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T AT&T

Filed: 2 Nov 18, 4:03pm
 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

  

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 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 Number 1-8610

 

AT&T INC.

 

Incorporated under the laws of the State of Delaware

I.R.S. Employer Identification Number 43-1301883

 

208 S. Akard St., Dallas, Texas 75202

Telephone Number: (210) 821-4105

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                                                                                                                                           Yes [X]    No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

                                                                                                                                                                 Yes [X]   No [  ]

 

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

 

Large accelerated filer

[X]

 

Accelerated filer

[   ]

Non-accelerated filer

[   ]

 

Smaller reporting company

[   ]

 

 

 

Emerging growth company

[   ]

 

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

                                                                                                                                                                              Yes [   ]   No [   ]

 

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

                                                                                                                                                                              Yes [   ]   No [X]

At October 31, 2018, there were 7,278 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,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

As Adjusted

 

 

 

 

As Adjusted

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

Service

$

41,297

 

$

36,378

 

$

109,849

 

$

109,372

Equipment

 

4,442

 

 

3,290

 

 

12,914

 

 

9,498

Total operating revenues

 

45,739

 

 

39,668

 

 

122,763

 

 

118,870

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

   Equipment

 

4,828

 

 

4,191

 

 

14,053

 

 

12,177

   Broadcast, programming and operations

 

7,227

 

 

5,284

 

 

17,842

 

 

15,156

   Other cost of revenues (exclusive of depreciation and

         amortization shown separately below)

 

8,651

 

 

9,694

 

 

24,215

 

 

28,551

Selling, general and administrative

 

9,598

 

 

8,650

 

 

26,179

 

 

25,981

Depreciation and amortization

 

8,166

 

 

6,042

 

 

20,538

 

 

18,316

Total operating expenses

 

38,470

 

 

33,861

 

 

102,827

 

 

100,181

Operating Income

 

7,269

 

 

5,807

 

 

19,936

 

 

18,689

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,051)

 

 

(1,686)

 

 

(5,845)

 

 

(4,374)

Equity in net income (loss) of affiliates

 

(64)

 

 

11

 

 

(71)

 

 

(148)

Other income (expense) – net

 

1,053

 

 

842

 

 

5,108

 

 

2,255

Total other income (expense)

 

(1,062)

 

 

(833)

 

 

(808)

 

 

(2,267)

Income Before Income Taxes

 

6,207

 

 

4,974

 

 

19,128

 

 

16,422

Income tax expense

 

1,391

 

 

1,851

 

 

4,305

 

 

5,711

Net Income

 

4,816

 

 

3,123

 

 

14,823

 

 

10,711

Less: Net Income Attributable to Noncontrolling Interest

 

(98)

 

 

(94)

 

 

(311)

 

 

(298)

Net Income Attributable to AT&T

$

4,718

 

$

3,029

 

$

14,512

 

$

10,413

Basic Earnings Per Share Attributable to AT&T

$

0.65

 

$

0.49

 

$

2.19

 

$

1.69

Diluted Earnings Per Share Attributable to AT&T

$

0.65

 

$

0.49

 

$

2.19

 

$

1.69

Weighted Average Number of Common Shares

   Outstanding – Basic (in millions)

 

7,284

 

 

6,162

 

 

6,603

 

 

6,164

Weighted Average Number of Common Shares

   Outstanding – with Dilution (in millions)

 

7,320

 

 

6,182

 

 

6,630

 

 

6,184

Dividends Declared Per Common Share

$

0.50

 

$

0.49

 

$

1.50

 

$

1.47

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

2


 

AT&T INC.

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

Dollars in millions

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

Net income

$

4,816

 

$

3,123

 

$

14,823

 

$

10,711

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

    Foreign currency:

 

 

 

 

 

 

 

 

 

 

 

        Translation adjustment (includes $(7), $10, $(37) and $6

            attributable to noncontrolling interest), net of taxes of

            $(2), $74, $(145) and $580

 

(14)

 

 

151

 

 

(824)

 

 

490

    Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

        Net unrealized gains (losses), net of taxes of $(4), $28, $(8)

            and $72

 

(10)

 

 

45

 

 

(22)

 

 

128

        Reclassification adjustment included in net income, net of

            taxes of $0, $(50), $0 and $(54)

 

-

 

 

(79)

 

 

-

 

 

(86)

     Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

        Net unrealized gains (losses), net of taxes of $0, $178,

            $68 and $(94)

 

4

 

 

330

 

 

257

 

 

(174)

        Reclassification adjustment included in net income, net of

            taxes of $3, $5, $9 and $15

 

12

 

 

10

 

 

35

 

 

29

     Defined benefit postretirement plans:

 

 

 

 

 

 

 

 

 

 

 

        Net prior service (cost) credit arising during period, net of

            taxes of $0, $0, $173 and $594

 

-

 

 

-

 

 

530

 

 

969

        Amortization of net prior service credit included in net

            income, net of taxes of $(108), $(157), $(322) and $(447)

 

(332)

 

 

(256)

 

 

(989)

 

 

(731)

Other comprehensive income (loss)

 

(340)

 

 

201

 

 

(1,013)

 

 

625

Total comprehensive income

 

4,476

 

 

3,324

 

 

13,810

 

 

11,336

Less: Total comprehensive income attributable to

            noncontrolling interest

 

(91)

 

 

(104)

 

 

(274)

 

 

(304)

Total Comprehensive Income Attributable to AT&T

$

4,385

 

$

3,220

 

$

13,536

 

$

11,032

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

3


AT&T INC.

CONSOLIDATED BALANCE SHEETS

Dollars in millions except per share amounts

 

September 30,

 

December 31,

 

2018

 

2017

Assets

(Unaudited)

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

$

8,657

 

$

50,498

Accounts receivable - net of allowances for doubtful accounts of $845 and $663

 

26,312

 

 

16,522

Prepaid expenses

 

1,860

 

 

1,369

Other current assets

 

16,278

 

 

10,757

Total current assets

 

53,107

 

 

79,146

Noncurrent Inventories and Theatrical Film and Television Production Costs

 

7,221

 

 

-

Property, plant and equipment

 

327,680

  

 

313,499

   Less: accumulated depreciation and amortization

 

(197,332)

 

 

(188,277)

Property, Plant and Equipment – Net

 

130,348

 

 

125,222

Goodwill

 

146,475

 

 

105,449

Licenses

 

96,077

 

 

96,136

Trademarks and Trade Names – Net

 

24,389

 

 

7,021

Distribution Networks – Net

 

16,962

 

 

-

Other Intangible Assets – Net

 

28,673

 

 

11,119

Investments in and Advances to Equity Affiliates

 

6,128

 

 

1,560

Other Assets

 

25,490

 

 

18,444

Total Assets

$

534,870

 

$

444,097

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Debt maturing within one year

$

14,905

 

$

38,374

Accounts payable and accrued liabilities

 

39,375

 

 

34,470

Advanced billing and customer deposits

 

6,045

 

 

4,213

Accrued taxes

 

1,460

 

 

1,262

Dividends payable

 

3,635

 

 

3,070

Total current liabilities

 

65,420

 

 

81,389

Long-Term Debt

 

168,513

 

 

125,972

Deferred Credits and Other Noncurrent Liabilities

 

 

 

 

 

Deferred income taxes

 

60,495

 

 

43,207

Postemployment benefit obligation

 

28,981

 

 

31,775

Other noncurrent liabilities

 

26,490

 

 

19,747

Total deferred credits and other noncurrent liabilities

 

115,966

 

 

94,729

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2018 and

   December 31, 2017: issued 7,620,748,598 at September 30, 2018 and 6,495,231,088 at

   December 31, 2017)

 

7,621

 

 

6,495

Additional paid-in capital

 

125,706

 

 

89,563

Retained earnings

 

57,624

 

 

50,500

Treasury stock (350,465,537 at September 30, 2018 and 355,806,544

 

 

 

 

 

   at December 31, 2017, at cost)

 

(12,486)

 

 

(12,714)

Accumulated other comprehensive income

 

5,383

 

 

7,017

Noncontrolling interest

 

1,123

 

 

1,146

Total stockholders’ equity

 

184,971

 

 

142,007

Total Liabilities and Stockholders’ Equity

$

534,870

 

$

444,097

See Notes to Consolidated Financial Statements.

 

 

 

 

 

4


 

AT&T INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in millions

(Unaudited)

  

 

  

 

Nine months ended

 

September 30,

 

2018

 

2017

 

 

 

 

As Adjusted

Operating Activities

 

 

 

  

 

Net income

$

14,823

 

$

10,711

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

   Depreciation and amortization

 

20,538

 

 

18,316

   Amortization of television and film costs

 

1,608

 

 

-

   Undistributed earnings from investments in equity affiliates

 

312

 

 

171

   Provision for uncollectible accounts

 

1,240

 

 

1,216

   Deferred income tax expense

 

2,934

 

 

3,254

   Net (gain) loss from investments, net of impairments

 

(501)

 

 

(114)

   Actuarial (gain) loss on pension and postretirement benefits

 

(2,726)

 

 

(259)

Changes in operating assets and liabilities:

 

 

 

 

 

   Accounts receivable

 

(1,018)

 

 

(652)

   Other current assets, inventories and theatrical film and television production costs

 

(2,729)

 

 

(106)

   Accounts payable and other accrued liabilities

 

(1,385)

 

 

(1,437)

   Equipment installment receivables and related sales

 

220

 

 

451

   Deferred customer contract acquisition and fulfillment costs

 

(2,657)

 

 

(1,102)

Retirement benefit funding

 

(420)

 

 

(420)

Other net

 

1,283

 

 

(1,556)

Total adjustments

 

16,699

 

 

17,762

Net Cash Provided by Operating Activities

 

31,522

 

 

28,473

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

   Purchase of property and equipment

 

(16,695)

 

 

(15,756)

   Interest during construction

 

(404)

 

 

(718)

Acquisitions, net of cash acquired

 

(43,116)

 

 

1,154

Dispositions

 

983

 

 

56

(Purchases) sales of securities, net

 

(234)

 

 

235

Advances to and investments in equity affiliates, net

 

(1,021)

 

 

-

Cash collections of deferred purchase price

 

500

 

 

665

Net Cash Used in Investing Activities

 

(59,987)

 

 

(14,364)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in short-term borrowings with original maturities of three months or less

 

