, 2018 and 2017, respectively. |
Operating Results
Our International segment consists of the Latin American satellite video operations acquired with DIRECTV as well as our Mexican wireless operations. Video entertainment services are provided to primarily residential customers using satellite technology. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Operating revenues
Operations and support
expenses increasedDepreciation
expense increasedOperating income
decreased47
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
WarnerMedia
Segment Results for the period from June 15, 2018 to June 30, 2018
Second Quarter | Six-Month Period | |||||||||||||||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Content | $ | 487 | $ | - | - | % | $ | 487 | $ | - | - | % | ||||||||||||
Subscription | 591 | - | - | 591 | - | - | ||||||||||||||||||
Advertising | 208 | - | - | 208 | - | - | ||||||||||||||||||
Other | 51 | - | - | 51 | - | - | ||||||||||||||||||
Intrasegment eliminations | (62 | ) | - | - | (62 | ) | - | - | ||||||||||||||||
Total Segment Operating Revenues | 1,275 | - | - | 1,275 | - | - | ||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 794 | - | - | 794 | - | - | ||||||||||||||||||
Depreciation and amortization | 30 | - | - | 30 | - | - | ||||||||||||||||||
Total Segment Operating Expenses | 824 | - | - | 824 | - | - | ||||||||||||||||||
Segment Operating Income (Loss) | 451 | - | - | 451 | - | - | ||||||||||||||||||
Equity in Net Income (Loss) of Affiliates | (6 | ) | - | - | (6 | ) | - | - | ||||||||||||||||
Segment Contribution | $ | 445 | $ | - | - | % | $ | 445 | $ | - | - | % | ||||||||||||
The WarnerMedia segment consists of the results of Time Warner after we completed our acquisition June 14, 2018. Our WarnerMedia segment operating income margin was 35.4% for the16-day period ended June 30, 2018. Consistent with our past practice, many of the fair value adjustments from the application of purchase accounting required under GAAP have not been allocated to the segment, instead they are reported as acquisition-related items in the reconciliation to consolidated results. The WarnerMedia segment consists of the following businesses:
● | Turner, consisting principally of cable networks and digital media properties. |
● | HBO consisting principally of premium pay television and OTT services. |
● | Warner Bros., consisting principally of television, feature film, home video and game production and distribution. |
48
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
WarnerMedia
Segment Results for the period from June 15, 2018 to June 30, 2018
Second Quarter | Six-Month Period | |||||||||||||||||||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||||||
Turner | $ | 549 | $ | - | - | % | $ 549 | $ | - | - | % | |||||||||||||||||
Warner Bros. | 507 | - | - | 507 | - | - | ||||||||||||||||||||||
HBO | 281 | - | - | 281 | - | - | ||||||||||||||||||||||
Intrasegment eliminations | (62 | ) | - | - | (62 | ) | - | - | ||||||||||||||||||||
Total Segment Operating Revenues | 1,275 | - | - | 1,275 | - | - | ||||||||||||||||||||||
Segment Operating Contribution | ||||||||||||||||||||||||||||
Turner | 280 | - | - | 280 | - | - | ||||||||||||||||||||||
Warner Bros. | 90 | - | - | 90 | - | - | ||||||||||||||||||||||
HBO | 105 | - | - | 105 | - | - | ||||||||||||||||||||||
Corporate | (13 | ) | - | - | (13 | ) | - | - | ||||||||||||||||||||
Intrasegment eliminations | (11 | ) | - | - | (11 | ) | - | - | ||||||||||||||||||||
Segment Operating Income (Loss) | $ | 451 | $ | - | - | % | $ 451 | $ | - | - | % | |||||||||||||||||
Operating Revenues were $1,275 for the16-day period ended June 30, 2018.
Contentrevenues were $487 for the period, including $455 from Warner Bros., $21 from Turner and $11 from HBO. Content revenues are derived from content production and distribution. Revenue from the distribution of television programs and series totaled $186 for Warner Bros. for the16-day period. Revenues from the distribution of feature films by Warner Bros., or theatrical revenues, were $222 and revenues from games and other totaled $47 for the period.
Subscription revenues were $591 for the period, including $314 from Turner, $270 from HBO and $7 from Warner Bros. Subscription revenues are derived from the provision of programming to operators and digital distributors who have contracted to receive and distribute programming to their customers. Revenues reflect higher domestic rates and growth at Turner’s international networks, partially offset by the impact of lower domestic subscribers and unfavorable foreign exchange rates. Subscriber trends remain stable with growth from virtual MVPDs and international offset by lower traditional subscribers.
Advertisingrevenues were $208 for the period, including $200 from Turner and $8 from Warner Bros. These revenues result from sale of advertising on our networks and digital properties and the digital properties we manage and/or operate for others.
Operations and support expenses were $794 for the period and are primarily attributable to programming expenses along with marketing costs. Programming expenses reflect higher original and acquired programming costs.
Depreciation expense was $30 for the16-day period ended June 30, 2018.
49
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility). See "Discussion“Discussion and Reconciliation ofNon-GAAP Measure" Measures” for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.
AT&T Mobility Results
Second Quarter | Six-Month Period | |||||||||||||||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||
Service | $ | 13,682 | $ | 14,471 | (5.5 | )% | $ | 27,085 | $ | 28,939 | (6.4) | % | ||||||||||||
Equipment | 3,600 | 2,984 | 20.6 | 7,552 | 5,613 | 34.5 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Operating Revenues | 17,282 | 17,455 | (1.0 | ) | 34,637 | 34,552 | 0.2 | |||||||||||||||||
|
| |||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Operations and support | 9,663 | 10,091 | (4.2 | ) | 19,765 | 19,976 | (1.1) | |||||||||||||||||
|
| |||||||||||||||||||||||
EBITDA | 7,619 | 7,364 | 3.5 | 14,872 | 14,576 | 2.0 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Depreciation and amortization | 2,113 | 1,988 | 6.3 | 4,208 | 3,980 | 5.7 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Operating Expenses | 11,776 | 12,079 | (2.5 | ) | 23,973 | 23,956 | 0.1 | |||||||||||||||||
|
| |||||||||||||||||||||||
Operating Income | $ | 5,506 | $ | 5,376 | 2.4 | % | $ | 10,664 | $ | 10,596 | 0.6 | % | ||||||||||||
The following tables highlight other key measures of performance for AT&T Mobility:
June 30, | Percent Change | |||||||||||
(in 000s) | 2018 | 2017 | ||||||||||
Wireless Subscribers1 | ||||||||||||
Postpaid smartphones | 60,183 | 59,178 | 1.7 | % | ||||||||
Postpaid feature phones and data-centric devices | 17,189 | 17,824 | (3.6) | |||||||||
Postpaid | 77,372 | 77,002 | 0.5 | |||||||||
Prepaid3 | 16,217 | 14,187 | 14.3 | |||||||||
Branded | 93,589 | 91,189 | 2.6 | |||||||||
Reseller | 8,582 | 10,255 | (16.3) | |||||||||
Connected devices2, 3 | 44,718 | 34,658 | 29.0 | |||||||||
Total Wireless Subscribers | 146,889 | 136,102 | 7.9 | |||||||||
Branded Smartphones | 73,797 | 71,818 | 2.8 | |||||||||
Smartphones under our installment programs at end of period | 31,918 | 31,649 | 0.8 | % | ||||||||
1 | Represents 100% of AT&T Mobility wireless subscribers. |
2 | Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes postpaid tablets. |
3 | Beginning in the third quarter of 2017, we began reporting prepaid IoT connections, which primarily consist of connected cars, as a component of prepaid subscribers. |
50
AT&T Mobility Results | ||||||||||||||||||||||||
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
