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T AT&T

Filed: 4 Nov 19, 7:00pm
0000732717 us-gaap:OperatingSegmentsMember t:WarnerMediaMember t:WarnerBrosMember t:SubscriptionArrangementServiceRevenueMember 2018-01-01 2018-09-30

 

 

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, 2019

 

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 001-8610

 

AT&T INC.

 

Incorporated under the laws of the State of Delaware

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

 

208 S. Akard St., Dallas, Texas 75202

Telephone Number: (210) 821-4105

 

 

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

 

 

 

Name of each exchange

Title of each class

Trading Symbol(s)

on which registered

Common Shares (Par Value $1.00 Per Share)

T

New York Stock Exchange

AT&T Inc. Floating Rate Global Notes due August 3, 2020

T 20C

New York Stock Exchange

AT&T Inc. 1.875% Global Notes due December 4, 2020

T 20

New York Stock Exchange

AT&T Inc. 2.65% Global Notes due December 17, 2021

T 21B

New York Stock Exchange

AT&T Inc. 1.45% Global Notes due June 1, 2022

T 22B

New York Stock Exchange

AT&T Inc. 2.50% Global Notes due March 15, 2023

T 23

New York Stock Exchange

AT&T Inc. 2.75% Global Notes due May 19, 2023

T 23C

New York Stock Exchange

AT&T Inc. Floating Rate Global Notes due September 5, 2023

T 23D

New York Stock Exchange

AT&T Inc. 1.05% Global Notes due September 5, 2023

T 23E

New York Stock Exchange

AT&T Inc. 1.30% Global Notes due September 5, 2023

T 23A

New York Stock Exchange

AT&T Inc. 1.95% Global Notes due September 15, 2023

T 23F

New York Stock Exchange

AT&T Inc. 2.40% Global Notes due March 15, 2024

T 24A

New York Stock Exchange

AT&T Inc. 3.50% Global Notes due December 17, 2025

T 25

New York Stock Exchange

AT&T Inc. 0.250% Global Notes due March 4, 2026

T 26E

New York Stock Exchange

AT&T Inc. 1.80% Global Notes due September 5, 2026

T 26D

New York Stock Exchange

AT&T Inc. 2.90% Global Notes due December 4, 2026

T 26A

New York Stock Exchange

 

 

 

 

 


 

 

 

Name of each exchange

Title of each class

Trading Symbol(s)

on which registered

AT&T Inc. 2.35% Global Notes due September 5, 2029

T 29D

New York Stock Exchange

AT&T Inc. 4.375% Global Notes due September 14, 2029

T 29B

New York Stock Exchange

AT&T Inc. 2.60% Global Notes due December 17, 2029

T 29A

New York Stock Exchange

AT&T Inc. 0.800% Global Notes due March 4, 2030

T 30B

New York Stock Exchange

AT&T Inc. 3.55% Global Notes due December 17, 2032

T 32

New York Stock Exchange

AT&T Inc. 5.20% Global Notes due November 18, 2033

T 33

New York Stock Exchange

AT&T Inc. 3.375% Global Notes due March 15, 2034

T 34

New York Stock Exchange

AT&T Inc. 2.45% Global Notes due March 15, 2035

T 35

New York Stock Exchange

AT&T Inc. 3.15% Global Notes due September 4, 2036

T 36A

New York Stock Exchange

AT&T Inc. 1.800% Global Notes due September 14, 2039

T 39B

New York Stock Exchange

AT&T Inc. 7.00% Global Notes due April 30, 2040

T 40

New York Stock Exchange

AT&T Inc. 4.25% Global Notes due June 1, 2043

T 43

New York Stock Exchange

AT&T Inc. 4.875% Global Notes due June 1, 2044

T 44

New York Stock Exchange

AT&T Inc. 5.35% Global Notes due November 1, 2066

TBB

New York Stock Exchange

AT&T Inc. 5.625% Global Notes due August 1, 2067

TBC

New York Stock Exchange

 

 

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

Yes [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [X] No [ ]

 

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

 

Large Accelerated Filer

[X]

 

Accelerated Filer

[ ]

Non-accelerated filer

[ ]

 

Smaller reporting company

[ ]

 

 

 

Emerging growth company

[ ]

 

 

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

Yes [ ] No [ ]

 

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

Yes [ ] No [X]

 

At October 31, 2019, there were 7,305 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,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

Service

$

40,317

 

$

41,297

 

$

122,024

 

$

109,849

Equipment

 

4,271

 

 

4,442

 

 

12,348

 

 

12,914

Total operating revenues

 

44,588

 

 

45,739

 

 

134,372

 

 

122,763

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

Equipment

 

4,484

 

 

4,828

 

 

13,047

 

 

14,053

Broadcast, programming and operations

 

7,066

 

 

7,227

 

 

22,448

 

 

17,842

Other cost of revenues (exclusive of depreciation and

amortization shown separately below)

 

8,604

 

 

8,651

 

 

25,910

 

 

24,215

Selling, general and administrative

 

9,584

 

 

9,598

 

 

29,077

 

 

26,179

Depreciation and amortization

 

6,949

 

 

8,166

 

 

21,256

 

 

20,538

Total operating expenses

 

36,687

 

 

38,470

 

 

111,738

 

 

102,827

Operating Income

 

7,901

 

 

7,269

 

 

22,634

 

 

19,936

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,083)

 

 

(2,051)

 

 

(6,373)

 

 

(5,845)

Equity in net income (loss) of affiliates

 

3

 

 

(64)

 

 

36

 

 

(71)

Other income (expense) – net

 