(1,071)

 

 

(2)

Issuance of other short-term borrowings

 

4,852

 

 

-

Repayment of other short-term borrowings

 

(1,075)

 

 

-

Issuance of long-term debt

 

38,325

 

 

46,761

Repayment of long-term debt

 

(43,579)

 

 

(10,309)

Purchase of treasury stock

 

(577)

 

 

(460)

Issuance of treasury stock

 

359

 

 

26

Dividends paid

 

(9,775)

 

 

(9,030)

Other

 

(1,138)

 

 

1,716

Net Cash (Used in) Provided by Financing Activities

 

(13,679)

 

 

28,702

Net (decrease) increase in cash and cash equivalents and restricted cash

 

(42,144)

 

 

42,811

Cash and cash equivalents and restricted cash beginning of year

 

50,932

 

 

5,935

Cash and Cash Equivalents and Restricted Cash End of Period

$

8,788

 

$

48,746

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)

 

September 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

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

Balance at beginning of year

 

 

$

89,563

Issuance of common stock

 

 

 

35,473

Issuance of treasury stock

 

 

 

(49)

Share-based payments

 

 

 

719

Balance at end of period

 

 

$

125,706

 

 

 

 

 

Retained Earnings

 

 

 

 

Balance at beginning of year

 

 

$

50,500

Net income attributable to AT&T ($2.19 per diluted share)

 

 

 

14,512

Dividends to stockholders ($1.50 per share)

 

 

 

(10,388)

Cumulative effect of accounting changes

 

 

 

3,000

Balance at end of period

 

 

$

57,624

 

 

 

 

 

Treasury Stock

 

 

 

 

Balance at beginning of year

(356)

 

$

(12,714)

Repurchase and acquisition of common stock

(19)

 

 

(641)

Issuance of treasury stock

24

 

 

869

Balance at end of period

(351)

 

$

(12,486)

 

 

 

 

 

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

 

 

 

(976)

Amounts reclassified to retained earnings

 

 

 

(658)

Balance at end of period

 

 

$

5,383

 

 

 

 

 

Noncontrolling Interest

 

 

 

 

Balance at beginning of year

 

 

$

1,146

Net income attributable to noncontrolling interest

 

 

 

311

Contributions

 

 

 

8

Distributions

 

 

 

(332)

Acquisition of noncontrolling interest

 

 

 

1

Acquisition of interest held by noncontrolling owners

 

 

 

(9)

Translation adjustments attributable to noncontrolling interest, net of taxes

 

 

 

(37)

Cumulative effect of accounting changes

 

 

 

35

Balance at end of period

 

 

$

1,123

 

 

 

 

 

Total Stockholders’ Equity at beginning of year

 

 

$

142,007

Total Stockholders’ Equity at end of period

 

 

$

184,971

See Notes to Consolidated Financial Statements.

 

6


AT&T INC.
SEPTEMBER 30, 2018

 

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 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, including the operating results of recently acquired Time Warner Inc. (referred to as “Time Warner” or “WarnerMedia”) as of June 15, 2018 (see Note 8).

 

All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees’ other comprehensive income (OCI) items, including 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. Certain prior period amounts have been conformed to the current period’s presentation, including impacts for the adoption of recent accounting standards and changes in our reportable segments (see Note 4).

 

Tax Reform  The 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 a one-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 nine 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, which had an impact on net income of $107, or $0.02 per diluted share, in the third quarter and $233, or $0.04 per diluted share, for the first nine months of 2018.

 

Film and Television Production Cost Recognition, Participations and Residuals and Impairments  Film and television production costs include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value. The amount of capitalized film and television production costs recognized as broadcast, programming and operations expenses for a given period is determined using the film forecast computation method. Under this method, the amortization of capitalized costs and the accrual of participations and residuals is based on the proportion of the film’s revenues recognized for such period to the film’s estimated remaining ultimate revenues (i.e., the total revenue to be received throughout a film’s life cycle).

 

7


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The process of estimating a film’s ultimate revenues requires us to make a series of significant judgments related to future revenue generating activities associated with a particular film. We estimate the ultimate revenues, less additional costs to be incurred (including exploitation and participation costs), in order to determine whether the value of a film or television series is impaired and requires an immediate write-off of unrecoverable film and television production costs. We also determine, using the film forecast computation method, the amount of capitalized film and television production costs and the amount of participations and residuals to be recognized as broadcast, programming and operations expenses for a given film or television series in a particular period. To the extent that the ultimate revenues are adjusted, the resulting gross margin reported on the exploitation of that film or television series in a period is also adjusted.

 

Prior to the theatrical release of a film, our estimates are based on factors such as the historical performance of similar films, the star power of the lead actors, the rating and genre of the film, pre-release market research (including test market screenings), international distribution plans and the expected number of theaters in which the film will be released. In the absence of revenues directly related to the exhibition of owned film or television programs on our television networks, premium pay television or over-the-top (OTT) services, management estimates a portion of the unamortized costs that are representative of the utilization of that film or television program in that exhibition and expenses such costs as the film or television program is exhibited. The period over which ultimate revenues are estimated is generally not to exceed ten years from the initial release of a motion picture or from the date of delivery of the first episode of an episodic television series. Estimates are updated based on information available during the film’s production and, upon release, the actual results of each film. Changes in estimates of ultimate revenues from period to period affect the amount of production costs amortized in a given period and, therefore, could have an impact on the financial results for that period.

 

Licensed Programming Inventory Cost Recognition and Impairment  We enter into agreements to license programming exhibition rights from licensors. A programming inventory asset related to these rights and a corresponding liability payable to the licensor are recorded (on a discounted basis if the license agreements are long-term) when (i) the cost of the programming is reasonably determined, (ii) the programming material has been accepted in accordance with the terms of the agreement, (iii) the programming is available for its first showing or telecast, and (iv) the license period has commenced. There are variations in the amortization methods of these rights, depending on whether the network is advertising-supported (e.g., TNT and TBS) or not advertising-supported (e.g., HBO and Turner Classic Movies).

 

For the advertising-supported networks, our general policy is to amortize each program’s costs on a straight-line basis (or per-play basis, if greater) over its license period. In circumstances where the initial airing of the program has more value than subsequent airings, an accelerated method of amortization is used. The accelerated amortization upon the first airing versus subsequent airings is determined based on a study of historical and estimated future advertising sales for similar programming. For rights fees paid for sports programming arrangements, such rights fees are amortized using a revenue-forecast model, in which the rights fees are amortized using the ratio of current period advertising revenue to total estimated remaining advertising revenue over the term of the arrangement.

 

For premium pay television and OTT services that are not advertising-supported, each licensed program’s costs are amortized on a straight-line basis over its license period or estimated period of use, beginning with the month of initial exhibition. When we have the right to exhibit feature theatrical programming in multiple windows over a number of years, historical audience viewership is used as the basis for determining the amount of programming amortization attributable to each window.

 

Licensed programming inventory is carried at the lower of unamortized cost or estimated net realizable value. For networks that generate both advertising and subscription revenues, the net realizable value of unamortized programming costs is generally evaluated based on the network’s programming taken as a whole. In assessing whether the programming inventory for a particular advertising-supported network is impaired, the net realizable value for all of the network’s programming inventory is determined based on a projection of the network’s profitability. Similarly, for premium pay television and OTT services that are not advertising-supported, an evaluation of the net realizable value of unamortized programming costs is performed based on the premium pay television and OTT services’ licensed programming taken as a whole. Specifically, the net realizable value for all premium pay television and OTT service licensed programming is determined based on projections of estimated subscription revenues less certain costs of delivering and distributing the licensed programming. Changes in management’s intended usage of a specific program, such as a decision to no longer exhibit that program and forego the use of the rights associated with the program license, results in a reassessment of that program’s net realizable value, which could result in an impairment.

8


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Recently Adopted Accounting Standards

 

Revenue Recognition  As of January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606), using the modified retrospective method, which does not allow us to adjust prior periods. We applied the rules to all open contracts existing as of January 1, 2018, recording an increase of $2,342 to retained earnings for the cumulative effect of the change, with an offsetting contract asset of $1,737, deferred contract acquisition costs of $1,454, other asset reductions of $239, other liability reductions of $212, deferred income taxes of $787 and noncontrolling interest of $35. (See Note 5)

 

Pension and Other Postretirement Benefits  As of January 1, 2018, we adopted, with retrospective application, ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU 2017-07). We are no longer allowed to present the interest, estimated return on assets and amortization of prior service credits components of our net periodic benefit cost in our consolidated operating expenses, but rather are required to include those amounts in “other income (expense) – 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 ASU 2017-07 (presentation of benefit cost): 

 

 

 

 

Pension and Postretirement Benefits

 

 

 

Historical

 

Effect of

 

 

 

 

 

 

Accounting

 

Adoption of

 

As

 

 

 

Method

 

ASU 2017-07

 

Adjusted

For the three months ended September 30, 2018

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

Other cost of revenues

$

8,527

 

$

124

 

$

8,651

Selling, general and administrative expenses

 

9,207

 

 

391

 

 

9,598

Operating Income

 

7,784

 

 

(515)

 

 

7,269

Other Income (Expense) – net

 

538

 

 

515

 

 

1,053

Net Income

 

4,816

 

 

-

 

 

4,816

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2017

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

Other cost of revenues

$

9,431

 

$

263

 

$

9,694

Selling, general and administrative expenses

 

8,317

 

 

333

 

 

8,650

Operating Income

 

6,403

 

 

(596)

 

 

5,807

Other Income (Expense) – net

 

246

 

 

596

 

 

842

Net Income

 

3,123

 

 

-

 

 

3,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

Other cost of revenues

$

23,166

 

$

1,049

 

$

24,215

Selling, general and administrative expenses

 

22,859

 

 

3,320

 

 

26,179

Operating Income

 

24,305

 

 

(4,369)

 

 

19,936

Other Income (Expense) – net

 

739

 

 

4,369

 

 

5,108

Net Income

 

14,823

 

 

-

 

 

14,823

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2017

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

Other cost of revenues

$

27,714

 

$

837

 

$

28,551

Selling, general and administrative expenses

 

24,917

 

 

1,064

 

 

25,981

Operating Income

 

20,590

 

 

(1,901)

 

 

18,689

Other Income (Expense) – net

 

354

 

 

1,901

 

 

2,255

Net Income

 