2017 | 2016 | Percent Change | 2017 | 2016 | Percent Change | |||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||
Service | $ | 14,541 | $ | 14,964 | (2.8 | )% | $ | 43,613 | $ | 44,673 | (2.4 | )% | ||||||||||||
Equipment | 2,895 | 3,229 | (10.3 | ) | 8,508 | 9,398 | (9.5 | ) | ||||||||||||||||
Total Operating Revenues | 17,436 | 18,193 | (4.2 | ) | 52,121 | 54,071 | (3.6 | ) | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Operations and support | 10,113 | 10,697 | (5.5 | ) | 30,308 | 31,822 | (4.8 | ) | ||||||||||||||||
EBITDA | 7,323 | 7,496 | (2.3 | ) | 21,813 | 22,249 | (2.0 | ) | ||||||||||||||||
Depreciation and amortization | 2,010 | 2,107 | (4.6 | ) | 5,999 | 6,244 | (3.9 | ) | ||||||||||||||||
Total Operating Expenses | 12,123 | 12,804 | (5.3 | ) | 36,307 | 38,066 | (4.6 | ) | ||||||||||||||||
Operating Income | $ | 5,313 | $ | 5,389 | (1.4 | )% | $ | 15,814 | $ | 16,005 | (1.2 | )% |
The following tables highlight other key measures of performance for AT&T Mobility: | ||||||||||||
September 30, | Percent | |||||||||||
(in 000s) | 2017 | 2016 | Change | |||||||||
Wireless Subscribers 1 | ||||||||||||
Postpaid smartphones | 59,277 | 58,688 | 1.0 | % | ||||||||
Postpaid feature phones and data-centric devices | 18,138 | 18,700 | (3.0 | ) | ||||||||
Postpaid | 77,415 | 77,388 | - | |||||||||
Prepaid 3 | 15,136 | 13,035 | 16.1 | |||||||||
Branded | 92,551 | 90,423 | 2.4 | |||||||||
Reseller | 9,877 | 12,624 | (21.8 | ) | ||||||||
Connected devices 2, 3 | 36,398 | 30,291 | 20.2 | |||||||||
Total Wireless Subscribers | 138,826 | 133,338 | 4.1 | |||||||||
Branded Smartphones | 72,242 | 69,752 | 3.6 | |||||||||
Smartphones under our installment programs at end of period | 31,207 | 29,382 | 6.2 | % | ||||||||
1 Represents 100% of AT&T Mobility wireless subscribers. | ||||||||||||
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes | ||||||||||||
postpaid tablets. See (3) below. | ||||||||||||
3 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component of | ||||||||||||
prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543 subscribers | ||||||||||||
that were formerly included in connected devices. |
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Third Quarter | Nine-Month Period | |||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
(in 000s) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
Wireless Net Additions 1, 4 | ||||||||||||||||||||||||
Postpaid | 117 | 212 | (44.8 | )% | 53 | 598 | (91.1 | )% | ||||||||||||||||
Prepaid 5 | 324 | 304 | 6.6 | 873 | 1,169 | (25.3 | ) | |||||||||||||||||
Branded Net Additions | 441 | 516 | (14.5 | ) | 926 | 1,767 | (47.6 | ) | ||||||||||||||||
Reseller | (392 | ) | (315 | ) | (24.4 | ) | (1,342 | ) | (1,174 | ) | (14.3 | ) | ||||||||||||
Connected devices 2, 5 | 2,274 | 1,331 | 70.8 | 7,102 | 4,081 | 74.0 | ||||||||||||||||||
Wireless Net Subscriber Additions | 2,323 | 1,532 | 51.6 | 6,686 | 4,674 | 43.0 | ||||||||||||||||||
Smartphones sold under our installment programs during period | 3,491 | 4,283 | (18.5 | )% | 10,575 | 12,378 | (14.6 | )% | ||||||||||||||||
Total Churn 3, 4 | 1.32 | % | 1.45 | % | (13) BP | 1.35 | % | 1.41 | % | (6) BP | ||||||||||||||
Branded Churn 3, 4 | 1.70 | % | 1.63 | % | 7 BP | 1.66 | % | 1.57 | % | 9 BP | ||||||||||||||
Postpaid Churn 3, 4 | 1.07 | % | 1.05 | % | 2 BP | 1.07 | % | 1.04 | % | 3 BP | ||||||||||||||
Postpaid Phone Only Churn 3, 4 | 0.84 | % | 0.90 | % | (6) BP | 0.84 | % | 0.90 | % | (6) BP | ||||||||||||||
1 Excludes acquisition-related additions during the period. | ||||||||||||||||||||||||
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes | ||||||||||||||||||||||||
postpaid tablets. See (5) below. | ||||||||||||||||||||||||
3 Calculated 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. | ||||||||||||||||||||||||
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers. | ||||||||||||||||||||||||
5 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component | ||||||||||||||||||||||||
of prepaid subscribers, resulting in 97 additional prepaid net adds in the quarter. Had we restated our prior periods, prepaid | ||||||||||||||||||||||||
net adds for the comparable periods would have been 381 in the third quarter of 2016, and 1,060 and 1,324 for the first nine months of, | ||||||||||||||||||||||||
2017 and 2016, respectively. |
Second Quarter | Six-Month Period | |||||||||||||||||||||||
(in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Wireless Net Additions1 | ||||||||||||||||||||||||
Postpaid5 | 73 | 143 | (49.0)% | 122 | (51) | - | % | |||||||||||||||||
Prepaid4 | 453 | 267 | 69.7 | 694 | 549 | 26.4 | ||||||||||||||||||
Branded Net Additions | 526 | 410 | 28.3 | 816 | 498 | 63.9 | ||||||||||||||||||
Reseller | (444 | ) | (368 | ) | (20.7) | (832 | ) | (950 | ) | 12.4 | ||||||||||||||
Connected devices2, 4 | 2,982 | 2,256 | 32.2 | 5,710 | 4,828 | 18.3 | ||||||||||||||||||
Wireless Net Subscriber Additions | 3,064 | 2,298 | 33.3 | 5,694 | 4,376 | 30.1 | ||||||||||||||||||
Smartphones sold under our installment programs during period | 3,644 | 3,583 | 1.7 % | 7,637 | 7,084 | 7.8 | % | |||||||||||||||||
Branded Churn3 | 1.50% | 1.57% | (7) BP | 1.57% | 1.64% | (7) BP | ||||||||||||||||||
Postpaid Churn3 | 1.02% | 1.01% | 1 BP | 1.04% | 1.07% | (3) BP | ||||||||||||||||||
Postpaid Phone Only Churn3,5 | 0.82% | 0.79% | 3 BP | 0.83% | 0.84% | (1) BP | ||||||||||||||||||
1 | Excludes acquisition-related additions during the period. |
2 | Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes postpaid tablets. See (5) below. |
3 | Calculated 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. |
4 | Beginning in the third quarter of 2017, we began reporting prepaid IoT connections, which primarily consist of connected cars, as a component of prepaid subscribers, resulting in 97 and 146 additional prepaid net adds in the second quarter and first six months of 2018. |
5 | Postpaid phone net adds were 46 and (89) in the second quarter and 24 and (437) for the first six months of 2018 and 2017, respectively. |
Operating income
Subscriber Relationships
As the wireless industry continues to mature,has matured, future wireless growth will become increasingly dependentdepend on our ability to offer innovative services, plans and devices and to provide these services in bundled product offerings with our video and broadband services. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. To support higher mobile video and 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 maturingmature and highly competitive market, we have launched a wide variety of plans, including unlimited and bundled services, as well as equipment installment programs. Beginning in
ARPU
Postpaid phone-only ARPU was $54.18 for the second quarter and $53.63 for the first quartersix months of 2018, compared to $58.30 and $58.20 in 2017, we expanded our unlimited wireless data plans to make them available to customers that do not subscribe to our video services.primarily reflecting lower revenues recognized under new revenue accounting standards. ARPU
51
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
has also been affected by customers shifting to unlimited plans, which decreases overage revenues; however, customers are adding additional devices helping to offset that decline.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. TotalPostpaid churn was slightly higher in the second quarter, but lower for the third quarter and first ninesix months of 2017. Postpaid churn was higher for the third quarter and first nine months of 2017, driven by2018, even with higher tablet churn. Postpaid phone-onlyphone only churn was lowerhigher in the thirdsecond quarter, and first nine months of 2017, despite competitive pressure inbut lower for the industry.