(935)

 

 

1,053

 

 

(967)

 

 

5,108

Total other income (expense)

 

(3,015)

 

 

(1,062)

 

 

(7,304)

 

 

(808)

Income Before Income Taxes

 

4,886

 

 

6,207

 

 

15,330

 

 

19,128

Income tax expense

 

937

 

 

1,391

 

 

3,059

 

 

4,305

Net Income

 

3,949

 

 

4,816

 

 

12,271

 

 

14,823

Less: Net Income Attributable to Noncontrolling Interest

 

(249)

 

 

(98)

 

 

(762)

 

 

(311)

Net Income Attributable to AT&T

$

3,700

 

$

4,718

 

$

11,509

 

$

14,512

Basic Earnings Per Share Attributable to AT&T

$

0.50

 

$

0.65

 

$

1.57

 

$

2.19

Diluted Earnings Per Share Attributable to AT&T

$

0.50

 

$

0.65

 

$

1.57

 

$

2.19

Weighted Average Number of Common Shares

Outstanding – Basic (in millions)

 

7,327

 

 

7,284

 

 

7,321

 

 

6,603

Weighted Average Number of Common Shares

Outstanding with Dilution (in millions)

 

7,356

 

 

7,320

 

 

7,350

 

 

6,630

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

3


 

AT&T INC.

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

Dollars in millions

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2019

 

2018

 

2019

 

2018

Net income

$

3,949

 

$

4,816

 

$

12,271

 

$

14,823

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency:

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment (includes $(17), $(7), $(15) and $(37)

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interest), net of taxes of

 

 

 

 

 

 

 

 

 

 

 

$(69), $(2), $(21) and $(145)

 

(342)

 

 

(14)

 

 

(181)

 

 

(824)

Securities:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses), net of taxes of $7, $(4), $22

 

 

 

 

 

 

 

 

 

 

 

and $(8)

 

25

 

 

(10)

 

 

67

 

 

(22)

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses), net of taxes of $(168), $0,

 

 

 

 

 

 

 

 

 

 

 

$(299) and $68

 

(516)

 

 

4

 

 

(1,006)

 

 

257

Reclassification adjustment included in net income,

 

 

 

 

 

 

 

 

 

 

 

net of taxes of $2, $3, $7 and $9

 

7

 

 

12

 

 

24

 

 

35

Defined benefit postretirement plans:

 

 

 

 

 

 

 

 

 

 

 

Net prior service (cost) credit arising during period, net of taxes of $0, $0, $0 and $173

 

-

 

 

-

 

 

-

 

 

530

Amortization of net prior service credit included in net

 

 

 

 

 

 

 

 

 

 

 

income, net of taxes of $(112), $(108), $(332)

 

 

 

 

 

 

 

 

 

 

 

and $(322)

 

(343)

 

 

(332)

 

 

(1,031)

 

 

(989)

Other comprehensive income (loss)

 

(1,169)

 

 

(340)

 

 

(2,127)

 

 

(1,013)

Total comprehensive income

 

2,780

 

 

4,476

 

 

10,144

 

 

13,810

Less: Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

(232)

 

 

(91)

 

 

(747)

 

 

(274)

Total Comprehensive Income Attributable to AT&T

$

2,548

 

$

4,385

 

$

9,397

 

$

13,536

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

4


 

AT&T INC.

CONSOLIDATED BALANCE SHEETS

Dollars in millions except per share amounts

 

September 30,

 

December 31,

 

2019

 

2018

Assets

(Unaudited)

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

$

6,588

 

$

5,204

Accounts receivable - net of allowances for doubtful accounts of $1,121 and $907

 

22,921

 

 

26,472

Prepaid expenses

 

1,493

 

 

2,047

Other current assets

 

19,693

 

 

17,704

Total current assets

 

50,695

 

 

51,427

Noncurrent Inventories and Theatrical Film and Television Production Costs

 

12,014

 

 

7,713

Property, plant and equipment

 

337,240

 

 

330,690

Less: accumulated depreciation and amortization

 

(205,924)

 

 

(199,217)

Property, Plant and Equipment – Net

 

131,316

 

 

131,473

Goodwill

 

146,106

 

 

146,370

Licenses – Net

 

96,026

 

 

96,144

Trademarks and Trade Names – Net

 

23,855

 

 

24,345

Distribution Networks – Net

 

15,806

 

 

17,069

Other Intangible Assets – Net

 

22,060

 

 

26,269

Investments in and Advances to Equity Affiliates

 

4,137

 

 

6,245

Operating lease right-of-use assets

 

24,477

 

 

-

Other Assets

 

22,304

 

 

24,809

Total Assets

$

548,796

 

$

531,864

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Debt maturing within one year

$

11,608

 

$

10,255

Accounts payable and accrued liabilities

 

43,955

 

 

43,184

Advanced billings and customer deposits

 

6,097

 

 

5,948

Accrued taxes

 

2,741

 

 

1,179

Dividends payable

 

3,725

 

 

3,854

Total current liabilities

 

68,126

 

 

64,420

Long-Term Debt

 

153,568

 

 

166,250

Deferred Credits and Other Noncurrent Liabilities

 

 

 

 

 

Deferred income taxes

 

57,786

 

 

57,859

Postemployment benefit obligation

 

22,853

 

 

19,218

Operating lease liabilities

 

22,288

 

 

-

Other noncurrent liabilities

 

29,848

 

 

30,233

Total deferred credits and other noncurrent liabilities

 

132,775

 

 

107,310

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2019 and

 

 

 

 

 

December 31, 2018: issued 7,620,748,598 at September 30, 2019 and December 31, 2018)

 

7,621

 

 

7,621

Additional paid-in capital

 

125,139

 

 

125,525

Retained earnings

 

59,347

 

 

58,753

Treasury stock (317,374,689 at September 30, 2019 and 339,120,073 December 31, 2018,

 

 

 

 

 

at cost)

 

(11,195)

 

 

(12,059)

Accumulated other comprehensive income

 

2,137

 

 

4,249

Noncontrolling interest

 

11,278

 

 

9,795

Total stockholders’ equity

 

194,327

 

 

193,884

Total Liabilities and Stockholders’ Equity

$

548,796

 

$

531,864

See Notes to Consolidated Financial Statements.