10,711

 

 

-

 

 

10,711

9


AT&T INC.
SEPTEMBER 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, ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). Under ASU 2016-15, 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, ASU No. 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash,” (ASU 2016-18). The primary impact of ASU 2016-18 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 ASU 2016-15 (cash receipts on deferred purchase price) and ASU 2016-18 (restricted cash): 

 

 

 

 

Cash Flows

 

 

 

Historical

 

Effect of

 

Effect of

 

 

 

 

 

Accounting

 

Adoption of

 

Adoption of

 

As

 

 

 

Method

 

ASU 2016-15

 

ASU 2016-18

 

Adjusted

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Changes in other current assets

$

(2,731)

 

$

-

 

$

2

 

$

(2,729)

Equipment installment receivables and related sales

  

720

 

  

(500)

 

  

-

 

  

220

Other – net

 

1,399

 

 

-

 

 

(116)

 

 

1,283

Cash Provided by (Used in) Operating Activities

 

32,136

 

 

(500)

 

 

(114)

 

 

31,522

(Purchases) sales of securities – net

 

7

 

 

-

 

 

(241)

 

 

(234)

Cash collections of deferred purchase price

 

-

 

 

500

 

 

-

 

 

500

Cash (Used in) Provided by Investing Activities

 

(60,246)

 

 

500

 

 

(241)

 

 

(59,987)

Change in cash and cash equivalents and restricted cash

$

(41,789)

 

$

-

 

$

(355)

 

$

(42,144)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Changes in other current assets

$

(106)

 

$

-

 

$

-

 

$

(106)

Equipment installment receivables and related sales

 

1,116

 

 

(665)

 

 

-

 

 

451

Other – net

 

(1,420)

 

 

-

 

 

(136)

 

 

(1,556)

Cash Provided by (Used in) Operating Activities

 

29,274

 

 

(665)

 

 

(136)

 

 

28,473

(Purchases) sales of securities – net

 

(2)

 

 

-

 

 

237

 

 

235

Cash collections of deferred purchase price

 

-

 

 

665

 

 

-

 

 

665

Cash (Used in) Provided by Investing Activities

 

(15,266)

 

 

665

 

 

237

 

 

(14,364)

Change in cash and cash equivalents and restricted cash

$

42,711

 

$

-

 

$

100

 

$

42,811

 

Financial Instruments  As of January 1, 2018, we adopted ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01), 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 ASU 2016-01, with an offset to accumulated other comprehensive income (accumulated OCI).

 

10


AT&T INC.
SEPTEMBER 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 ASU No. 2016-02, “Leases (Topic 842),” as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. 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, 2018, 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 current methodology. We are continuing to evaluate the magnitude and other potential impacts to our financial statements.

 

NOTE 2. EARNINGS PER SHARE

 

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and nine months ended September 30, 2018 and 2017, is shown in the table below:

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

Numerators

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

   Net Income

$

4,816

 

$

3,123

 

$

14,823

 

$

10,711

   Less: Net income attributable to noncontrolling interest

 

(98)

 

 

(94)

 

 

(311)

 

 

(298)

   Net Income attributable to AT&T

 

4,718

 

 

3,029

 

 

14,512

 

 

10,413

   Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

      Share-based payment

 

4

 

 

3

 

 

13

 

 

9

Numerator for diluted earnings per share

$

4,722

 

$

3,032

 

$

14,525

 

$

10,422

Denominators (000,000)

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

   Weighted average number of common shares outstanding

 

7,284

 

 

6,162

 

 

6,603

 

 

6,164

   Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

      Share-based payment (in shares)

 

36

 

 

20

 

 

27

 

 

20

Denominator for diluted earnings per share

 

7,320

 

 

6,182

 

 

6,630

 

 

6,184

Basic earnings per share attributable to AT&T

$

0.65

 

$

0.49

 

$

2.19

 

$

1.69

Diluted earnings per share attributable to AT&T

$

0.65

 

$

0.49

 

$

2.19

 

$

1.69

 

 

11


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 3. OTHER COMPREHENSIVE INCOME

 

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

 

  

Foreign Currency Translation Adjustment

 

Net Unrealized Gains (Losses) on 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, 2017

$

(2,054)

 

$

660

 

$

1,402

 

$

7,009

 

$

7,017

Other comprehensive income

   (loss) before reclassifications

 

(787)

 

 

(22)

 

 

257

 

 

530

 

 

(22)

Amounts reclassified

   from accumulated OCI

 

-

1

 

-

1

 

35

2

 

(989)

3

 

(954)

Net other comprehensive

   income (loss)

 

(787)

 

 

(22)

 

 

292

 

 

(459)

 

 

(976)

Amounts reclassified to

   retained earnings

 

-

 

 

(658)

4

 

-

 

 

-

 

 

(658)

Balance as of September 30, 2018

$

(2,841)

 

$

(20)

 

$

1,694

 

$

6,550

 

$

5,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

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

 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 ASU 2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings

 

(see Note 1).

                

 

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 four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America, and (4) Xandr.

 

12


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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

 

Due to organizational changes and our June 14, 2018 acquisition of Time Warner, effective for the quarter ended September 30, 2018, we revised our operating segments to align with the new management structure and organizational responsibilities, and have accordingly recast our segment disclosures for all periods presented. As a result of the realignment to combine all domestic wireless products and services into the Mobility business unit, which is now one of our reporting units, $27,568 of goodwill from our former Business Solutions segment and $16,540 from our former Consumer Mobility segment was reallocated to the Mobility business unit.   

 

With our acquisition of Time Warner, 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 of pre-acquisition released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we report the historical content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historical content production cost amortization reported in the segment results was $1,491 for the quarter ended September 30, 2018, $772 of which was for pre-acquisition released programming. For the 108-day period included in our nine months ended September 30, 2018, historical content production cost amortization reported in the segment results was $1,677, $870 of which was for pre-acquisition released programming.

 

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

·        Mobility provides nationwide wireless service and equipment.

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

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

 

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

·        Turner is comprised of the historic Turner division as well the financial results of our RSN. This business unit creates and programs branded news, entertainment, sports and kids multi-platform content that is sold to various distribution affiliates. Turner also sells advertising on its networks and digital properties.

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

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

 

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

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

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

 

13


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The Xandr segment provides advertising services. These services utilize data insights to develop higher value targeted advertising. Certain revenues in this segment are also reported by the Communications segment and are eliminated upon consolidation.

 

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

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

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

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

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

 

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

 

14


AT&T INC.

SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended September 30, 2018

 

 

Revenues

 

 

Operations

and Support

Expenses

 

 

EBITDA

 

 

Depreciation

and

Amortization

 

 

Operating

Income (Loss)

 

 

Equity in Net

Income (Loss) of

Affiliates

 

 

Segment

Contribution

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Mobility

$

17,938

 

$

10,255

 

$

7,683

 

$

2,079

 

$

5,604

 

$

(1)

 

$

5,603

  Entertainment Group

 

11,589

 

 

9,155

 

 

2,434

 

 

1,331

 

 

1,103

 

 

1

 

 

1,104

  Business Wireline

 

6,703

 

 

4,030

 

 

2,673

 

 

1,197

 

 

1,476

 

 

(1)

 

 

1,475

Total Communications

 

36,230

 

 

23,440

 

 

12,790

 

 

4,607

 

 

8,183

 

 

(1)

 

 

8,182

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Turner

 

2,988

 

 

1,487

 

 

1,501

 

 

59

 

 

1,442

 

 

7

 

 

1,449

  Home Box Office

 

1,644

 

 

991

 

 

653

 

 

25

 

 

628

 

 

2

 

 

630

  Warner Bros.

 

3,720

 

 

3,104

 

 

616

 

 

40

 

 

576

 

 

(23)

 

 

553

  Other

 

(148)

 

 

(79)

 

 

(69)

 

 

10

 

 

(79)

 

 

(25)

 

 

(104)

Total WarnerMedia

 

8,204

 

 

5,503

 

 

2,701

 

 

134

 

 

2,567

 

 

(39)

 

 

2,528

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Vrio

 

1,102

 

 

877

 

 

225

 

 

168

 

 

57

 

 

9

 

 

66

  Mexico

 

731

 

 

869

 

 

(138)

 

 

129

 

 

(267)

 

 

-

 

 

(267)

Total Latin America

 

1,833

 

 

1,746

 

 

87

 

 

297

 

 

(210)

 

 

9

 

 

(201)

Xandr

 

445

 

 

109

 

 

336

 

 

3

 

 

333

 

 

-

 

 

333

Segment Total

$

46,712

 

$

30,798

 

$

15,914

 

$

5,041

 

$

10,873

 

$

(31)

 

$

10,842

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Corporate

 

308

 

 

(18)

 

 

326

 

 

797

 

 

(471)

 

 

 

 

 

 

  Acquisition-related items

 

-

 

 

362

 

 

(362)

 

 

2,329

 

 

(2,691)

 

 

 

 

 

 

  Certain significant items

 

-

 

 

75

 

 

(75)

 

 

-

 

 

(75)

 

 

 

 

 

 

Eliminations and consolidations

 

(1,281)

 

 

(913)

 

 

(368)

 

 

(1)

 

 

(367)

 

 

 

 

 

 

AT&T Inc.

$

45,739

 

$

30,304

 

$

15,435

 

$

8,166

 

$

7,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

 

Revenues

 

 

Operations and Support Expenses

 

 

EBITDA

 

 

Depreciation and Amortization

 

 

Operating Income (Loss)

 

 

Equity in Net

Income (Loss) of

Affiliates

 

 

Segment Contribution

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Mobility

$

52,575

 

$

30,020

 

$

22,555

 

$

6,287

 

$

16,268

 

$

(1)

 

$

16,267

  Entertainment Group

 

34,498

 

 

26,623

 

 

7,875

 

 

3,986

 

 

3,889

 

 

(1)

 

 

3,888

  Business Wireline

 

20,100

 

 

12,084

 

 

8,016

 

 

3,547

 

 

4,469

 

 

(1)

 

 

4,468

Total Communications

 

107,173

 

 

68,727

 

 

38,446

 

 

13,820

 

 

24,626

 

 

(3)

 

 

24,623

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Turner 

 

3,767

 

 

1,933

 

 

1,834

 

 

71

 

 

1,763

 

 

39

 

 

1,802

  Home Box Office

 

1,925

 

 

1,162

 

 

763

 

 

30

 

 

733

 

 

1

 

 

734

  Warner Bros.