Branded Subscribers
Branded subscribers increased 1.1%0.5% in the thirdsecond quarter of 20172018 when compared to March 31, 2018 and increased 2.6% when compared to June 30, 20172017. The year-over-year increase includes increases of 0.5% and increased 2.4% when compared to September 30, 2016. Both the sequential14.3% in postpaid and year-over-year increases reflect postpaid subscribers remaining essentially flat while prepaid subscribers, grew 6.7% and 16.1%, respectively. Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars where customers actively subscribe for vehicle connectivity, as a component of prepaid subscribers. The prepaid subscriber base at September
At June 30, 2017 now includes2018, approximately 543,000 subscribers that were formerly included in connected devices.
Our equipment installment purchase programs including AT&T Next, allow for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, AT&T Next subscribers also havewith the rightoption to trade in the original device for a new device with a new installment plan and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest.paid or settled once conditions are met. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. At September 30, 2017, about 53%Over half of the postpaid smartphone base is on an equipment installment program compared to 50% at September 30, 2016. Over 90%and the majority of postpaid smartphone gross adds and upgrades for all periods presented were either equipment installment plans or Bring Your Own Device (BYOD). While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.
Connected Devices
Connected Devicesdevices includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Connected device subscribers increased 5.0%7.2% during the thirdsecond quarter when compared to March 31, 2018 and 29.0% when compared to June 30, 2017 and 20.2% when compared to September 30, 2016.2017. During the thirdsecond quarter and first ninesix months of 2017,2018, we added approximately 1.51.9 million and 4.73.6 million wholesale connected cars respectively, through agreements with various carmakers, and experienced strong growth in other IoT connections as well. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.
52
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Supplemental Results Under Historical Accounting Method
As a supplemental discussion of our financing arrangements.
Second Quarter | ||||||||||||||||||||
Reported | Promotions & Other | USF | Commission Deferrals | Historical Accounting | ||||||||||||||||
Service Revenues | ||||||||||||||||||||
Consumer Mobility | $ | 11,853 | $ | (245 | ) | $ (358) | $ | - | $ | 12,456 | ||||||||||
Business Solutions | 8,282 | (146 | ) | (384) | - | 8,812 | ||||||||||||||
Entertainment Group | 11,647 | (44 | ) | (162) | - | 11,853 | ||||||||||||||
International | 1,671 | (40 | ) | - | - | 1,711 | ||||||||||||||
Corporate and Other | 320 | (7 | ) | (4) | - | 331 | ||||||||||||||
AT&T Service Revenues | 33,773 | (482 | ) | (908) | - | 35,163 | ||||||||||||||
AT&T Mobility | 13,682 | (390 | ) | (423) | - | 14,495 | ||||||||||||||
Equipment Revenues | ||||||||||||||||||||
Consumer Mobility | 3,016 | 291 | - | - | 2,725 | |||||||||||||||
Business Solutions | 781 | 158 | - | - | 623 | |||||||||||||||
Entertainment Group | 3 | - | - | - | 3 | |||||||||||||||
International | 280 | 18 | - | - | 262 | |||||||||||||||
Corporate and Other | - | 2 | - | - | (2 | ) | ||||||||||||||
AT&T Equipment Revenues | 4,080 | 469 | - | - | 3,611 | |||||||||||||||
AT&T Mobility | 3,600 | 451 | - | - | 3,149 | |||||||||||||||
Total Operating Revenues | ||||||||||||||||||||
Consumer Mobility | 14,869 | 46 | (358) | - | 15,181 | |||||||||||||||
Business Solutions | 9,063 | 12 | (384) | - | 9,435 | |||||||||||||||
Entertainment Group | 11,650 | (44 | ) | (162) | - | 11,856 | ||||||||||||||
International | 1,951 | (22 | ) | - | - | 1,973 | ||||||||||||||
WarnerMedia | 1,275 | (2 | ) | - | - | 1,277 | ||||||||||||||
Corporate and Other | 319 | (5 | ) | (4) | - | 328 | ||||||||||||||
Eliminations | (141 | ) | - | - | - | (141 | ) | |||||||||||||
AT&T Operating Revenues | 38,986 | (15 | ) | (908) | - | 39,909 | ||||||||||||||
AT&T Mobility | 17,282 | 61 | (423) | - | 17,644 | |||||||||||||||
Total Operating Expenses | ||||||||||||||||||||
Consumer Mobility | 9,891 | 85 | (358) | (298 | ) | 10,462 | ||||||||||||||
Business Solutions | 7,103 | 4 | (384) | (63 | ) | 7,546 | ||||||||||||||
Entertainment Group | 10,198 | 2 | (162) | (265 | ) | 10,623 | ||||||||||||||
International | 2,116 | 6 | - | (47 | ) | 2,157 | ||||||||||||||
WarnerMedia | 824 | (6 | ) | - | - | 830 | ||||||||||||||
Corporate and Other | 2,529 | 4 | (4) | - | 2,529 | |||||||||||||||
Eliminations | (141 | ) | - | - | - | (141 | ) | |||||||||||||
AT&T Operating Expenses | 32,520 | 95 | (908) | (673 | ) | 34,006 | ||||||||||||||
AT&T Mobility | 11,776 | 86 | (423) | (333 | ) | 12,446 | ||||||||||||||
Total Operating Income | ||||||||||||||||||||
Consumer Mobility | 4,978 | (39 | ) | - | 298 | 4,719 | ||||||||||||||
Business Solutions | 1,960 | 8 | - | 63 | 1,889 | |||||||||||||||
Entertainment Group | 1,452 | (46 | ) | - | 265 | 1,233 | ||||||||||||||
International | (165 | ) | (28 | ) | - | 47 | (184 | ) | ||||||||||||
WarnerMedia | 451 | 4 | - | - | 447 | |||||||||||||||
Corporate and Other | (2,210 | ) | (9 | ) | - | - | (2,201 | ) | ||||||||||||
AT&T Operating Income | 6,466 | (110 | ) | - | 673 | 5,903 | ||||||||||||||
AT&T Mobility | 5,506 | (25 | ) | - | 333 | 5,198 | ||||||||||||||
53
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Consumer Mobility
Supplemental Segment Results
Second Quarter | ||||||||||||||||||||
Reported 2018 | Accounting Impact | Historical Method 2018 | 2017 | Percent Change | ||||||||||||||||
Segment operating revenues | ||||||||||||||||||||
Service | $ | 11,853 | $ | (603 | ) | $ | 12,456 | $ | 12,467 | (0.1 | )% | |||||||||
Equipment | 3,016 | 291 | 2,725 | 2,624 | 3.8 | |||||||||||||||
Total Segment Operating Revenues | 14,869 | (312 | ) | 15,181 | 15,091 | 0.6 | ||||||||||||||
Segment operating expenses | ||||||||||||||||||||
Operations and support | 8,085 | (571 | ) | 8,656 | 8,636 | 0.2 | ||||||||||||||
EBITDA | 6,784 | 259 | 6,525 | 6,455 | 1.1 | |||||||||||||||
Depreciation and amortization | 1,806 | - | 1,806 | 1,716 | 5.2 | |||||||||||||||
Total Segment Operating Expenses | 9,891 | (571 | ) | 10,462 | 10,352 | 1.1 | ||||||||||||||
Segment Operating Income | 4,978 | 259 | 4,719 | 4,739 | (0.4 | ) | ||||||||||||||
Equity in Net Income of Affiliates | - | - | - | - | - | |||||||||||||||
Segment Contribution | $ | 4,978 | $ | 259 | $ | 4,719 | $ | 4,739 | (0.4 | )% | ||||||||||