 

 

 

 

 

5


 

AT&T INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in millions

(Unaudited)

 

 

 

 

Nine months ended

 

September 30,

 

2019

 

2018

Operating Activities

 

 

 

 

 

Net income

$

12,271

 

$

14,823

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

 

 

 

 

 

Depreciation and amortization

 

21,256

 

 

20,538

Amortization of television and film costs

 

7,059

 

 

1,608

Undistributed earnings from investments in equity affiliates

 

81

 

 

312

Provision for uncollectible accounts

 

1,855

 

 

1,240

Deferred income tax expense

 

1,039

 

 

4,337

Net (gain) loss from investments, net of impairments

 

(1,014)

 

 

(501)

Pension and postretirement benefit expense (credit)

 

(1,297)

 

 

(762)

Actuarial (gain) loss on pension and postretirement benefits

 

4,048

 

 

(2,726)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

2,503

 

 

(1,268)

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

 

(9,337)

 

 

(2,729)

Accounts payable and other accrued liabilities

 

(936)

 

 

(1,385)

Equipment installment receivables and related sales

 

848

 

 

220

Deferred customer contract acquisition and fulfillment costs

 

(796)

 

 

(2,657)

Postretirement claims and contributions

 

(635)

 

 

(630)

Other - net

 

(220)

 

 

1,102

Total adjustments

 

24,454

 

 

16,699

Net Cash Provided by Operating Activities

 

36,725

 

 

31,522

Investing Activities

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

Purchase of property and equipment

 

(15,683)

 

 

(16,695)

Interest during construction

 

(160)

 

 

(404)

Acquisitions, net of cash acquired

 

(1,124)

 

 

(43,116)

Dispositions

 

3,775

 

 

983

(Purchases), sales and settlements of securities and investments, net

 

523

 

 

(234)

Advances to and investments in equity affiliates, net

 

(333)

 

 

(1,021)

Cash collections of deferred purchase price

 

-

 

 

500

Net Cash Used in Investing Activities

 

(13,002)

 

 

(59,987)

Financing Activities

 

 

 

 

 

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

 

(22)

 

 

(1,071)

Issuance of other short-term borrowings

 

4,012

 

 

4,852

Repayment of other short-term borrowings

 

(4,702)

 

 

(1,075)

Issuance of long-term debt

 

15,034

 

 

38,325

Repayment of long-term debt

 

(24,368)

 

 

(43,579)

Payment of vendor financing

 

(2,601)

 

 

(347)

Purchase of treasury stock

 

(409)

 

 

(577)

Issuance of treasury stock

 

576

 

 

359

Issuance of preferred interests in subsidiary

 

1,488

 

 

-

Dividends paid

 

(11,162)

 

 

(9,775)

Other

 

(187)

 

 

(791)

Net Cash Used in Financing Activities

 

(22,341)

 

 

(13,679)

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

 

1,382

 

 

(42,144)

Cash and cash equivalents and restricted cash beginning of year

 

5,400

 

 

50,932

Cash and Cash Equivalents and Restricted Cash End of Period

$

6,782

 

$

8,788

See Notes to Consolidated Financial Statements.

 

6


 

AT&T INC.

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Dollars and shares in millions except per share amounts

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

September 30, 2019

 

September 30, 2018

 

September 30, 2019

 

September 30, 2018

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

7,621

 

$

7,621

 

7,621

 

$

7,621

 

7,621

 

$

7,621

 

6,495

 

$

6,495

Issuance of stock

-

 

 

-

 

-

 

 

-

 

-

 

 

-

 

1,126

 

 

1,126

Balance at end of period

7,621

 

$

7,621

 

7,621

 

$

7,621

 

7,621

 

$

7,621

 

7,621

 

$

7,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

$

125,109

 

 

 

$

125,960

 

 

 

$

125,525

 

 

 

$

89,563

Issuance of common stock

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

35,473

Issuance of treasury stock

 

 

 

(1)

 

 

 

 

(45)

 

 

 

 

(128)

 

 

 

 

(49)

Share-based payments

 

 

 

31

 

 

 

 

(209)

 

 

 

 

(258)

 

 

 

 

719

Balance at end of period

 

 

$

125,139

 

 

 

$

125,706

 

 

 

$

125,139

 

 

 

$

125,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

$

59,389

 

 

 

$

56,555

 

 

 

$

58,753

 

 

 

$

50,500

Net income attributable to AT&T ($0.50,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.65, $1.57 and $2.19 per diluted share)

 

 

 

3,700

 

 

 

 

4,718

 

 

 

 

11,509

 

 

 

 

14,512

Dividends to stockholders ($0.51, $0.50,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.53, and $1.50 per share)

 

 

 

(3,742)

 

 

 

 

(3,649)

 

 

 

 

(11,231)

 

 

 

 

(10,388)