 

4,227

 

 

3,507

 

 

720

 

 

54

 

 

666

 

 

(24)

 

 

642

  Other

 

(210)

 

 

(106)

 

 

(104)

 

 

11

 

 

(115)

 

 

(71)

 

 

(186)

Total WarnerMedia

 

9,709

 

 

6,496

 

 

3,213

 

 

166

 

 

3,047

 

 

(55)

 

 

2,992

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Vrio

 

3,710

 

 

2,894

 

 

816

 

 

559

 

 

257

 

 

24

 

 

281

  Mexico

 

2,099

 

 

2,459

 

 

(360)

 

 

383

 

 

(743)

 

 

-

 

 

(743)

Total Latin America

 

5,809

 

 

5,353

 

 

456

 

 

942

 

 

(486)

 

 

24

 

 

(462)

Xandr

 

1,174

 

 

218

 

 

956

 

 

4

 

 

952

 

 

-

 

 

952

Segment Total

$

123,865

 

$

80,794

 

$

43,071

 

$

14,932

 

$

28,139

 

$

(34)

 

$

28,105

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Corporate

 

961

 

 

1,378

 

 

(417)

 

 

938

 

 

(1,355)

 

 

 

 

 

 

  Acquisition-related items

 

-

 

 

750

 

 

(750)

 

 

4,669

 

 

(5,419)

 

 

 

 

 

 

  Certain significant items

 

-

 

 

407

 

 

(407)

 

 

-

 

 

(407)

 

 

 

 

 

 

Eliminations and consolidations

 

(2,063)

 

 

(1,040)

 

 

(1,023)

 

 

(1)

 

 

(1,022)

 

 

 

 

 

 

AT&T Inc.

$

122,763

 

$

82,289

 

$

40,474

 

$

20,538

 

$

19,936

 

 

 

 

 

 

 

15

 


AT&T INC.

SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Mobility

$

17,370

 

$

10,029

 

$

7,341

 

$

2,008

 

$

5,333

 

$

-

 

$

5,333

  Entertainment Group

 

12,467

 

 

9,804

 

 

2,663

 

 

1,379

 

 

1,284

 

 

(1)

 

 

1,283

  Business Wireline

 

7,278

 

 

4,635

 

 

2,643

 

 

1,189

 

 

1,454

 

 

1

 

 

1,455

Total Communications

 

37,115

 

 

24,468

 

 

12,647

 

 

4,576

 

 

8,071

 

 

-

 

 

8,071

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Turner

 

107

 

 

97

 

 

10

 

 

1

 

 

9

 

 

13

 

 

22

  Home Box Office

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

  Warner Bros.

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

  Other

 

-

 

 

1

 

 

(1)

 

 

-

 

 

(1)

 

 

(19)

 

 

(20)

Total WarnerMedia

 

107

 

 

98

 

 

9

 

 

1

 

 

8

 

 

(6)

 

 

2

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Vrio

 

1,363

 

 

1,075

 

 

288

 

 

206

 

 

82

 

 

17

 

 

99

  Mexico

 

736

 

 

862

 

 

(126)

 

 

98

 

 

(224)

 

 

-

 

 

(224)

Total Latin America

 

2,099

 

 

1,937

 

 

162

 

 

304

 

 

(142)

 

 

17

 

 

(125)

Xandr

 

333

 

 

39

 

 

294

 

 

-

 

 

294

 

 

-

 

 

294

Segment Total

$

39,654

 

$

26,542

 

$

13,112

 

$

4,881

 

$

8,231

 

$

11

 

$

8,242

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Corporate

 

382

 

 

801

 

 

(419)

 

 

24

 

 

(443)

 

 

 

 

 

 

  Acquisition-related items

 

-

 

 

134

 

 

(134)

 

 

1,136

 

 

(1,270)

 

 

 

 

 

 

  Certain significant items

 

(89)

 

 

325

 

 

(414)

 

 

1

 

 

(415)

 

 

 

 

 

 

  Eliminations and consolidations

 

(279)

 

 

17

 

 

(296)

 

 

-

 

 

(296)

 

 

 

 

 

 

AT&T Inc.

$

39,668

 

$

27,819

 

$

11,849

 

$

6,042

 

$

5,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Mobility

$

51,922

 

$

30,005

 

$

21,917

 

$

5,988

 

$

15,929

 

$

-

 

$

15,929

  Entertainment Group

 

37,435

 

 

28,711

 

 

8,724

 

 

4,254

 

 

4,470

 

 

-

 

 

4,470

  Business Wireline

 

21,911

 

 

13,906

 

 

8,005

 

 

3,583

 

 

4,422

 

 

-

 

 

4,422

Total Communications

 

111,268

 

 

72,622

 

 

38,646

 

 

13,825

 

 

24,821

 

 

-

 

 

24,821

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Turner

 

323

 

 

273

 

 

50

 

 

3

 

 

47

 

 

32

 

 

79

  Home Box Office

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

  Warner Bros.

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

  Other

 

-

 

 

3

 

 

(3)

 

 

-

 

 

(3)

 

 

(55)

 

 

(58)

Total WarnerMedia

 

323

 

 

276

 

 

47

 

 

3

 

 

44

 

 

(23)

 

 

21

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Vrio

 

4,065

 

 

3,123

 

 

942

 

 

642

 

 

300

 

 

62

 

 

362

  Mexico

 

1,989

 

 

2,345

 

 

(356)

 

 

263

 

 

(619)

 

 

-

 

 

(619)

Total Latin America

 

6,054

 

 

5,468

 

 

586

 

 

905

 

 

(319)

 

 

62

 

 

(257)

Xandr

 

992

 

 

118

 

 

874

 

 

1

 

 

873

 

 

-

 

 

873

Segment Total

$

118,637

 

$

78,484

 

$

40,153

 

$

14,734

 

$

25,419

 

$

39

 

$

25,458

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Corporate

 

1,182

 

 

2,440

 

 

(1,258)

 

 

73

 

 

(1,331)

 

 

 

 

 

 

  Acquisition-related items

 

-

 

 

622

 

 

(622)

 

 

3,508

 

 

(4,130)

 

 

 

 

 

 

  Certain significant items

 

(89)

 

 

302

 

 

(391)

 

 

1

 

 

(392)

 

 

 

 

 

 

  Eliminations and consolidations

 

(860)

 

 

17

 

 

(877)

 

 

-

 

 

(877)

 

 

 

 

 

 

AT&T Inc.

$

118,870

 

$

81,865

 

$

37,005

 

$

18,316

 

$

18,689

 

 

 

 

 

 

 

16


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter

 

 

Nine-month period

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Communications

$

8,182

 

$

8,071

 

$

24,623

 

$

24,821

WarnerMedia

 

2,528

 

 

2

 

 

2,992

 

 

21

Latin America

 

(201)

 

 

(125)

 

 

(462)

 

 

(257)

Xandr

 

333

 

 

294

 

 

952

 

 

873

Segment Contribution

 

10,842

 

 

8,242

 

 

28,105

 

 

25,458

Reconciling Items:

 

 

 

 

 

 

 

 

 

 

 

   Corporate and Other

 

(471)

 

 

(443)

 

 

(1,355)

 

 

(1,331)

   Merger and integration items

 

(362)

 

 

(134)

 

 

(750)

 

 

(622)

   Amortization of intangibles acquired

 

(2,329)

 

 

(1,136)

 

 

(4,669)

 

 

(3,508)

   Employee separation charges

 

(75)

 

 

(208)

 

 

(259)

 

 

(268)

   Gain on wireless spectrum transactions

 

-

 

 

-

 

 

-

 

 

181

   Natural disaster items

 

-

 

 

(207)

 

 

(104)

 

 

(207)

   Foreign currency devaluation

 

-

 

 

-

 

 

(44)

 

 

(98)

   Segment equity in net income of affiliates

 

31

 

 

(11)

 

 

34

 

 

(39)

   Eliminations and consolidations

 

(367)

 

 

(296)

 

 

(1,022)

 

 

(877)

AT&T Operating Income

 

7,269

 

 

5,807

 

 

19,936

 

 

18,689

Interest Expense

 

(2,051)

 

 

(1,686)

 

 

(5,845)

 

 

(4,374)

Equity in net income (loss) of affiliates

 

(64)

 

 

11

 

 

(71)

 

 

(148)

Other income (expense) - Net

 

1,053

 

 

842

 

 

5,108

 

 

2,255

Income Before Income Taxes

$

6,207

 

$

4,974

 

$

19,128

 

$

16,422

 

The following tables present intersegment revenues, assets, investments in equity affiliates and capital expenditures by segment.

 

Intersegment Reconciliation

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter

 

Nine-Month Period

 

2018

 

2017

 

2018

 

2017

Intersegment revenues

 

 

 

 

 

 

 

 

 

 

 

Communications

$

6

 

$

-

 

$

8

 

$

-

WarnerMedia

 

844

 

 

33

 

 

1,053

 

 

99

Latin America

 

-

 

 

-

 

 

-

 

 

-

Xandr

 

-

 

 

-

 

 

-

 

 

-

Total Intersegment Revenues

 

850

 

 

33

 

 

1,061

 

 

99

Consolidations

 

431

 

 

246

 

 

1,002

 

 

761

Eliminations and consolidations

$

1,281

 

$

279

 

$

2,063

 

$

860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in Equity Method Investees

Capital Expenditures

 

 

 

 

 

 

 

 

 

 

At September 30, 2018

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Communications

$

487,833

 

$

1

 

$

16,024

 

 

 

WarnerMedia

 

132,689

 

 

5,395

 

 

298

 

 

 

Latin America

 

18,420

 

 

713

 

 

524

 

 

 

Xandr

 

2,647

 

 

-

 

 

66

 

 

 

Corporate and eliminations

 

(106,719)

 

 

19

 

 

187

 

 

 

Total

$

534,870

 

$

6,128

 

$

17,099

 

 

 

 

17


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 5. REVENUE RECOGNITION

 

As of January 1, 2018, we adopted 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 Form 10-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.

 

Wireless, Advanced Data, Legacy Voice & Data Services and Equipment Revenue

We offer service-only contracts and contracts that bundle equipment used to access the services and/or with other service offerings. Some contracts have fixed terms and others are cancellable on a short-term basis (i.e., month-to-month arrangements).