Operating Income Margin | 33.5% | 31.1% | 31.4% | (30)BP | ||||||||||||||||
EBITDA Margin | 45.6% | 43.0% | 42.8% | 20 BP | ||||||||||||||||
EBITDA Service Margin | 57.2% | 52.4% | 51.8% | 60 BP |
54
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Business Solutions
Supplemental Segment Results
Second Quarter | ||||||||||||||||||||
Reported 2018 | Accounting Impact | Historical Method 2018 | 2017 | Percent Change | ||||||||||||||||
Segment operating revenues | ||||||||||||||||||||
Wireless service | $ | 1,829 | $ (209) | $ | 2,038 | $ | 2,004 | 1.7 | % | |||||||||||
Strategic services | 3,039 | (2) | 3,041 | 2,958 | 2.8 | |||||||||||||||
Legacy voice and data services | 2,723 | (251) | 2,974 | 3,423 | (13.1) | |||||||||||||||
Other service and equipment | 888 | (70) | 958 | 922 | 3.9 | |||||||||||||||
Wireless equipment | 584 | 160 | 424 | 360 | 17.8 | |||||||||||||||
Total Segment Operating Revenues | 9,063 | (372) | 9,435 | 9,667 | (2.4) | |||||||||||||||
Segment operating expenses | ||||||||||||||||||||
Operations and support | 5,616 | (443) | 6,059 | 6,053 | 0.1 | |||||||||||||||
EBITDA | 3,447 | 71 | 3,376 | 3,614 | (6.6) | |||||||||||||||
Depreciation and amortization | 1,487 | - | 1,487 | 1,483 | 0.3 | |||||||||||||||
Total Segment Operating Expenses | 7,103 | (443) | 7,546 | 7,536 | 0.1 | |||||||||||||||
Segment Operating Income | 1,960 | 71 | 1,889 | 2,131 | (11.4) | |||||||||||||||
Equity in Net Income of Affiliates | 1 | - | 1 | - | - | |||||||||||||||
Segment Contribution | $ | 1,961 | $ | 71 | $ | 1,890 | $ | 2,131 | (11.3) | % | ||||||||||
Operating Income Margin | 21.6% | 20.0% | 22.0% | (200) | BP | |||||||||||||||
EBITDA Margin | 38.0% | 35.8% | 37.4% | (160) | BP |
55
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Entertainment Group
Supplemental Segment Results
Second Quarter | ||||||||||||||||||||
Reported 2018 | Accounting Impact | Historical Method 2018 | 2017 | Percent Change | ||||||||||||||||
Segment operating revenues | ||||||||||||||||||||
Video entertainment | $ | 8,331 | $ | (107) | $ | 8,438 | $ | 9,153 | (7.8) | % | ||||||||||
High-speed internet | 1,981 | - | 1,981 | 1,927 | 2.8 | |||||||||||||||
Legacy voice and data services | 785 | (33) | 818 | 981 | (16.6) | |||||||||||||||
Other service and equipment | 553 | (66) | 619 | 600 | 3.2 | |||||||||||||||
| ||||||||||||||||||||
Total Segment Operating Revenues | 11,650 | (206) | 11,856 | 12,661 | (6.4) | |||||||||||||||
| ||||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||
Operations and support | 8,852 | (425) | 9,277 | 9,561 | (3.0) | |||||||||||||||
| ||||||||||||||||||||
EBITDA | 2,798 | 219 | 2,579 | 3,100 | (16.8) | |||||||||||||||
| ||||||||||||||||||||
Depreciation and amortization | 1,346 | - | 1,346 | 1,458 | (7.7) | |||||||||||||||
| ||||||||||||||||||||
Total Segment Operating Expenses | 10,198 | (425) | 10,623 | 11,019 | (3.6) | |||||||||||||||
| ||||||||||||||||||||
Segment Operating Income | 1,452 | 219 | 1,233 | 1,642 | (24.9) | |||||||||||||||
Equity in Net Income (Loss) of Affiliates | (20) | - | (20) | (12) | (66.7) | |||||||||||||||
| ||||||||||||||||||||
Segment Contribution | $ | 1,432 | $ | 219 | $ | 1,213 | $ | 1,630 | (25.6 | )% | ||||||||||
Operating Income Margin | 12.5 | % | 10.4 | % | 13.0 | % | (260) | BP | ||||||||||||
EBITDA | 24.0 | % | 21.8 | % | 24.5 | % | (270) | BP |
56
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
International
Supplemental Segment Results
Second Quarter | ||||||||||||||||||||
Historical | ||||||||||||||||||||
Reported | Accounting | Method | Percent | |||||||||||||||||
2018 | Impact | 2018 | 2017 | Change | ||||||||||||||||
Segment operating revenues | ||||||||||||||||||||
Video entertainment | $ | 1,254 | $ | - | $ | 1,254 | $ | 1,361 | (7.9)% | |||||||||||
Wireless service | 417 | (40 | ) | 457 | 535 | (14.6) | ||||||||||||||
Wireless equipment | 280 | 18 | 262 | 130 | - | |||||||||||||||
Total Segment Operating Revenues | 1,951 | (22 | ) | 1,973 | 2,026 | (2.6) | ||||||||||||||
Segment operating expenses | ||||||||||||||||||||
Operations and support | 1,803 | (41 | ) | 1,844 | 1,772 | 4.1 | ||||||||||||||
EBITDA | 148 | 19 | 129 | 254 | (49.2) | |||||||||||||||
Depreciation and amortization | 313 | - | 313 | 311 | 0.6 | |||||||||||||||
Total Segment Operating Expenses | 2,116 | (41 | ) | 2,157 | 2,083 | 3.6 | ||||||||||||||
Segment Operating Income (Loss) | (165 | ) | 19 | (184 | ) | (57 | ) | - | ||||||||||||
Equity in Net Income (Loss) of Affiliates | 15 | - | 15 | 25 | (40.0) | |||||||||||||||
Segment Contribution | $ | (150 | ) | $ | 19 | $ | (169 | ) | $ | (32 | ) | - % | ||||||||
| ||||||||||||||||||||
Operating Income Margin | -8.5 | % | -9.3 | % | -2.8 | % | (650)BP | |||||||||||||
EBITDA Margin | 7.6 | % | 6.5 | % | 12.5 | % | (600)BP |
AT&T Mobility Supplemental Results
Second Quarter | ||||||||||||||||||||
Historical | ||||||||||||||||||||
Reported | Accounting | Method | Percent | |||||||||||||||||
2018 | Impact | 2018 | 2017 | Change | ||||||||||||||||
Operating revenues | ||||||||||||||||||||
Service | $ | 13,682 | $ | (813 | ) | $ | 14,495 | $ | 14,471 | 0.2% | ||||||||||
Equipment | 3,600 | 451 | 3,149 | 2,984 | 5.5 | |||||||||||||||
Total Operating Revenues | 17,282 | (362 | ) | 17,644 | 17,455 | 1.1 | ||||||||||||||
Operating expenses | ||||||||||||||||||||
Operations and support | 9,663 | (670 | ) | 10,333 | 10,091 | 2.4 | ||||||||||||||
EBITDA | 7,619 | 308 | 7,311 | 7,364 | (0.7) | |||||||||||||||
Depreciation and amortization | 2,113 | - | 2,113 | 1,988 | 6.3 | |||||||||||||||
Total Operating Expenses | 11,776 | (670 | ) | 12,446 | 12,079 | 3.0 | ||||||||||||||
Operating Income | $ | 5,506 | $ | 308 | $ | 5,198 | $ | 5,376 | (3.3) % | |||||||||||
| ||||||||||||||||||||
Operating Income Margin | 31.9% | 29.5% | 30.8% | (130)BP | ||||||||||||||||
EBITDA Margin | 44.1% | 41.4% | 42.2% | (80)BP | ||||||||||||||||
EBITDA Service Margin | 55.7% | 50.4% | 50.9% | (50)BP |
57
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
OTHER BUSINESS MATTERS
Time WarnerOn June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. The deal combines Time Warner’s vast library of content and ability to buildcreate new premium content for audiences around the world with our extensive customer relationships and managedistribution, one of the first nationwideworld’s largestpay-TV subscriber bases and scale in TV, mobile and broadband network dedicated to America's first responders. FirstNet will provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout.distribution. We expect that the transaction will advance ourdirect-to-consumer efforts and provide us with the ability to spend about $40,000, in part recoverable from FirstNet, overdevelop innovative new content offerings.