Cumulative effect of accounting changes

 

 

 

-

 

 

 

 

-

 

 

 

 

316

 

 

 

 

3,000

Balance at end of period

 

 

$

59,347

 

 

 

$

57,624

 

 

 

$

59,347

 

 

 

$

57,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

(316)

 

$

(11,151)

 

(361)

 

$

(12,872)

 

(339)

 

$

(12,059)

 

(356)

 

$

(12,714)

Repurchase and acquisition of common stock

(5)

 

 

(186)

 

(1)

 

 

(34)

 

(14)

 

 

(466)

 

(19)

 

 

(641)

Issuance of treasury stock

4

 

 

142

 

11

 

 

420

 

36

 

 

1,330

 

24

 

 

869

Balance at end of period

(317)

 

$

(11,195)

 

(351)

 

$

(12,486)

 

(317)

 

$

(11,195)

 

(351)

 

$

(12,486)

See Notes to Consolidated Financial Statements.

7


 

AT&T INC.

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - continued

Dollars and shares in millions except per share amounts

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

September 30, 2019

 

September 30, 2018

 

September 30, 2019

 

September 30, 2018

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

Accumulated Other Comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Attributable to AT&T, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

$

3,289

 

 

 

$

5,716

 

 

 

$

4,249

 

 

 

$

7,017

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to AT&T

 

 

 

(1,152)

 

 

 

 

(333)

 

 

 

 

(2,112)

 

 

 

 

(976)

Amounts reclassified to retained earnings

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

(658)

Balance at end of period

 

 

$

2,137

 

 

 

$

5,383

 

 

 

$

2,137

 

 

 

$

5,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

$

9,824

 

 

 

$

1,150

 

 

 

$

9,795

 

 

 

$

1,146

Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

249

 

 

 

 

98

 

 

 

 

762

 

 

 

 

311

Interest acquired by noncontrolling owners

 

 

 

1,488

 

 

 

 

-

 

 

 

 

1,498

 

 

 

 

8

Acquisition of noncontrolling interest

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

1

Acquisition of interests held by

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling owners

 

 

 

-

 

 

 

 

(9)

 

 

 

 

-

 

 

 

 

(9)

Distributions

 

 

 

(266)

 

 

 

 

(109)

 

 

 

 

(791)

 

 

 

 

(332)

Translation adjustments attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest, net of taxes

 

 

 

(17)

 

 

 

 

(7)

 

 

 

 

(15)

 

 

 

 

(37)

Cumulative effect of accounting changes

 

 

 

-

 

 

 

 

-

 

 

 

 

29

 

 

 

 

35

Balance at end of period

 

 

$

11,278

 

 

 

$

1,123

 

 

 

$

11,278

 

 

 

$

1,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity at beginning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of period

 

 

$

194,081

 

 

 

$

184,130

 

 

 

$

193,884

 

 

 

$

142,007

Total Stockholders’ Equity at end

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of period

 

 

$

194,327

 

 

 

$

184,971

 

 

 

$

194,327

 

 

 

$

184,971

See Notes to Consolidated Financial Statements.

 

8


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

 

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

 

Basis of Presentation Throughout this document, AT&T Inc. is referred to as “we,” “AT&T” or the “Company.” The consolidated financial statements include the accounts of the Company and subsidiaries and affiliates which we control, including the operating results of Warner Media, LLC (referred to as “Time Warner” or “WarnerMedia”), which was acquired on June 14, 2018 (see Note 8). Our operating results for 2018 include the results from Time Warner following the acquisition date. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. The results for the interim periods are not necessarily indicative of those for the full year. These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items.

 

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

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain prior period amounts have been conformed to the current period’s presentation.

 

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

 

 

Adopted Accounting Standards and Other Changes

 

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

 

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

 

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

9


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

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

 

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

 

Recently Issued Accounting Standards

 

Credit Loss Standard In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13, as amended), which replaces the incurred loss impairment methodology under current GAAP. ASU 2016-13 affects trade receivables, loans and other financial assets that are not subject to fair value through net income, as defined by the standard. The amendments under ASU 2016-13 will be effective for years beginning after December 15, 2019, and interim periods within those years. We are currently evaluating ASU 2016-13 but do not anticipate it will have a material impact on our financial statements.

10


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 2. EARNINGS PER SHARE

 

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and nine months ended September 30, 2019 and 2018, is shown in the table below:

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2019

 

2018

 

2019

 

2018

Numerators

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Net Income

$

3,949

 

$

4,816

 

$

12,271

 

$

14,823

Less: Net income attributable to noncontrolling interest

 

(249)

 

 

(98)

 

 

(762)

 

 

(311)

Net Income attributable to AT&T

 

3,700

 

 

4,718

 

 

11,509

 

 

14,512

Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

Share-based payment

 

6

 

 

4

 

 

16

 

 

13

Numerator for diluted earnings per share

$

3,706

 

$

4,722

 

$

11,525

 

$

14,525

Denominators (000,000)

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

7,327

 

 

7,284

 

 

7,321

 

 

6,603

Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

Share-based payment (in shares)

 

29

 

 

36

 

 

29

 

 

27

Denominator for diluted earnings per share

 

7,356

 

 

7,320

 

 

7,350

 

 

6,630

Basic earnings per share attributable to AT&T

$

0.50

 

$

0.65

 

$

1.57

 

$

2.19

Diluted earnings per share attributable to AT&T

$

0.50

 

$

0.65

 

$

1.57

 

$

2.19

11


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 3. OTHER COMPREHENSIVE INCOME

 

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

 

 

 