 

Examples of service revenues include wireless, video entertainment (e.g., AT&T U-verse and DIRECTV), strategic services (e.g., virtual private network service), and legacy voice and data (e.g., traditional local and long-distance). These services represent a series of distinct services that is considered a separate performance obligation. 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).

 

Some of our services require customer premises equipment that, when combined and integrated with AT&T’s specific network infrastructure, facilitate the delivery of service to the customer.  In evaluating whether the equipment is a separate performance obligation, we consider the customer’s ability to benefit from the equipment on its own or together with other readily available resources and if so, whether the service and equipment are separately identifiable (i.e., is the service highly dependent on, or highly interrelated with the equipment). When the equipment does not meet the criteria to be a distinct performance obligation (e.g., equipment associated with certain video services), we allocate the total transaction price to the related service. When equipment is a distinct performance obligation, we record the sale of equipment when title has passed and the products are accepted by the customer. For devices sold through indirect channels (e.g., national dealers), revenue is recognized when the dealer accepts the device, not upon activation.

 

Our equipment and service revenues are predominantly recognized on a gross basis, as most of our services do not involve a third party and we typically control the equipment that is sold to our customers.

 

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 the trade-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.

 

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.

 

Revenues from transactions between us and our customers are recorded net of revenue-based 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.

 

18


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Subscription Revenue

Subscription revenues from cable networks and premium pay and basic tier television services are recognized over the license period as programming is provided to affiliates or digital distributors based on negotiated contractual programming rates. When a distribution contract with an affiliate has expired and a new distribution contract has not been executed, revenues are based on estimated rates, giving consideration to factors including the previous contractual rates, inflation, current payments by the affiliate and the status of the negotiations on a new contract. When the new distribution contract terms are finalized, an adjustment to revenue is recorded, if necessary, to reflect the new terms.

 

Subscription revenues from end-user subscribers are recognized when services are provided, based upon either usage or period of time. Subscription revenues from OTT services are recognized as programming services are provided to customers.

 

Content Revenue

Feature films typically are produced or acquired for initial exhibition in theaters, followed by distribution, generally commencing within three years of such initial exhibition. Revenues from film rentals by theaters are recognized as the films are exhibited.

 

Television programs and series are initially produced for broadcast and may be subsequently licensed or sold in physical format and/or electronic delivery. Revenues from the distribution of television programming through broadcast networks, cable networks, first-run syndication and OTT services are recognized when the programs or series are available to the licensee. In certain circumstances, pursuant to the terms of the applicable contractual arrangements, the availability dates granted to customers may precede the date in which the customer can be billed for these sales.

 

Revenues from sales of feature films and television programming in physical format are recognized at the later of the delivery date or the date when made widely available for sale or rental by retailers based on gross sales less a provision for estimated returns, rebates and pricing allowances. Revenues from the licensing of television programs and series for electronic sell-through or video-on-demand are recognized when the product has been purchased by and made available to the consumer to either download or stream. Revenues from the distribution of television programming through OTT services are recognized when the television programs or series are available to the licensee.

 

Upfront or guaranteed payments for the licensing of intellectual property are recognized as revenue at either the inception of the license term if the intellectual property has significant standalone functionality or over the corresponding license term if the licensee’s ability to derive utility is dependent on our continued support of the intellectual property throughout the license term.

 

Revenues from the sales of console games are recognized at the later of the delivery date or the date that the product is made widely available for sale or rental by retailers based on gross sales less a provision for estimated returns, rebates and pricing allowances.

 

Advertising Revenue

Advertising revenues are recognized, net of agency commissions, in the period that the advertisements are aired. If there is a targeted audience guarantee, revenues are recognized for the actual audience delivery and revenues are deferred for any shortfall until the guaranteed audience delivery is met, typically by providing additional advertisements. Advertising revenues from digital properties are recognized as impressions are delivered or the services are performed.

 

19


AT&T INC.

SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Revenue Categories

The following tables set forth reported revenue by category:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

  

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Mobility

$

13,912

 

$

-

 

$

-

 

$

-

 

$

-

 

$

77

 

$

-

 

$

3,949

 

$

17,938

   Entertainment Group

 

-

 

 

2,045

 

 

740

 

 

7,882

 

 

-

 

 

401

 

 

518

 

 

3

 

 

11,589

   Business Wireline

 

-

 

 

3,059

 

 

2,615

 

 

-

 

 

-

 

 

-

 

 

830

 

 

199

 

 

6,703

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Turner

 

-

 

 

-

 

 

-

 

 

1,855

 

 

125

 

 

944

 

 

64

 

 

-

 

 

2,988

   Home Box Office

 

-

 

 

-

 

 

-

 

 

1,517

 

 

125

 

 

-

 

 

2

 

 

-

 

 

1,644

   Warner Bros.

 

-

 

 

-

 

 

-

 

 

20

 

 

3,494

 

 

20

 

 

186

 

 

-

 

 

3,720

   Eliminations and Other

 

-

 

 

-

 

 

-

 

 

27

 

 

(199)

 

 

19

 

 

5

 

 

-

 

 

(148)

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Vrio

 

-

 

 

-

 

 

-

 

 

1,102

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,102

   Mexico

 

440

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

291

 

 

731

Xandr

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

445

 

 

-

 

 

-

 

 

445

Corporate and Other

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

308

 

 

-

 

 

308

Eliminations and

   consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(829)

 

 

(401)

 

 

(51)

 

 

-

 

 

(1,281)

Total Operating Revenues

$

14,352

 

$

5,104

 

$

3,355

 

$

12,403

 

$

2,716

 

$

1,505

 

$

1,862

 

$

4,442

 

$

45,739

 

 

 

For the nine months ended September 30, 2018

  

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Mobility

$

40,912

 

$

-

 

$

-

 

$

-

 

$

-

 

$

162

 

$

-

 

$

11,501

 

$

52,575

   Entertainment Group

 

-

 

 

5,904

 

 

2,317

 

 

23,559

 

 

-

 

 

1,122

 

 

1,588

 

 

8

 

 

34,498

   Business Wireline

 

-

 

 

9,168

 

 

8,176

 

 

-

 

 

-

 

 

-

 

 

2,189

 

 

567

 

 

20,100

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Turner

 

-

 

 

-

 

 

-

 

 

2,363

 

 

146

 

 

1,181

 

 

77

 

 

-

 

 

3,767

   Home Box Office

 

-

 

 

-

 

 

-

 

 

1,787

 

 

136

 

 

-

 

 

2

 

 

-

 

 

1,925

   Warner Bros.

 

-

 

 

-

 

 

-

 

 

27

 

 

3,949

 

 

28

 

 

223

 

 

-

 

 

4,227

   Eliminations and Other

 

-

 

 

-

 

 

-

 

 

27

 

 

(255)

 

 

13

 

 

5

 

 

-

 

 

(210)

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Vrio

 

-

 

 

-

 

 

-

 

 

3,710

 

 

-

 

 

-

 

 

-

 

 

-

 

 

3,710

   Mexico

 

1,261

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

838

 

 

2,099

Xandr

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,174

 

 

-

 

 

-

 

 

1,174

Corporate and Other

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

961

 

 

-

 

 

961

Eliminations and

   consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,039)

 

 

(1,122)

 

 

98

 

 

-

 

 

(2,063)

Total Operating Revenues

$

42,173

 

$

15,072

 

$

10,493

 

$

31,473

 

$

2,937

 

$

2,558

 

$

5,143

 

$

12,914

 

$

122,763

 

20


AT&T INC.

SEPTEMBER 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 $3,409 and $11,304 as of September 30, 2018, respectively, of which $1,572 and $3,905 were included in Other current assets on our consolidated balance sheets. For the nine months ended September 30, 2018, we amortized $959 and $2,983 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 September 30, 2018:

 

 

 

 

September 30,

 

 

 

2018

 

 

 

 

Contract asset

 

$

1,923

Contract liability

 

 

6,920

 

 

 

 

Beginning of period contract liability recorded as customer contract revenue during the period

 

 

4,716

 

Our consolidated balance sheet at September 30, 2018 included approximately $1,244 for the current portion of our contract asset in “Other current assets” and $5,846 for the current portion of our contract liability in “Advanced billings and customer deposits.”

 

Remaining Performance Obligations 

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

 

Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $40,474 of which we expect to recognize approximately 70% by the end of next year, with the balance recognized thereafter.

 

The aggregate amount of transaction price allocated to remaining performance obligations included $12,661 from WarnerMedia operations related 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.

 

21


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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.

 

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 September 30, 2018

 

As

Reported

 

 

Historical Accounting Method

Consolidated Statements of Income:

 

 

 

 

 

  Service Revenues

$

41,297

 

$

42,681

  Equipment Revenues

 

4,442

 

 

3,926

  Total Operating Revenues

 

45,739

 

 

46,607

  Other cost of revenues

 

8,651

 

 

9,568

  Selling, general and administrative expenses

 

9,598

 

 

10,145

  Total Operating Expenses

 

38,470

 

 

39,934

  Operating income

 

7,269

 

 

6,673

  Income before income taxes

 

6,207

 

 

5,611

  Income tax expense

 

1,391

 

 

1,245

  Net income

 

4,816

 

 

4,366

  Net income attributable to AT&T

$

4,718

 

$

4,273

 

 

 

 

 

 

  Basic Earnings per Share Attributable to AT&T

$

0.65

 

$

0.59

  Diluted Earnings per Share Attributable to AT&T

$

0.65

 

$

0.59

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

 

 

 

 

Consolidated Statements of Income:

 

 

 

 

 

  Service Revenues

$

109,849

 

$

114,048

  Equipment Revenues

 

12,914

 

 

11,398

  Total Operating Revenues

 

122,763

 

 

125,446

  Other cost of revenues

 

24,215

 

 

26,964

  Selling, general and administrative expenses

 

26,179

 

 

27,909

  Total Operating Expenses

 

102,827

 

 

107,306

  Operating income

 

19,936

 

 

18,140

  Income before income taxes

 

19,128

 

 

17,332

  Income tax expense

 

4,305

 

 

3,865

  Net income

 

14,823

 

 

13,467

  Net income attributable to AT&T

$

14,512

 

$

13,173

 

 

 

 

 

 

  Basic Earnings per Share Attributable to AT&T

$

2.19

 

$

1.99

  Diluted Earnings per Share Attributable to AT&T

$

2.19

 

$

1.99

 

 

 

 

 

 

At September 30, 2018

 

 

 

 

 

Consolidated Balance Sheets:

 

 

 

 

 

  Other current assets

$

16,278

 

$

13,750

  Other Assets

 

25,490

 

 

23,050

  Accounts payable and accrued liabilities

 

39,375

 

 

39,554

  Advanced billings and customer deposits

 

6,045

 

 

6,109

  Deferred income taxes

 

60,495

 

 

59,264

  Other noncurrent liabilities

 

26,490

 

 

26,252

  Retained earnings

 

57,624

 

 

53,929

  Accumulated other comprehensive income

 

5,383

 

 

5,385

  Noncontrolling interest

$

1,123

 

$

1,071

 

22


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 6. PENSION AND POSTRETIREMENT BENEFITS

 

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

 

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,803 at September 30, 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. We distributed $420 to the trust during the nine months ended September 30, 2018. So long as we make the distributions, 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’s separate financial statements. On October 15, 2018, we made an additional voluntary contribution of $80 to the qualified pension plan.