Under the lifemerger agreement, each share of the 25-year contractTime Warner stock was exchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to build, operate and maintain the network.trusts consolidated by AT&T, will constructshare-based payment arrangements and operate the network and provide sustainability paymentsfractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to FirstNet. Sustainability payments are required to be used for the operating expenses of FirstNet and to fund network improvements included in our $40,000 estimate. FirstNet's operating expenses are anticipated to beTime Warner shareholders, giving them an approximate 16% stake in the $75-$100 range annually,combined company. Based on our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and when adjusted for inflation,$42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,114. On July 12, 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we expectwill continue to bevigorously defend our legal position in the $3,000 range over the life of the 25-year contract. After FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will be reinvested into the network. As of November 2, 2017, 30 states and territories have opted-in to the program, representing 38%, or approximately $6,900, of this total sustainability payment commitment. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states and territories electing to participate in FirstNet.
Litigation Challenging DIRECTV'sDIRECTV’s NFL SUNDAY TICKET
Federal Trade Commission Litigation Involving DIRECTV
In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore OnlineUnlimited Data Plan Claims
In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The58
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC'sFTC’s allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and, onin August 29, 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC asked the Court of Appeals to reconsider the decision
Labor Contracts
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. Since the Telecom Act was passed, the Federal Communications Commission (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. However, based on their public statements and written opinions, we expect theThe new leadership at the FCC to chartis charting a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. Based on its public statements, we expect the FCC to continue to eliminate antiquated, unnecessary regulations and streamline processes. 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 allIP-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.
In April 20, 2017, the FCC adopted an order that maintains light touch pricing regulation of packet-based services, extends such light touch pricing regulation to high-speed TDMTime Division Multiplex (TDM) transport services and to most of our TDM channel termination services, based on a competitive market test for such services. For those services that do not qualify for light touch regulation, the order allows companies to offer volume and term discounts, as well as contract tariffs. Several parties appealed the FCC'sFCC’s decision. These appeals were consolidated in the U.S. Court of Appeals for the Eighth Circuit, where they remain pending.
In October 2016, a sharply divided 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, includingso-called "edge" “edge” providers such as Google and Facebook. OnIn April 3, 2017, the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuance of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress. In June 2017,
59
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Privacy-related legislation has been considered in a number of states since the FCC released an order clarifying that providersCongressional Review act was passed. The policy environment is complex and rapidly evolving. Legislative and regulatory action 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. On June 28, 2018, the State of California enacted comprehensive privacy legislation that gives California consumers the right to know what personal information is being collected about them, to know 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 consumers the right toopt-out of the sale of personal information. The law applies the same rules to all companies that collect consumer information. The new law could significantly affect how data markets operate and will impose implementation costs and challenges. We will continue to be subjectsupport congressional action to codify a set of standard consumer rules of the internet including a federal privacy requirementsframework, which would have the effect of preempting state law under section 222the supremacy clause of The Communications Act of 1934 (Communications Act), but not the more restrictive rules that were adopted in October 2016.
In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The FCC's decisionOrder, which represented a departure from longstanding bipartisan precedent, significantly expanded itsthe FCC’s authority to regulate the provision of fixed and mobile broadband internet access services. AT&T and other providers of
We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provideIP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for our services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
We provide wireless services in robustly competitive markets, but are subject to substantial governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers'providers’ prices and offerings are generally not subject to state or local regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the areas of consumer protection and the deployment of cell sites and equipment. The anticipated 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"“small cell” equipment and therefore increase the need for a quicklocal permitting process.
60
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in April 2017millions except per share and per subscriber amounts
Also facilitating the deployment of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").
As the wireless industry continues to mature,has matured, future wireless growth will become increasingly dependentdepend on our ability to offer innovative videoservices, plans and datadevices and to provide these services andin bundled product offerings to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations.innovations on as broad a geographic basis as possible. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, we have:
Submitted winning bids for 251 Advanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality spectrum in theAWS-3 Auction. |
Redeployed spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks. |
Secured the |
Invested in 5G and millimeter-wave technologies with our |
Connect America Fund Phase II Auction (Auction 903) The FCC plans to conduct a reverse auction to award government funding to the lowest bidders in millions except per share and per subscriber amounts
LIQUIDITY AND CAPITAL RESOURCES
With the completion of the Time Warner transaction, we had $48,499$13,523 in cash and cash equivalents available at SeptemberJune 30, 2017.2018. Cash and cash equivalents included cash of $3,707$3,457 and money market funds and other cash equivalents of $44,792.$10,066. Approximately $888$1,226 of our cash and cash equivalents resided in foreign jurisdictions and were primarily in foreign currencies; these funds are primarily usedcurrencies, some of which may be subject to meet working capital requirements of foreign operations.
Cash and cash equivalents increased $42,711decreased $36,975 since December 31, 2016.2017. In the first ninesix months of 2017,2018, cash inflows were primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables and other customer receivables to third parties. We alsoparties, issuance of commercial paper and long-term debt and collateral received a $1,438 deposit refund from the FCC.banks and other participants in our derivative arrangements. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, the acquisition of Time Warner and wireless spectrum, payment of operating expenses, funding capital expenditures, debt repayments, and dividends to stockholders,stockholders.
We actively manage the timing of our vendor payments to optimize the use of our cash. Among other things, we seek to have vendor payments made on90-day or greater terms, while providing vendors with access to bank facilities that permit earlier payments at the vendors’ cost. For example, for payments to a key supplier, we have arrangements that allow us to extend payment terms between approximately 40 to 60 days at an additional cost to us. We believe these arrangements provide benefits to us relative to alternative financing arrangements. During the second quarter of 2018 and for the acquisition of wireless spectrum and other operations. We discuss manyfirst six months then ended, the net impact of these factorscash management activities on our cash flows provided by operating activities was not material.
61
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in detail below.
On December 22, 2017, federal tax reform was enacted into law. Beginning with 2018, the Act reduces the U.S. federal corporate tax rate from 35% to 21% and permits immediate deductions for certain new assets. As a result, cash taxes will be significantly lower than they would have been in 2018 and beyond without federal tax reform.