Foreign Currency Translation Adjustment

 

Net Unrealized Gains (Losses) on Securities

 

Net Unrealized Gains (Losses) on Derivative Instruments

 

Defined Benefit Postretirement Plans

 

Accumulated Other Comprehensive Income

Balance as of December 31, 2018

$

(3,084)

 

$

(2)

 

$

818

 

$

6,517

 

$

4,249

Other comprehensive income

(loss) before reclassifications

 

(166)

 

 

67

 

 

(1,006)

 

 

-

 

 

(1,105)

Amounts reclassified

from accumulated OCI

 

-

 

 

-

 

 

24

1

 

(1,031)

2

 

(1,007)

Net other comprehensive

income (loss)

 

(166)

 

 

67

 

 

(982)

 

 

(1,031)

 

 

(2,112)

Balance as of September 30, 2019

$

(3,250)

 

$

65

 

$

(164)

 

$

5,486

 

$

2,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustment

 

Net Unrealized Gains (Losses) on Securities

 

Net Unrealized Gains (Losses) on Derivative Instruments

 

Defined Benefit Postretirement Plans

 

Accumulated Other Comprehensive Income

Balance as of December 31, 2017

$

(2,054)

 

$

660

 

$

1,402

 

$

7,009

 

$

7,017

Other comprehensive income

(loss) before reclassifications

 

(787)

 

 

(22)

 

 

257

 

 

530

 

 

(22)

Amounts reclassified

from accumulated OCI

 

-

 

 

-

 

 

35

1

 

(989)

2

 

(954)

Net other comprehensive

income (loss)

 

(787)

 

 

(22)

 

 

292

 

 

(459)

 

 

(976)

Amounts reclassified to

retained earnings

 

-

 

 

(658)

3

 

-

 

 

-

 

 

(658)

Balance as of September 30, 2018

$

(2,841)

 

$

(20)

 

$

1,694

 

$

6,550

 

$

5,383

1

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

2

The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the

consolidated statements of income (see Note 6).

3

With the adoption of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial

Assets and Liabilities," the unrealized (gains) losses on our equity investments are reclassified to retained earnings.

12


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 4. SEGMENT INFORMATION

 

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

 

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

 

We have recast our segment results for all prior periods to exclude our wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands from our Mobility and Business Wireline business units of the Communications segment, instead reporting them with Corporate and Other. (See Note 8)

 

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

Mobility provides nationwide wireless service and equipment.

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

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

 

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

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

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

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

 

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

Mexico provides wireless service and equipment to customers in Mexico.

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

 

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

 

13


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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

Corporate, which consists of: (1) businesses no longer integral to our operations or which we no longer actively market, (2) corporate support functions, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense) – net and (5) the recharacterization of programming intangible asset amortization, for released programming acquired in the Time Warner acquisition, which we continue to report within WarnerMedia segment operating expense, to consolidated amortization expense. The programming and intangible asset amortization reclass was $108 and $772 in the third quarter and $370 and $870 for the first nine months of 2019 and 2018, respectively.

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 network 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, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended September 30, 2019

 

 

Revenues

 

 

Operations

and Support

Expenses

 

 

EBITDA

 

 

Depreciation

and

Amortization

 

 

Operating

Income (Loss)

 

 

Equity in Net

Income (Loss) of

Affiliates

 

 

Segment

Contribution

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

17,701

 

$

9,948

 

$

7,753

 

$

2,011

 

$

5,742

 

$

-

 

$

5,742

Entertainment Group

 

11,197

 

 

8,797

 

 

2,400

 

 

1,316

 

 

1,084

 

 

1

 

 

1,085

Business Wireline

 

6,503

 

 

4,022

 

 

2,481

 

 

1,271

 

 

1,210

 

 

(1)

 

 

1,209

Total Communications

 

35,401

 

 

22,767

 

 

12,634

 

 

4,598

 

 

8,036

 

 

-

 

 

8,036

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

3,007

 

 

1,460

 

 

1,547

 

 

68

 

 

1,479

 

 

10

 

 

1,489

Home Box Office

 

1,819

 

 

1,072

 

 

747

 

 

33

 

 

714

 

 

10

 

 

724

Warner Bros.

 

3,333

 

 

2,706

 

 

627

 

 

39

 

 

588

 

 

(25)

 

 

563

Eliminations and other

 

(313)

 

 

(71)

 

 

(242)

 

 

10

 

 

(252)

 

 

20

 

 

(232)

Total WarnerMedia

 

7,846

 

 

5,167

 

 

2,679

 

 

150

 

 

2,529

 

 

15

 

 

2,544

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

1,013

 

 

851

 

 

162

 

 

162

 

 

-

 

 

13

 

 

13

Mexico

 

717

 

 

774

 

 

(57)

 

 

122

 

 

(179)

 

 

-

 

 

(179)

Total Latin America

 

1,730

 

 

1,625

 

 

105

 

 

284

 

 

(179)

 

 

13

 

 

(166)

Xandr

 

504

 

 

162

 

 

342

 

 

15

 

 

327

 

 

-

 

 

327

Segment Total

 

45,481

 

 

29,721

 

 

15,760

 

 

5,047

 

 

10,713

 

$

28

 

$

10,741

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

407

 

 

703

 

 

(296)

 

 

131

 

 

(427)

 

 

 

 

 

 

Acquisition-related items

 

-

 

 

190

 

 

(190)

 

 

1,771

 

 

(1,961)

 

 

 

 

 

 

Certain significant items

 

-

 

 

39

 

 

(39)

 

 

-

 

 

(39)

 

 

 

 

 

 

Eliminations and consolidations

 

(1,300)

 

 

(915)

 

 

(385)

 

 

-

 

 

(385)

 

 

 

 

 

 

AT&T Inc.