 

We recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. During the first quarter of 2018, a substantive plan change involving the frequency of future health reimbursement account credit increases was communicated to our retirees. During the second quarter of 2018, a written plan change involving the ability of certain participants of the pension plan to receive their benefit in a lump-sum amount upon retirement was communicated to our employees. These plan changes triggered a remeasurement of our postretirement and pension benefit obligations, resulting in an actuarial gain of $930 in the first quarter and $1,796 in the second quarter of 2018. These plan changes also resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by $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. As a result of the plan changes and remeasurements, our postretirement and pension benefit obligations decreased $1,682 and $1,746, respectively.

 

The following table details pension and postretirement benefit costs included in the accompanying consolidated statements of income. The service cost component of net periodic pension cost (benefit) is recorded in operating expenses in the consolidated statements of income while the remaining components are recorded in other income (expense) – net. Service costs are eligible for capitalization as part of internal construction projects, providing a small reduction in the net expense recorded.

23


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

Pension cost:

 

 

 

 

 

 

 

 

 

 

 

   Service cost – benefits earned during the period

$

270

 

$

282

 

$

845

 

$

846

   Interest cost on projected benefit obligation

 

551

 

 

484

 

 

1,542

 

 

1,452

   Expected return on assets

 

(761)

 

 

(783)

 

 

(2,276)

 

 

(2,350)

   Amortization of prior service credit

 

(28)

 

 

(31)

 

 

(87)

 

 

(93)

   Actuarial (gain) loss

 

-

 

 

-

 

 

(1,796)

 

 

-

   Net pension (credit) cost

$

32

 

$

(48)

 

$

(1,772)

 

$

(145)

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement cost:

 

 

 

 

 

 

 

 

 

 

 

   Service cost – benefits earned during the period

$

27

 

$

32

 

$

82

 

$

107

   Interest cost on accumulated postretirement benefit obligation

 

196

 

 

193

 

 

582

 

 

617

   Expected return on assets

 

(76)

 

 

(81)

 

 

(228)

 

 

(240)

   Amortization of prior service credit

 

(412)

 

 

(382)

 

 

(1,222)

 

 

(1,084)

   Actuarial (gain) loss

 

-

 

 

-

 

 

(930)

 

 

(259)

   Net postretirement (credit) cost

$

(265)

 

$

(238)

 

$

(1,716)

 

$

(859)

 

 

 

 

 

 

 

 

 

 

 

 

   Combined net pension and postretirement (credit) cost

$

(233)

 

$

(286)

 

$

(3,488)

 

$

(1,004)

 

As part of our first- and second-quarter 2018 remeasurements, we modified the weighted-average discount rate used to measure our benefit obligations 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 service and interest costs after remeasurement is 4.30% and 3.70%, respectively, for postretirement and 4.40% and 4.00% for pension.

 

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the third quarter ended 2018 and 2017, net supplemental pension benefits costs not included in the table above were $24 and $22. For the first nine months of 2018 and 2017, net supplemental pension benefit costs were $65 and $67.

 

NOTE 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.

 

24


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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, 2017.

 

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, 2018

 

December 31, 2017

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

Amount

 

Value

 

Amount

 

Value

Notes and debentures1

$

177,718

 

$

180,887

 

$

162,526

 

$

171,938

Commercial paper

 

3,787

 

 

3,787

 

 

-

 

 

-

Bank borrowings

 

3

 

 

3

 

 

2

 

 

2

Investment securities2

 

3,646

 

 

3,646

 

 

2,447

 

 

2,447

1

Includes credit agreement borrowings.

2

Excludes investments accounted for under the equity method.

 

The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.  

 

Following is the fair value leveling for investment securities that are measured at fair value and derivatives as of September 30, 2018 and December 31, 2017. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.

 

 

 

September 30, 2018

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Equity Securities

 

 

 

 

 

 

 

 

 

 

 

   Domestic equities

$

1,279

 

$

-

 

$

-

 

$

1,279

   International equities

 

291

 

 

-

 

 

-

 

 

291

   Fixed income equities

 

149

 

 

-

 

 

-

 

 

149

Available-for-Sale Debt Securities

 

-

 

 

881

 

 

-

 

 

881

Asset Derivatives

 

 

 

 

 

 

 

 

 

 

 

   Cross-currency swaps

 

-

 

 

1,330

 

 

-

 

 

1,330

   Foreign exchange contracts

 

-

 

 

52

 

 

-

 

 

52

Liability Derivatives

 

 

 

 

 

 

 

 

 

 

 

   Interest rate swaps

 

-

 

 

(90)

 

 

-

 

 

(90)

   Cross-currency swaps

 

-

 

 

(1,614)

 

 

-

 

 

(1,614)

   Foreign exchange contracts

 

-

 

 

(3)

 

 

-

 

 

(3)

 

25


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

 

 

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

 

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

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

Total gains (losses) recognized on equity securities

$

80

 

$

113

 

$

88

 

$

216

Gains (Losses) recognized on equity securities sold

 

1

 

 

126

 

 

50

 

 

137

Unrealized gains (losses) recognized on equity securities held at end of period

 

79

 

 

(13)

 

 

38

 

 

79

 

Debt securities of $44 have maturities of less than one year, $146 within one to three years, $94 within three to five years and $597 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 current assets” and our investment securities are recorded in “Other Assets” on the consolidated balance sheets.

 

Derivative Financial Instruments

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

 

26


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Fair Value Hedging  We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount.

 

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

 

Accrued and realized gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged. Unrealized gains on fair value hedges are recorded at fair market value as assets, and unrealized losses are recorded at fair market value as liabilities. Changes in the fair value of derivative instruments designated as fair value hedges are offset against the change in fair value of the hedged assets or liabilities through earnings. In the nine months ended September 30, 2018 and 2017, no ineffectiveness was measured on fair value hedges

                                                                         

Cash Flow Hedging  We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our foreign-denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated interest rate to a fixed U.S. dollar denominated interest rate.

 

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

 

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into the consolidated statements of income in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as “Other income (expense) – net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cash flow hedges each quarter. In the nine months ended September 30, 2018 and 2017, no ineffectiveness was measured on cash flow hedges.

 

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $61 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

 

Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2018, we had posted collateral of $468 (a deposit asset) and held collateral of $1,056 (a receipt liability). Under the agreements, if AT&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in September, we would have been required to post additional collateral of $150. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- (S&P), we would have been required to post additional collateral of $200. At December 31, 2017, we had posted collateral of $495 (a deposit asset) and held collateral of $968 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

 

 

27


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Following are the notional amounts of our outstanding derivative positions: 

 

 

September 30,

 

December 31,

2018

 

2017

Interest rate swaps

$

7,333

 

$

9,833

Cross-currency swaps

 

42,192

 

 

38,694

Foreign exchange contracts

 

2,386

 

 

-

Total

$

51,911

 

$

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

 

Nine months ended

 

September 30,

 

September 30,

Fair Value Hedging Relationships

2018

 

2017

 

2018

 

2017

Interest rate swaps (Interest expense):

 

 

 

 

 

 

 

 

 

 

 

     Gain (Loss) on interest rate swaps

$

2

 

$

(3)

 

$

(60)

 

$

(51)

     Gain (Loss) on long-term debt

 

(2)

 

 

3

 

 

60

 

 

51

 

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

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

Cash Flow Hedging Relationships

2018

 

2017

 

2018

 

2017

Cross-currency swaps:

 

 

 

 

 

 

 

 

 

 

 

     Gain (Loss) recognized in accumulated OCI

$

(13)

 

$

429

 

$

308

 

$

(268)

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

     Gain (Loss) recognized in accumulated OCI

 

17

 

 

-

 

 

17

 

 

-

Interest rate locks:

 

 

 

 

 

 

 

 

 

 

 

     Gain (Loss) recognized in accumulated OCI

 

-

 

 

79

 

 

-

 

 

-

     Interest income (expense) reclassified from

         accumulated OCI into income

 

(15)

 

 

(15)

 

 

(44)

 

 

(44)

 

NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

 

Acquisitions

 

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

 

Under the merger agreement, each share of Time Warner stock was exchanged 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 our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,358, excluding Time Warner’s net debt at acquisition. 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 will continue to vigorously defend our legal position in the appellate court.

 

28


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content, in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. At September 30, 2018, our consolidated balance sheet includes the assets and liabilities of Time Warner, which have been measured at fair value.

 

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

 

Assets acquired

 

 

 

Cash

 

$

1,655

Accounts receivable

 

 

9,016

All other current assets

 

 

3,150

Noncurrent inventory and theatrical film and television production costs

 

 

5,719

Property, plant and equipment

 

 

4,906

Intangible assets subject to amortization

 

 

 

   Distribution network

 

 

17,470

   Released television and film content

 

 

10,929

   Trademarks and trade names

 

 

18,081

   Other

 

 

10,300

Investments and other assets

 

 

9,428

Goodwill

 

 

38,955

Total assets acquired

 

 

129,609

 

 

 

 

Liabilities assumed

 

 

 

Current liabilities, excluding current portion of long-term debt

 

 

8,280

Debt maturing within one year

 

 

4,471

Long-term debt

 

 

18,394

Other noncurrent liabilities

 

 

19,105

Total liabilities assumed

 

 

50,250

Net assets acquired

 

 

79,359

Noncontrolling interest

 

 

(1)

Aggregate value of consideration paid

 

$

79,358

 

 

29


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecorded pre-acquisition contingencies where the related asset, 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 unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units 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.