Cash Provided by or Used in Operating Activities
During the first ninesix months of 2017,2018, cash provided by operating activities was $29,274,$19,176, compared to $29,202$17,670 for the first ninesix months of 2016.2017. Higher operating cash flows in 20172018 were primarily due to net tax refunds and contributions from WarnerMedia, offset by higher receipts from our sale of AT&T Next receivablesinterest payments and working capital improvements.
Cash Used in or Provided by Investing Activities
For the first ninesix months of 2017,2018, cash used in investing activities totaled $15,266$52,635, and consisted primarily of $15,756$40,715 for acquisition costs related to Time Warner and other acquisitions and $10,959 for capital expenditures, excluding interest during construction.
The majority of our capital expenditures are spent on our networks, our video servicesincluding product development and related support systems. Capital expenditures, excluding interest during construction, increased $473$209 in the first ninesix months. The increase was primarily due to our continued fiber buildout and timingWe do not report capital expenditures at the segment level. During 2018, approximately $800 of assets for FirstNet build schedules in 2017 comparedhave been placed into service with 2016. Additionally, ina net cash impact of $100. Total reimbursements from the government for FirstNet during the first six months of 2018 were $336.
In connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing)., which are excluded from our investing activities and reported as financing activities. We enter into these supplier arrangements when the terms provide benefits to us relative to alternative financing arrangements. For the first ninesix months of 2017,2018, vendor financing payments related to capital investments was $897. We do not report capital expenditures atwere approximately $257. During the segment level.
The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital spending takes into account existing tax law and does not reflect anticipated tax reform. We continue to focusare also focused on ensuring DIRECTV merger commitments are met.
In 2018, we expect Capital investment, which consists of capital expenditures plus vendor financing payments, of approximately $25,000, $22,000 net of expected FirstNet reimbursements and vendor financing.
Cash Provided by or Used in Financing Activities
For the first ninesix months of 2017,2018, cash provided byused in financing activities totaled $28,703$3,720 and included net proceeds of $46,761$26,478, primarily resulting from drawing $20,925 on our Term Loan Credit Agreements in connection with our acquisition of Time Warner. Net proceeds for the following long-term debt issuances:
During the first six months of Operations - Continued
● | $ |
● | $750 of 1.750% notes due 2018. |
● | $300 of 6.450% notes due 2018. |
● | $1,000 of |
● | $ |
$ |
● | $600 of 6.875% WarnerMedia notes due 2018. |
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.4%4.3% as of SeptemberJune 30, 2017, compared to 4.2%2018 and 4.4% as of December 31, 2016.2017. We had $162,450$180,209 of total notes and debentures outstanding at SeptemberJune 30, 2017,2018, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso and Canadian dollar denominated debt that totaled approximately $37,260.$36,146.
62
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
As a result of Septemberthe Time Warner acquisition, we acquired debt with a fair value of $22,846 at the time of acquisition, of which $18,876 at face value remained on our balance sheet as of June 30, 2018. The face value of the remaining debt acquired is summarized primarily as follows:
● | $1,108 maturing between 2018 and 2019 with an interest rate ranging from 1.250% to 2.100%. |
● | $6,906 maturing between 2020 and 2024 with an interest rate ranging from 1.950% to 9.150%. |
● | $5,898 maturing between 2025 and 2034 with an interest rate ranging from 2.950% to 7.700%. |
● | $4,964 maturing between 2035 and 2045 with an interest rate ranging from 4.650% to 8.300%. |
At June 30, 2018, we had $21,672 of debt maturing within one year, including $8,139 of commercial paper borrowing and $13,323 of long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
● | $1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021. |
● | An accretingzero-coupon note that may be redeemed each May until maturity in 2022. In May 2017, $1 was redeemed by the holder for $1. If the remainder of thezero-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. |
Vrio, a consolidated holding company for our Latin American digital entertainment services units, DIRECTV Latin American and SKY Brasil, subsidiaries of Vrio, entered into the following long-term debt issuances:
● | April 5, 2018 issuance of $650 of 6.25% notes due 2023 and $350 of 6.875% notes due 2028. These notes were redeemed following our April 2018 withdrawal of the planned IPO of Vrio. |
● | April 11, 2018 borrowing of approximately $1,000 of debt denominated in Brazilian reais that matures in 2023. The floating rate for the facility is based upon the Brazil interbank deposit rate annualized (DI Rate), plus 175 basis points. |
On July 25, 2018 we issued $750 of 5.625% global notes due 2067. The underwriters have an option to purchase up to an additional $113 aggregate principal amount within 30 days of the offering.
On July 30, 2018 we issued €2,250 ($2,637 U.S. dollar equivalent) floating rate global notes due 2020.
At June 30, 2018, we had approximately 388376 million shares remaining from 2013 and 2014share repurchase authorizations from ourapproved by the Board of Directors to repurchase shares of our common stock.in 2013 and 2014. During the first ninesix months of 2017,2018, we repurchased approximately 713 million shares totaling $279 under these authorizations. In 2017, we intend to use free cash flow (operating cash flows less construction and capital expenditures) after dividends primarily to pay down debt.
We paid dividends of $9,030$6,144 during the first ninesix months of 2017,2018, compared with $8,850$6,021 for the first ninesix months of 2016,2017, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in October 2016.December 2017. Dividends declared by our Board of Directors totaled $0.49 per share in the third quarter and $1.47$1.00 per share in the first ninesix months of 20172018 and $0.48$0.98 per share in the third quarter and $1.44 for the first ninesix months of 2016.2017. Our dividend policy considers the
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 Form10-K.
We use credit facilities as a tool in managing our liquidity status. In December 2015,At June 30, 2018, we entered into ahad no amounts outstanding on our five-year $12,000 revolving credit agreement of which no amounts are outstanding as ofagreement.
In September 30, 2017. On September 5, 2017 we repaid all of the amounts outstanding under our $9,155 syndicated credit agreement and terminated the facility. On September 29, 2017, we entered into a five-year $2,250 syndicated term loan credit agreement containing (i) a three-year $750 term loan facility (the "Tranche“Tranche A Facility)Facility”), (ii) a four-year $750 term loan facility (the "Tranche“Tranche B Facility"Facility”) and (iii) a five-year $750 term loan facility (the "Tranche“Tranche C Facility"Facility”), with certain investment and commercial banks and The Bank of Nova Scotia, as administrative agent. No amounts are outstanding underWe drew on the Tranche A Facility, the Tranche B Facility orand the Tranche C Facility during the first quarter of 2018, with $2,250 in advances outstanding as of SeptemberJune 30, 2017.2018.
63
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
We also enter intoutilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases.
In connection with our pending Merger withanticipation of the Time Warner acquisition, we entered into a $30,000 bridge loan credit agreement ("Bridge Loan") and a $10,000 term loan agreement ("(“Term Loan"Loan”). Following the August issuances of $22,500 of global notes,In February 2018, we reduced the commitments under the Bridge Loan to $0 and terminated the facility. No amounts will be borrowed underamended the Term Loan prior to extend the closing ofcommitment termination date to December 31, 2018 and increased the Merger. Borrowings undercommitments to $16,175 from $10,000. We drew on the Term Loan will be used solelyfor the acquisition during the second quarter of 2018, with $16,175 outstanding as of June 30, 2018.
On June 13, 2018, we entered into an additional $2,500 Term Loan Credit Agreement (“June 2018 Term Loan”) to finance a portion of the cash to be paid inconsideration of the Merger, the refinancing of debt of Time Warner acquisition. We accordingly drew on the agreement, with $2,500 outstanding as of June 30, 2018.
On June 26, 2018, we repaid and its subsidiaries andterminated the payment$2,000 unsecured term loan agreement that Time Warner had in place at the time the merger closed. At June 14, 2018, Time Warner had approximately $1,100 of related expenses.