$

44,588

 

$

29,738

 

$

14,850

 

$

6,949

 

$

7,901

 

 

 

 

 

 

15


AT&T INC.

SEPTEMBER 30, 2019

 

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

$

17,735

 

$

10,104

 

$

7,631

 

$

2,057

 

$

5,574

 

$

1

 

$

5,575

Entertainment Group

 

11,589

 

 

9,155

 

 

2,434

 

 

1,331

 

 

1,103

 

 

1

 

 

1,104

Business Wireline

 

6,683

 

 

4,022

 

 

2,661

 

 

1,187

 

 

1,474

 

 

(3)

 

 

1,471

Total Communications

 

36,007

 

 

23,281

 

 

12,726

 

 

4,575

 

 

8,151

 

 

(1)

 

 

8,150

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

Eliminations and 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

 

46,489

 

 

30,639

 

 

15,850

 

 

5,009

 

 

10,841

 

$

(31)

 

$

10,810

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

531

 

 

141

 

 

390

 

 

829

 

 

(439)

 

 

 

 

 

 

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

 

 

 

 

 

 

16


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the nine months ended September 30, 2019

 

 

Revenues

 

 

Operations

and Support

Expenses

 

 

EBITDA

 

 

Depreciation

and

Amortization

 

 

Operating

Income (Loss)

 

 

Equity in Net

Income (Loss) of

Affiliates

 

 

Segment

Contribution

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

52,356

 

$

29,511

 

$

22,845

 

$

6,027

 

$

16,818

 

$

(1)

 

$

16,817

Entertainment Group

 

33,893

 

 

25,839

 

 

8,054

 

 

3,978

 

 

4,076

 

 

1

 

 

4,077

Business Wireline

 

19,588

 

 

12,029

 

 

7,559

 

 

3,735

 

 

3,824

 

 

-

 

 

3,824

Total Communications

 

105,837

 

 

67,379

 

 

38,458

 

 

13,740

 

 

24,718

 

 

-

 

 

24,718

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

9,860

 

 

5,813

 

 

4,047

 

 

167

 

 

3,880

 

 

46

 

 

3,926

Home Box Office

 

5,045

 

 

3,124

 

 

1,921

 

 

67

 

 

1,854

 

 

40

 

 

1,894

Warner Bros.

 

10,240

 

 

8,543

 

 

1,697

 

 

122

 

 

1,575

 

 

(19)

 

 

1,556

Eliminations and other

 

(570)

 

 

(31)

 

 

(539)

 

 

28

 

 

(567)

 

 

70

 

 

(497)

Total WarnerMedia

 

24,575

 

 

17,449

 

 

7,126

 

 

384

 

 

6,742

 

 

137

 

 

6,879

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

3,112

 

 

2,598

 

 

514

 

 

496

 

 

18

 

 

25

 

 

43

Mexico

 

2,093

 

 

2,312

 

 

(219)

 

 

372

 

 

(591)

 

 

-

 

 

(591)

Total Latin America

 

5,205

 

 

4,910

 

 

295

 

 

868

 

 

(573)

 

 

25

 

 

(548)

Xandr

 

1,415

 

 

469

 

 

946

 

 

41

 

 

905

 

 

-

 

 

905

Segment Total

 

137,032

 

 

90,207

 

 

46,825

 

 

15,033

 

 

31,792

 

$

162

 

$

31,954

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

1,290

 

 

2,129

 

 

(839)

 

 

505

 

 

(1,344)

 

 

 

 

 

 

Acquisition-related items

 

(72)

 

 

579

 

 

(651)

 

 

5,719

 

 

(6,370)

 

 

 

 

 

 

Certain significant items

 

-

 

 

381

 

 

(381)

 

 

-

 

 

(381)

 

 

 

 

 

 

Eliminations and consolidations

 

(3,878)

 

 

(2,814)

 

 

(1,064)

 

 

(1)

 

 

(1,063)

 

 

 

 

 

 

AT&T Inc.

$

134,372

 

$

90,482

 

$

43,890

 

$

21,256

 

$

22,634

 

 

 

 

 

 

17


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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

$

51,965

 

$

29,603

 

$

22,362

 

$

6,218

 

$

16,144

 

$

-

 

$

16,144

Entertainment Group

 

34,498

 

 

26,623

 

 

7,875

 

 

3,986

 

 

3,889

 

 

(1)

 

 

3,888

Business Wireline

 

20,035

 

 

12,047

 

 

7,988

 

 

3,520

 

 

4,468

 

 

(2)

 

 

4,466

Total Communications

 

106,498

 

 

68,273

 

 

38,225

 

 

13,724

 

 

24,501

 

 

(3)

 

 

24,498

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

Eliminations and 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

 

123,190

 

 

80,340

 

 

42,850

 

 

14,836

 

 

28,014

 

$

(34)

 

$

27,980

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

1,636

 

 

1,832

 

 

(196)

 

 

1,034

 

 

(1,230)

 

 

 

 

 

 

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

 

 

 

 

 

 

 

18


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

Communications

$

8,036

 

$

8,150

 

$

24,718

 

$

24,498

WarnerMedia

 

2,544

 

 

2,528

 

 

6,879

 

 

2,992

Latin America

 

(166)

 

 

(201)

 

 

(548)

 

 

(462)

Xandr

 

327

 

 

333

 

 

905

 

 