 

The following unaudited pro forma consolidated results of operations assume that the acquisition of Time Warner was completed as of January 1, 2017:

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

Total operating revenues

 

$

135,658

 

$

139,236

Net Income Attributable to AT&T

 

 

16,254

 

 

11,576

 

 

 

 

 

 

 

Basic Earnings Per Share Attributable to AT&T

 

$

2.23

 

$

1.59

Diluted Earnings Per Share Attributable to AT&T

 

$

2.22

 

$

1.57

 

These unaudited pro forma consolidated results reflect the adoption of ASC 606 for the nine-month period ended September 30, 2018, which is not on a comparable basis with the period ended September 30, 2017 (see Note 5). Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.

 

Otter Media On August 7, 2018, we acquired the remaining interest in Otter Media for $157 in cash and the conversion to equity of the $1,480 advance made in the first quarter. At acquisition, we remeasured the fair value of the total business, which exceeded the book value of our equity method investment and resulted in a pre-tax gain of $395 in the third quarter of 2018. We began consolidating that business upon close and recorded those assets at fair value, including $1,174 of goodwill that is reported in the WarnerMedia segment.

 

AppNexus On August 15, 2018, we purchased AppNexus for $1,432 and recorded $1,223 of goodwill that is reported in the Xandr segment. Our investment will allow us to create a marketplace for TV and digital video advertising.

 

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 by December 31, 2018, subject to customary closing conditions.

 

We applied held-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 September 30, 2018 consolidated balance sheet.

 

NOTE 9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

 

We offer our customers the option to purchase certain wireless devices in installments over a specified period of time and, in many cases, once certain conditions are met, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. As of September 30, 2018 and December 31, 2017, gross equipment installment receivables of $5,736 and $6,079 were included on our consolidated balance sheets, of which $3,370 and $3,340 are notes receivable that are included in “Accounts receivable - net.”

 

30


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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. As of September 30, 2018, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $6,267.

 

The following table sets forth a summary of equipment installment receivables sold during the three and nine months ended September 30, 2018 and 2017:

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

Gross receivables sold

$

2,161

 

$

1,619

 

$

7,077

 

$

6,217

Net receivables sold1

 

2,064

 

 

1,478

 

 

6,670

 

 

5,698

Cash proceeds received

 

1,752

 

 

1,292

 

 

5,679

 

 

4,139

Deferred purchase price recorded

 

335

 

 

285

 

 

1,161

 

 

1,767

Guarantee obligation recorded

 

75

 

 

65

 

 

270

 

 

139

1

Receivables net of allowance, imputed interest and trade-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 device trade-ins. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).

 

The following table 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 nine months ended September 30, 2018 and 2017:

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

Fair value of repurchased receivables

$

-

 

$

567

 

$

1,481

 

$

1,281

Carrying value of deferred purchase price

 

-

 

 

507

 

 

1,393

 

 

1,147

Gain (loss) on repurchases1

$

-

 

$

60

 

$

88

 

$

134

1

These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income.

 

At September 30, 2018 and December 31, 2017, our deferred purchase price receivable was $1,981 and $2,749, respectively, of which $1,114 and $1,781 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at September 30, 2018 and December 31, 2017 was $418 and $204, respectively, of which $230 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.

 

31


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to “Total Assets” reported on our consolidated balance sheets. We reflect cash receipts on owned equipment installment receivables as cash flows from operations in our consolidated statements of cash flows. With the retrospective adoption of ASU 2016-15 in 2018 (see Note 1), cash receipts 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 $8,428 and $7,446 at September 30, 2018 and December 31, 2017.

 

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 determined using the film forecast computation method.

 

The following table summarizes inventories and theatrical film and television production costs as of September 30, 2018:

 

 

 

September 30,

 

 

2018

Inventories:

 

 

   Programming costs, less amortization1

$

4,224

   Other inventory, primarily DVD and Blu-ray Discs

 

177

Total inventories

 

4,401

Less: current portion of inventory

 

(2,310)

Total noncurrent inventories

 

2,091

 

 

 

 

Theatrical film production costs:2

 

 

   Released, less amortization

 

178

   Completed and not released

 

821

   In production

 

736

   Development and pre-production

 

158

 

 

 

 

Television production costs:2

 

 

   Released, less amortization

 

582

   Completed and not released

 

868

   In production

 

1,762

   Development and pre-production

 

25

Total theatrical film and television production costs

 

5,130

Total noncurrent inventories and theatrical film and television production costs

$

7,221

 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 $9,184 of acquired film and television library intangible assets as of September 30, 2018, which are included in

 

"Other Intangible Assets - Net" on our consolidated balance sheet.

 

 

32


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 11. ADDITIONAL FINANCIAL INFORMATION

 

Cash and Cash Flows

We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments. The following summarizes cash and cash equivalents and restricted cash balances contained on our consolidated balance sheets:

 

 

 

September 30,

 

December 31,

Cash and Cash Equivalents and Restricted Cash

 

 

2018

 

 

2017

 

 

2017

 

 

2016

   Cash and cash equivalents

 

$

8,657

 

$

48,499

 

$

50,498

 

$

5,788

   Restricted cash in Other current assets

 

 

56

 

 

6

 

 

6

 

 

7

   Restricted cash in Other Assets

 

 

75

 

 

241

 

 

428

 

 

140

   Cash and cash equivalents and restricted cash

 

$

8,788

 

$

48,746

 

$

50,932

 

$

5,935

 

 

 

Nine months ended

 

 

September 30,

Consolidated Statements of Cash Flows

 

 

2018

 

 

2017

Cash paid (received) during the period for:

 

 

 

 

 

 

   Interest

 

$

6,943

 

$

5,031

   Income taxes, net of refunds

 

 

(537)

 

 

1,861

 

Debt Transactions

As of September 30, 2018, our total long-term debt obligations totaled $183,418. During the first nine 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 credit agreements: $16,175 with JPMorgan Chase Bank, N.A, $2,500 with BNP Paribas and $2,250 with Bank of Nova Scotia. As of September 30, 2018, we had $6,175, $0, and $2,250 outstanding under these credit agreements.

·        Issuance of approximately $5,250 U.S. dollar denominated floating rate notes maturing over three to six years, and other borrowings totaling $6,925.

·        Net borrowings of approximately $3,732 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 September 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 $22,865 of debt, of which we repaid $2,000 for amounts outstanding under term credit agreements, $2,000 of notes and $1,076 of commercial paper borrowings.

  

 

33


AT&T INC.

SEPTEMBER 30, 2018

 

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

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

 

OVERVIEW

AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). We completed the acquisition of Time Warner Inc. (referred to as Time Warner) on June 14, 2018, and have included its results after that date. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from Time Warner prior to the acquisition are excluded.

 

We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. Percentage increases and decreases that are not considered meaningful are denoted with a dash.

 

 

Third Quarter

 

 

Nine-Month Period

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

2018

 

2017

Change

 

 

2018

 

2017

Change

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Communications 

$

36,230

 

$

37,115

(2.4)

%

 

$

107,173

 

$

111,268

(3.7)

%

   WarnerMedia

 

8,204

 

 

107

-

 

 

 

9,709

 

 

323

-

 

   Latin America

 

1,833

 

 

2,099

(12.7)

 

 

 

5,809

 

 

6,054

(4.0)

 

   Xandr

 

445

 

 

333

33.6

 

 

 

1,174

 

 

992

18.3

 

   Corporate and other

 

308

 

 

293

5.1

 

 

 

961

 

 

1,093

(12.1)

 

   Eliminations and consolidation

 

(1,281)

 

 

(279)

-

 

 

 

(2,063)

 

 

(860)

-

 

AT&T Operating Revenues

 

45,739

 

 

39,668

15.3

 

 

 

122,763

 

 

118,870

3.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Communications

 

8,182

 

 

8,071

1.4

 

 

 

24,623

 

 

24,821

(0.8)

 

   WarnerMedia

 

2,528

 

 

2

-

 

 

 

2,992

 

 

21

-

 

   Latin America

 

(201)

 

 

(125)

(60.8)

 

 

 

(462)

 

 

(257)

(79.8)

 

   Xandr

 

333

 

 

294

13.3

 

 

 

952

 

 

873

9.0

 

Segment Operating Contribution

$

10,842

 

$

8,242

31.5

%

 

$

28,105

 

$

25,458

10.4

%

 

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

·        Mobility provides nationwide wireless service and equipment.

·        Entertainment Group provides video, internet and voice communications services to residential customers.

·        Business Wireline provides advanced IP-based services (referred to as “strategic services”), as well as traditional voice and data services to business customers.

 

The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. This segment contains the following business units:

·        Warner Bros. principally produces and distributes television shows, feature films and video games.

·        Home Box Office primarily operates multichannel premium pay television services.

·        Turner creates and programs branded news, entertainment, sports and kids multi-platform content.

 

34


AT&T INC.

SEPTEMBER 30, 2018

 

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

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

 

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

·        Vrio provides video services primarily to residential customers using satellite technology.

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

 

The Xandr segment provides advertising services. These services utilize data insights to develop higher value targeted advertising.