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 netdebt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than3.5-to-1. As of SeptemberJune 30, 2017,2018, we were in compliance with the covenants for our credit facilities.
Collateral Arrangements
During the first ninesix months of 2017,2018, we received $2,743posted $365 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. At September 30, 2017, we had posted collateral assets of $837 and received collateral liabilities of $338, compared to December 31, 2016, posted collateral assets of $3,242 and no collateral liabilities. (See Note 6)
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders'stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At SeptemberJune 30, 2017,2018, our debt ratio was 56.4%50.8%, compared to 50.1%53.3% at SeptemberJune 30, 2016,2017 and 49.9%53.6% at December 31, 2016.2017. Our net debt ratio was 39.7%47.2% at SeptemberJune 30, 2018, compared to 43.8% at June 30, 2017 compared to 47.8% at September 30, 2016 and 47.5%37.2% at December 31, 2016.2017. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.
During the first ninesix months of 2017,2018, we received $4,217$4,212 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the pension trust used to pay benefits under our qualified pension plans. The preferred equity interest had a value of $9,354$8,829 as of SeptemberJune 30, 2017,2018, and $8,477$9,155 as of December 31, 2016,2017, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts. Mobility IIWe distributed $420$280 to the trust during the first ninesix months of 2017.2018. So long as thosewe make the distributions, are made, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares.
64
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
DISCUSSION AND RECONCILIATION OFNON-GAAP MEASURE MEASURES
We believe the following measure ismeasures are 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. ThisThese supplemental measuremeasures should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.
Supplemental Operational Measure
We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to removenon-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.
Three Months Ended | ||||||||||||||||||||||||||||||||||||
June 30, 2018 | June 30, 2017 | |||||||||||||||||||||||||||||||||||
Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | |||||||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||||||
Wireless service | $ | 11,853 | $ | 1,829 | $ | - | $ | 13,682 | $ | 12,467 | $ | 2,004 | $ | - | $ | 14,471 | ||||||||||||||||||||
Strategic services | - | 3,039 | (3,039 | ) | - | - | 2,958 | (2,958 | ) | - | ||||||||||||||||||||||||||
Legacy voice and data services | - | 2,723 | (2,723 | ) | - | - | 3,423 | (3,423 | ) | - | ||||||||||||||||||||||||||
Other service and equipment | - | 888 | (888 | ) | - | - | 922 | (922 | ) | - | ||||||||||||||||||||||||||
Wireless equipment | 3,016 | 584 | - | 3,600 | 2,624 | 360 | - | 2,984 | ||||||||||||||||||||||||||||
Total Operating Revenues | 14,869 | 9,063 | (6,650 | ) | 17,282 | 15,091 | 9,667 | (7,303 | ) | 17,455 | ||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||||||
Operations and support | 8,085 | 5,616 | (4,038 | ) | 9,663 | 8,636 | 6,053 | (4,598 | ) | 10,091 | ||||||||||||||||||||||||||
EBITDA | 6,784 | 3,447 | (2,612 | ) | 7,619 | 6,455 | 3,614 | (2,705 | ) | 7,364 | ||||||||||||||||||||||||||
Depreciation and amortization | 1,806 | 1,487 | (1,180 | ) | 2,113 | 1,716 | 1,483 | (1,211 | ) | 1,988 | ||||||||||||||||||||||||||
Total Operating Expense | 9,891 | 7,103 | (5,218 | ) | 11,776 | 10,352 | 7,536 | (5,809 | ) | 12,079 | ||||||||||||||||||||||||||
Operating Income | $ | 4,978 | $ | 1,960 | $ | (1,432 | ) | $ | 5,506 | $ | 4,739 | $ | 2,131 | $ | (1,494 | ) | $ | 5,376 | ||||||||||||||||||
1Business wireline operations reported in Business Solutions segment.
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Three Months Ended | ||||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||||||||||||||||||
Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | |||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||
Wireless service | $ | 6,507 | $ | 8,034 | $ | - | $ | 14,541 | $ | 6,914 | $ | 8,050 | $ | - | $ | 14,964 | ||||||||||||||||
Fixed strategic services | - | 3,087 | (3,087 | ) | - | - | 2,913 | (2,913 | ) | - | ||||||||||||||||||||||
Legacy voice and data services | - | 3,434 | (3,434 | ) | - | - | 4,042 | (4,042 | ) | - | ||||||||||||||||||||||
Other service and equipment | - | 852 | (852 | ) | - | - | 886 | (886 | ) | - | ||||||||||||||||||||||
Wireless equipment | 1,241 | 1,654 | - | 2,895 | 1,353 | 1,876 | - | 3,229 | ||||||||||||||||||||||||
Total Operating Revenues | 7,748 | 17,061 | (7,373 | ) | 17,436 | 8,267 | 17,767 | (7,841 | ) | 18,193 | ||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Operations and support | 4,551 | 10,233 | (4,671 | ) | 10,113 | 4,751 | 10,925 | (4,979 | ) | 10,697 | ||||||||||||||||||||||
EBITDA | 3,197 | 6,828 | (2,702 | ) | 7,323 | 3,516 | 6,842 | (2,862 | ) | 7,496 | ||||||||||||||||||||||
Depreciation and amortization | 877 | 2,325 | (1,192 | ) | 2,010 | 944 | 2,539 | (1,376 | ) | 2,107 | ||||||||||||||||||||||
Total Operating Expense | 5,428 | 12,558 | (5,863 | ) | 12,123 | 5,695 | 13,464 | (6,355 | ) | 12,804 | ||||||||||||||||||||||
Operating Income | $ | 2,320 | $ | 4,503 | $ | (1,510 | ) | $ | 5,313 | $ | 2,572 | $ | 4,303 | $ | (1,486 | ) | $ | 5,389 | ||||||||||||||
1 Non-wireless (fixed) operations reported in Business Solutions segment. |
AT&T INC.
JUNE 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Six Months Ended | ||||||||||||||||||||||||||||||||||||
June 30, 2018 | June 30, 2017 | |||||||||||||||||||||||||||||||||||
Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | |||||||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||||||
Wireless service | $ | 23,465 | $ | 3,620 | $ | - | $ | 27,085 | $ | 24,932 | $ | 4,007 | $ | - | $ | 28,939 | ||||||||||||||||||||
Strategic services | - | 6,109 | (6,109 | ) | - | - | 5,862 | (5,862 | ) | - | ||||||||||||||||||||||||||
Legacy voice and data services | - | 5,561 | (5,561 | ) | - | - | 6,971 | (6,971 | ) | - | ||||||||||||||||||||||||||
Other service and equipment | - | 1,727 | (1,727 | ) | - | - | 1,800 | (1,800 | ) | - | ||||||||||||||||||||||||||
Wireless equipment | 6,390 | 1,162 | - | 7,552 | 4,965 | 648 | - | 5,613 | ||||||||||||||||||||||||||||
Total Operating Revenues | 29,855 | 18,179 | (13,397 | ) | 34,637 | 29,897 | 19,288 | (14,633 | ) | 34,552 | ||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||||||
Operations and support | 16,609 | 11,210 | (8,054 | ) | 19,765 | 17,196 | 12,051 | (9,271 | ) | 19,976 | ||||||||||||||||||||||||||
EBITDA | 13,246 | 6,969 | (5,343 | ) | 14,872 | 12,701 | 7,237 | (5,362 | ) | 14,576 | ||||||||||||||||||||||||||
Depreciation and amortization | 3,613 | 2,945 | (2,350 | ) | 4,208 | 3,432 | 2,943 | (2,395 | ) | 3,980 | ||||||||||||||||||||||||||
Total Operating Expense | 20,222 | 14,155 | (10,404 | ) | 23,973 | 20,628 | 14,994 | (11,666 | ) | 23,956 | ||||||||||||||||||||||||||
Operating Income | $ | 9,633 | $ | 4,024 | $ | (2,993 | ) | $ | 10,664 | $ | 9,269 | $ | 4,294 | $ | (2,967 | ) | $ | 10,596 | ||||||||||||||||||
1Business wireline operations reported in Business Solutions segment.