952

Segment Contribution

 

10,741

 

 

10,810

 

 

31,954

 

 

27,980

Reconciling Items:

 

 

 

 

 

 

 

 

 

 

 

Corporate and Other

 

(427)

 

 

(439)

 

 

(1,344)

 

 

(1,230)

Merger and integration items

 

(190)

 

 

(362)

 

 

(651)

 

 

(794)

Amortization of intangibles acquired

 

(1,771)

 

 

(2,329)

 

 

(5,719)

 

 

(4,669)

Employee separation charges

 

(39)

 

 

(75)

 

 

(381)

 

 

(259)

Natural disaster items

 

-

 

 

-

 

 

-

 

 

(104)

Segment equity in net income of affiliates

 

(28)

 

 

31

 

 

(162)

 

 

34

Eliminations and consolidations

 

(385)

 

 

(367)

 

 

(1,063)

 

 

(1,022)

AT&T Operating Income

 

7,901

 

 

7,269

 

 

22,634

 

 

19,936

Interest Expense

 

(2,083)

 

 

(2,051)

 

 

(6,373)

 

 

(5,845)

Equity in net income (loss) of affiliates

 

3

 

 

(64)

 

 

36

 

 

(71)

Other income (expense) - net

 

(935)

 

 

1,053

 

 

(967)

 

 

5,108

Income Before Income Taxes

$

4,886

 

$

6,207

 

$

15,330

 

$

19,128

 

The following table presents intersegment revenues by segment:

 

Intersegment Revenue Reconciliation

 

 

 

 

 

 

 

 

 

 

 

Three months ended

September 30,

Nine months ended

September 30,

 

2019

 

2018

2019

 

 

2018

Intersegment revenues

 

 

 

 

 

 

 

 

 

 

Communications

$

2

 

$

6

$

10

 

$

8

WarnerMedia

 

812

 

 

844

 

2,531

 

 

1,053

Latin America

 

-

 

 

-

 

-

 

 

-

Xandr

 

7

 

 

-

 

7

 

 

-

Total Intersegment Revenues

 

821

 

 

850

 

2,548

 

 

1,061

Consolidations

 

479

 

 

431

 

1,330

 

 

1,002

Eliminations and consolidations

$

1,300

 

$

1,281

$

3,878

 

$

2,063

 

19


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

NOTE 5. REVENUE RECOGNITION

 

Revenue Categories

The following tables set forth reported revenue by category and by business unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2019

 

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

13,856

 

$

-

 

$

-

 

$

-

 

$

-

 

$

74

 

$

-

 

$

3,771

 

$

17,701

Entertainment Group

 

-

 

 

2,117

 

 

628

 

 

7,512

 

 

-

 

 

421

 

 

517

 

 

2

 

 

11,197

Business Wireline

 

-

 

 

3,269

 

 

2,252

 

 

-

 

 

-

 

 

-

 

 

783

 

 

199

 

 

6,503

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

-

 

 

-

 

 

-

 

 

1,927

 

 

89

 

 

913

 

 

78

 

 

-

 

 

3,007

Home Box Office

 

-

 

 

-

 

 

-

 

 

1,533

 

 

284

 

 

-

 

 

2

 

 

-

 

 

1,819

Warner Bros.

 

-

 

 

-

 

 

-

 

 

23

 

 

3,129

 

 

13

 

 

168

 

 

-

 

 

3,333

Eliminations and Other

 

-

 

 

-

 

 

-

 

 

57

 

 

(387)

 

 

19

 

 

(2)

 

 

-

 

 

(313)

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

-

 

 

-

 

 

-

 

 

1,013

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,013

Mexico

 

455

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

262

 

 

717

Xandr

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

504

 

 

-

 

 

-

 

 

504

Corporate and Other

 

124

 

 

13

 

 

6

 

 

-

 

 

-

 

 

-

 

 

227

 

 

37

 

 

407

Eliminations and

consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(798)

 

 

(421)

 

 

(81)

 

 

-

 

 

(1,300)

Total Operating Revenues

$

14,435

 

$

5,399

 

$

2,886

 

$

12,065

 

$

2,317

 

$

1,523

 

$

1,692

 

$

4,271

 

$

44,588

 

20


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended September 30, 2018

 

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

13,751

 

$

-

 

$

-

 

$

-

 

$

-

 

$

77

 

$

-

 

$

3,907

 

$

17,735

Entertainment Group

 

-

 

 

2,045

 

 

739

 

 

7,882

 

 

-

 

 

401

 

 

518

 

 

4

 

 

11,589

Business Wireline

 

-

 

 

3,053

 

 

2,602

 

 

-

 

 

-

 

 

-

 

 

831

 

 

197

 

 

6,683

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

 

161

 

 

13

 

 

7

 

 

-

 

 

-

 

 

-

 

 

307

 

 

43

 

 

531

Eliminations and

consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(830)

 

 

(401)

 

 

(50)

 

 

-

 

 

(1,281)

Total Operating Revenues

$

14,352

 

$

5,111

 

$

3,348

 

$

12,403

 

$

2,715

 

$

1,505

 

$

1,863

 

$

4,442

 

$

45,739

 

21


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the nine months ended September 30, 2019

 

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

41,171

 

$

-

 

$

-

 

$

-

 

$

-

 

$

212

 

$

-

 

$

10,973

 

$

52,356

Entertainment Group

 

-

 

 

6,296

 

 

1,969

 

 

22,872

 

 

-

 

 

1,170

 

 

1,580

 

 

6

 

 

33,893

Business Wireline

 

-

 

 

9,649

 

 

6,973

 

 

-

 

 

-

 

 

-

 

 

2,430

 

 

536

 

 

19,588

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

-

 

 

-

 

 

-

 

 

5,835

 

 

335

 

 

3,440

 

 

250

 

 

-

 

 

9,860

Home Box Office

 

-

 

 

-

 

 

-

 

 

4,383

 

 

655

 

 

-

 

 

7

 

 

-

 

 

5,045

Warner Bros.