 

RESULTS OF OPERATIONS

 

Consolidated Results  Our financial results are summarized in the following discussions. Additional analysis is discussed in our “Segment Results” section. Percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

  

 

Third Quarter

 

 

Nine-Month Period

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

2018

 

2017

Change

 

 

2018

 

2017

Change

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Service 

$

41,297

 

$

36,378

13.5

%

 

$

109,849

 

$

109,372

0.4

%

   Equipment

 

4,442

 

 

3,290

35.0

 

 

 

12,914

 

 

9,498

36.0

 

Total Operating Revenues

 

45,739

 

 

39,668

15.3

 

 

 

122,763

 

 

118,870

3.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Operations and support

 

30,304

 

 

27,819

8.9

 

 

 

82,289

 

 

81,865

0.5

 

   Depreciation and amortization

 

8,166

 

 

6,042

35.2

 

 

 

20,538

 

 

18,316

12.1

 

Total Operating Expenses

 

38,470

 

 

33,861

13.6

 

 

 

102,827

 

 

100,181

2.6

 

Operating Income

 

7,269

 

 

5,807

25.2

 

 

 

19,936

 

 

18,689

6.7

 

Interest expense

 

(2,051)

 

 

(1,686)

21.6

 

 

 

(5,845)

 

 

(4,374)

33.6

 

Equity in net income (loss)

   of affiliates

 

(64)

 

 

11

-

 

 

 

(71)

 

 

(148)

(52.0)

 

Other income (expense) – net

 

1,053

 

 

842

25.1

 

 

 

5,108

 

 

2,255

-

 

Income Before Income Taxes

 

6,207

 

 

4,974

24.8

 

 

 

19,128

 

 

16,422

16.5

 

Net Income

 

4,816

 

 

3,123

54.2

 

 

 

14,823

 

 

10,711

38.4

 

Net Income Attributable to AT&T

$

4,718

 

$

3,029

55.8

%

 

$

14,512

 

$

10,413

39.4

%

 

Operating revenues increased in the third quarter and for the first nine months of 2018 primarily due to growth in our WarnerMedia and Xandr segments, driven by business acquisitions in 2018. Partially offsetting the increases was our adoption of a new revenue accounting standard, which included our policy election to record Universal Service Fund (USF) fees on a net basis. Also offsetting revenues were declines in our Communications segment, which continues to experience pressure from developing technology and shifts in customer behavior, partially offset increased equipment revenues.

 

Operations and support expenses increased in the third quarter and for the first nine months of 2018, primarily due to business acquisitions in 2018 and higher equipment costs related to wireless device sales and upgrades in our Communications segment. Increases were partially offset by our adoption of new accounting rules, which included our policy election to record USF fees on a net basis.

 

35


AT&T INC.

SEPTEMBER 30, 2018

 

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

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

 

Depreciation and amortization expense increased in the third quarter and for the first nine months of 2018.

·         Depreciation expense increased $159, or 3.2%, in the third quarter and $191, or 1.3%, for the first nine months of 2018, primarily due to WarnerMedia results as well as ongoing capital spending for network upgrades and expansion offset by lower expense resulting from our fourth-quarter 2017 abandonment of certain copper network assets.

·         Amortization expense increased $1,965 in the third quarter and increased $2,031, or 57.9%, for the first nine months of 2018, primarily due to the amortization of intangibles associated with WarnerMedia.

 

Operating income increased in the third quarter and for the first nine months of 2018. Our operating income margin in the third quarter increased from 14.6% in 2017 to 15.9% in 2018, and for the first nine months increased from 15.7% in 2017 to 16.2% in 2018.

 

Interest expense increased in the third quarter and for the first nine months of 2018. The increase was primarily due to higher debt balances related to our acquisition of Time Warner, including interest expense on Time Warner notes.

 

Equity in net income of affiliates decreased in the third quarter and increased for the first nine months of 2018. Results for the third quarter include net losses from investments acquired through our purchase of Time Warner. The increase in the first nine months was predominantly due to losses in the first quarter of 2017 from our legacy publishing business, which was sold in June 2017. This increase was partially offset by the net losses from Time Warner investments.

 

Other income (expense) net increased in the third quarter and for the first nine months. The increase in the third quarter was primarily due to a gain resulting from our Otter Media Holdings (Otter Media) transaction, in which we acquired the remaining equity interest during the quarter (see Note 8), partly offset by lower interest income after closing of the Time Warner transaction. The increase for the first nine months was primarily due to actuarial gains of $2,726 in 2018 compared to a gain of $259 in 2017, which resulted from remeasurement of our pension and postretirement benefit obligations in the first half of 2018. The nine-month increase also included $224 of additional interest income and the gain on our Otter Media transaction that was offset by premiums on the redemption of debt of $226 in the second quarter of 2018.

 

Income taxes decreased in the third quarter of 2018 and for the first nine months of 2018. Our effective tax rate was 22.4% in the third quarter and 22.5% for the first nine months of 2018, as compared to 37.2% for the third quarter and 34.8% for the first nine months of 2017. The standalone effective tax rate of WarnerMedia was approximately 21.5% for the third quarter and the 108-day period ended September 30, 2018. The decreases in income tax expense and our effective tax rates were primarily due to the December 2017 enactment of U.S. corporate tax reform, which reduced the federal tax rate from 35% to 21%. Partially offsetting the decreased tax rates were higher earnings. We continue to expect our effective tax rate, including WarnerMedia, to be approximately 23%.

 

36


AT&T INC.

SEPTEMBER 30, 2018

 

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

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

 

Selected Financial and Operating Data

 

 

 

 

September 30,

Subscribers and connections in (000s)

2018

 

2017

Domestic wireless subscribers

150,252

 

138,445

Mexican wireless subscribers

17,305

 

13,779

North American wireless subscribers

167,557

 

152,224

 

 

 

 

North American branded subscribers

110,982

 

105,717

North American branded net additions

3,351

 

2,812

 

 

 

 

Domestic satellite video subscribers

19,625

 

20,605

AT&T U-verse® (U-verse) video subscribers

3,693

 

3,718

DIRECTV NOW video subscribers

1,858

 

787

Latin America satellite video subscribers1

13,640

 

13,490

Total video subscribers

38,816

 

38,600

 

 

 

 

Total domestic broadband connections

15,747

 

15,715

 

 

 

 

Network access lines in service

10,399

 

12,249

U-verse VoIP connections

5,274

 

5,774

 

 

 

 

Debt ratio2

49.8%

 

56.4%

Net debt ratio3

47.4%

 

39.7%

Ratio of earnings to fixed charges4

3.55

 

3.55

Number of AT&T employees

269,280

 

256,800

 1  

Excludes subscribers of our Latin America segment equity investment in SKY Mexico, in which we own a 41.3% stake.

 

At June 30, 2018 and September 30, 2017, 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.

SEPTEMBER 30, 2018

 

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

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

 

COMMUNICATIONS SEGMENT

Third Quarter

 

 

Nine-Month Period

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

2018

 

2017

Change

 

 

2018

 

2017

Change

 

Segment Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Mobility

$

17,938

 

$

17,370

3.3

%

 

$

52,575

 

$

51,922

1.3

%

   Entertainment Group

 

11,589

 

 

12,467

(7.0)

 

 

 

34,498

 

 

37,435

(7.8)

 

   Business Wireline

 

6,703

 

 

7,278

(7.9)

 

 

 

20,100

 

 

21,911

(8.3)

 

Total Segment Operating Revenues

 

36,230

 

 

37,115

(2.4)

 

 

 

107,173

 

 

111,268

(3.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Mobility

 

5,603

 

 

5,333

5.1

 

 

 

16,267

 

 

15,929

2.1

 

   Entertainment Group

 

1,104

 

 

1,284

(14.0)

 

 

 

3,888

 

 

4,470

(13.0)

 

   Business Wireline

 

1,475

 

 

1,455

1.4

 

 

 

4,468

 

 

4,422

1.0

 

Total Segment Operating Contribution

$

8,182

 

$

8,072

1.4

%

 

$

24,623

 

$

24,821

(0.8)

%

 

Operating revenues decreased in the third quarter and for the first nine months of 2018. The decreases reflected declines in our Entertainment Group and Business Wireline business units, partially offset by increases in our Mobility business unit. The decreases reflect continued declines in legacy voice and data products, shift to unlimited wireless plans and over-the-top (OTT) video offerings, and our policy election to no longer include USF fees in revenues, partially offset by higher equipment revenues, from increased postpaid smartphone sales.

 

In the first half of 2018, we continued to see pressure from legacy services revenues and from wireless service revenues as we lapped the first year of offering unlimited data plans. Since our unlimited plans have now been in effect for over a year, service revenues on a comparable basis have shown improvements, which we expect to continue for the remainder of 2018.

 

Operating contribution increased in the third quarter and decreased for the first nine months of 2018, and was positively impacted by new revenue accounting rules. Operating contribution reflected improvement in our Mobility and Business Wireline business units, partially offset by declines in our Entertainment Group. Our Communications segment operating income margin in the third quarter increased from 21.7% in 2017 to 22.6% in 2018, and for the first nine months increased from 22.3% in 2017 to 23.0% in 2018.

 

38


AT&T INC.

SEPTEMBER 30, 2018

 

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

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

 

Communications Business Unit Discussion

Mobility Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter

 

Nine-Month Period

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

2018

 

2017

Change

 

2018

 

2017

Change

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Service

$

13,989

 

$

14,475

(3.4)

%

 

$

41,074

 

$

43,414

(5.4)

%

   Equipment

  

3,949

 

 

2,895

36.4

 

 

 

11,501

 

 

8,508

35.2

 

Total Operating Revenues

 

17,938

 

 

17,370

3.3

 

 

 

52,575

 

 

51,922

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Operations and support

 

10,255

 

 

10,029

2.3

 

 

 

30,020

 

 

30,005

-

 

   Depreciation and amortization

 

2,079

 

 

2,008

3.5

 

 

 

6,287

 

 

5,988

5.0

 

Total Operating Expenses

 

12,334

 

 

12,037

2.5

 

 

 

36,307

 

 

35,993

0.9

 

Operating Income

 

5,604

 

 

5,333

5.1

 

 

 

16,268

 

 

15,929

2.1

 

Equity in Net Income (Loss)

   of Affiliates

 

(1)

 

 

-

-

 

 

 

(1)

 

 

-

-

 

Operating Contribution

$

5,603

 

$

5,333

5.1

%

 

$

16,267

 

$

15,929

2.1

%

 

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

 

 

 

 

 

September 30,

Percent

(in 000s)

 

 

 

2018

 

 

2017

Change

Wireless Subscribers1

 

 

 

 

 

 

 

 

 

   Postpaid smartphones

 

 

 

60,408

 

 

59,278

1.9

%

   Postpaid feature phones and data-centric devices

 

 

 

16,588

 

 

17,756

(6.6)

 

Postpaid

 

 

 

76,996

 

 

77,034

-

 

Prepaid  

 

 

 

16,894

 

 

15,136

11.6

 

Branded

 

 

 

93,890

 

 

92,170

1.9

 

Reseller

 

 

 

8,183

 

 

9,877

(17.2)

 

Connected devices2

 

 

 

48,179

 

 

36,398

32.4

 

Total Wireless Subscribers

 

 

 

150,252

 

 

138,445

8.5