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Nine Months Ended | ||||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||||||||||||||||||
Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | |||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||
Wireless service | $ | 19,644 | $ | 23,969 | $ | - | $ | 43,613 | $ | 20,805 | $ | 23,868 | $ | - | $ | 44,673 | ||||||||||||||||
Fixed strategic services | - | 9,089 | (9,089 | ) | - | - | 8,469 | (8,469 | ) | - | ||||||||||||||||||||||
Legacy voice and data services | - | 10,572 | (10,572 | ) | - | - | 12,577 | (12,577 | ) | - | ||||||||||||||||||||||
Other service and equipment | - | 2,513 | (2,513 | ) | - | - | 2,619 | (2,619 | ) | - | ||||||||||||||||||||||
Wireless equipment | 3,635 | 4,873 | - | 8,508 | 3,976 | 5,422 | - | 9,398 | ||||||||||||||||||||||||
Total Operating Revenues | 23,279 | 51,016 | (22,174 | ) | 52,121 | 24,781 | 52,955 | (23,665 | ) | 54,071 | ||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Operations and support | 13,599 | 30,722 | (14,013 | ) | 30,308 | 14,343 | 32,584 | (15,105 | ) | 31,822 | ||||||||||||||||||||||
EBITDA | 9,680 | 20,294 | (8,161 | ) | 21,813 | 10,438 | 20,371 | (8,560 | ) | 22,249 | ||||||||||||||||||||||
Depreciation and amortization | 2,621 | 6,972 | (3,594 | ) | 5,999 | 2,798 | 7,568 | (4,122 | ) | 6,244 | ||||||||||||||||||||||
Total Operating Expense | 16,220 | 37,694 | (17,607 | ) | 36,307 | 17,141 | 40,152 | (19,227 | ) | 38,066 | ||||||||||||||||||||||
Operating Income | $ | 7,059 | $ | 13,322 | $ | (4,567 | ) | $ | 15,814 | $ | 7,640 | $ | 12,803 | $ | (4,438 | ) | $ | 16,005 | ||||||||||||||
1 Non-wireless (fixed) operations reported in Business Solutions segment. |
AT&T INC.
JUNE 30, 2017
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At SeptemberJune 30, 2017,2018, we had interest rate swaps with a notional value of $10,775$7,333 and a fair value of $11.
We havefixed-to-fixed andfloating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $38,694$36,092 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 $(842)$(290) at SeptemberJune 30, 2017.
We have foreign exchange contracts with a U.S. dollar notional value of $2,399 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 are amortized into income in the same period the hedged transaction affects earnings and qualify as cash flow hedges with a net fair value of $55 at June 30, 2018.
We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.
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'sCommission’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'sregistrant’s disclosure controls and procedures as of SeptemberJune 30, 2017.2018. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant'sregistrant’s disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2018.
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AT&T INC.
JUNE 30, 2017
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"“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:
Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our |
Changes in available technology and the effects of such changes, including product substitutions and deployment costs. |
Increases in our benefit |
The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limitation, special access and business data services; intercarrier compensation; interconnection obligations; pending Notices of Apparent Liability; the transition from legacy technologies toIP-based infrastructure, including the withdrawal of legacyTDM-based services; universal service; broadband deployment; wireless equipment siting regulations; E911 services; competition policy; privacy; net |
The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation ofIP-based services, relief from Carrier of Last Resort obligations and elimination of state commission review of the withdrawal of services. |
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. |
U.S. and foreign laws and regulations regarding privacy, personal data protection and user consent are complex and rapidly evolving and could result in impact to our business plans, increased costs, or claims against us that may harm our reputation. |
● | Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP andover-the-top video service), subscriber reluctance to purchase new wireless handsets, and our ability to maintain capital expenditures. |
The extent of competition including from governmental networks and other providers and the resulting pressure on customer totals and segment operating margins. |
Our ability to develop attractive and profitable product/service offerings to offset increasing |
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 |
The continued development and delivery of attractive and profitable video and broadband offerings; the extent to which regulatory andbuild-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 continued ability to maintain margins, attract and offer a diverse portfolio of video, wireless service and devices and device financing plans. |
Our ability to generate advertising revenue from attractive video content, especially from WarnerMedia, in the face of unpredictable and rapidly evolving public viewing habits. |
● | The availability and cost of additional wireless spectrum 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 video and 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. |
The impact from major equipment 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, natural disasters, 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. |
The U.S. Department of Justice prevailing on its appeal of the court decision permitting our |
● | Our ability to successfully |
Our ability to take advantage of the desire of advertisers to change traditional video advertising models. |
● | Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements. |
Our increased exposure to |
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.
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AT&T INC.
JUNE 30, 2017
PART II – OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form10-K was filed. For
Our ability to successfully integrate our June 2018 acquisition of Time Warner, including the third quarter 2017, there were no such material developments.risk that the costs savings and revenue synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due to the issuance of additional shares; the addition of Time Warner’s existing debt to our balance sheet; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.
We completed our acquisition of Time Warner in June 2018. We believe that the acquisition will give us the scale, resources and ability to deploy video content more efficiently to more customers than otherwise possible and to provide very attractive integrated offerings of video, broadband and wireless services; compete more effectively against other video providers as well as other technology, media and communications companies; create premium advertising opportunities, and produce cost and revenue synergies. We must integrate a large number of operational and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. This acquisition also has increased the amount of debt on our balance sheet leading to additional interest expense and, due to the additional shares issued, will result in additional cash being required for any dividends declared. Both of these factors could put pressure on our financial flexibility to continue capital investments, develop new services and declare future dividends. In addition, events outside our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition. Following the closing, the U.S. Department of Justice filed an appeal of the court decision allowing us to complete the acquisition; we believe the lower court decision will be upheld.
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AT&T INC. JUNE 30, 2018 PART II – OTHER INFORMATION - CONTINUED Dollars in millions except per share amounts Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(c) A summary of our repurchases of common stock during the |
(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 | ||||||||||||
April 1, 2018 - April 30, 2018 | 6,318,863 | $ | 32.99 | 6,317,000 | 381,979,000 | |||||||||||
May 1, 2018 - May 31, 2018 | 6,319,909 | 33.37 | 6,317,000 | 375,662,000 | ||||||||||||
June 1, 2018 - June 30, 2018 | 738,393 | 33.23 | - | 375,662,000 | ||||||||||||
Total | 13,377,165 | $ | 33.18 | 12,634,000 |
1 | |||||||||
stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. | |||||||||
The authorizations have no expiration date.
2 | Of the shares repurchased, 10,957 shares were acquired through the withholding of taxes on the vesting of restricted stock | ||||||||
and performance shares or on the exercise price of options. | |||||||||
3 | Of the shares repurchased, 732,208 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:
Number | Exhibit Description | 10-a | AT&T Health Plan | 10-b | Agreement between Robert Quinn and AT&T Inc. | 12 | Computation of Ratios of Earnings to Fixed Charges | 31 | Rule13a-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 | XBRL Instance Document | |
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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. | ||||||
August 2, 2018 | /s/ John J. Stephens | |||||
John J. Stephens | ||||||
Senior Executive Vice President and Chief Financial Officer |
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