 

-

 

 

-

 

 

-

 

 

67

 

 

9,636

 

 

33

 

 

504

 

 

-

 

 

10,240

Eliminations and Other

 

-

 

 

-

 

 

-

 

 

160

 

 

(776)

 

 

36

 

 

10

 

 

-

 

 

(570)

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

-

 

 

-

 

 

-

 

 

3,112

 

 

-

 

 

-

 

 

-

 

 

-

 

 

3,112

Mexico

 

1,376

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

717

 

 

2,093

Xandr

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,415

 

 

-

 

 

-

 

 

1,415

Corporate and Other

 

437

 

 

40

 

 

20

 

 

-

 

 

-

 

 

-

 

 

605

 

 

116

 

 

1,218

Eliminations and

consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(2,475)

 

 

(1,170)

 

 

(233)

 

 

-

 

 

(3,878)

Total Operating Revenues

$

42,984

 

$

15,985

 

$

8,962

 

$

36,429

 

$

7,375

 

$

5,136

 

$

5,153

 

$

12,348

 

$

134,372

 

22


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the nine months ended September 30, 2018

 

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

40,432

 

$

-

 

$

-

 

$

-

 

$

-

 

$

162

 

$

-

 

$

11,371

 

$

51,965

Entertainment Group

 

-

 

 

5,904

 

 

2,317

 

 

23,559

 

 

-

 

 

1,122

 

 

1,588

 

 

8

 

 

34,498

Business Wireline

 

-

 

 

9,101

 

 

8,176

 

 

-

 

 

-

 

 

-

 

 

2,192

 

 

566

 

 

20,035

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

 

480

 

 

39

 

 

28

 

 

-

 

 

-

 

 

-

 

 

958

 

 

131

 

 

1,636

Eliminations and

consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,039)

 

 

(1,122)

 

 

98

 

 

-

 

 

(2,063)

Total Operating Revenues

$

42,173

 

$

15,044

 

$

10,521

 

$

31,473

 

$

2,937

 

$

2,558

 

$

5,143

 

$

12,914

 

$

122,763

 

23


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Deferred Customer Contract Acquisition and Fulfillment Costs

Costs to acquire and fulfill customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from three years to five years. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.

 

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

 

 

 

September 30,

 

 

December 31,

Consolidated Balance Sheets

 

2019

 

 

2018

Deferred Acquisition Costs

 

 

 

 

 

Other current assets

$

2,190

 

$

1,901

Other Assets

 

2,878

 

 

2,073

Total deferred customer contract acquisition costs

 

5,068

 

 

3,974

 

 

 

 

 

 

Deferred Fulfillment Costs

 

 

 

 

 

Other current assets

 

4,589

 

 

4,090

Other Assets

 

6,640

 

 

7,450

Total deferred customer contract fulfillment costs

$

11,229

 

$

11,540

 

The following table presents deferred customer contract acquisition cost and deferred customer contract fulfillment cost amortization for the nine months ended:

 

 

 

September 30,

 

 

September 30,

Consolidated Statements of Income

 

2019

 

 

2018

Deferred acquisition cost amortization

$

1,565

 

$

959

Deferred fulfillment cost amortization

 

3,656

 

 

2,983

 

Contract Assets and Liabilities

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

 

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

 

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

 

 

 

 

 

September 30,

 

 

December 31,

Consolidated Balance Sheets

 

 

2019

 

 

2018

 

 

 

 

 

 

 

Contract asset

 

$

2,255

 

$

1,896

Contract liability

 

 

6,886

 

 

6,856

 

Our December 31, 2018 contract liability recorded as customer contract revenue during 2019 was $5,295.

 

24


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Our consolidated balance sheets at September 30, 2019 and December 31, 2018 included approximately $1,496 and $1,244, respectively, for the current portion of our contract asset in “Other current assets” and $5,910 and $5,752, respectively, for the current portion of our contract liability in “Advanced billings and customer deposits.”

 

Remaining Performance Obligations

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

 

Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $40,216, of which we expect to recognize approximately 70% by the end of 2020, with the balance recognized thereafter.

 

NOTE 6. PENSION AND POSTRETIREMENT BENEFITS

 

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

 

In first quarter of 2019, for certain management participants in our pension plan who terminated employment before April 1, 2019, we offered the option of more favorable 2018 interest rates and mortality basis for determining lump-sum distributions. During the first nine months of 2019, we have recorded special termination benefits of $81 in “Other income (expense) – net.” During 2019, we also offered certain terminated vested pension plan participants the opportunity to receive their benefit in a lump-sum amount.

 

We recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of “Other income (expense) – net” at our annual measurement date of December 31, unless earlier remeasurements are required. We anticipated total distributions from the pension plan would exceed the threshold of service and interest costs for 2019, requiring us to follow settlement accounting and remeasure our pension benefit obligation at each quarter-end, resulting in the recognition of actuarial losses of $432, $1,699, and $1,888 in the first, second and third quarters of 2019, respectively.

 

As part of our quarterly 2019 remeasurements, we decreased the weighted-average discount rate used to measure our pension benefit obligation from 4.50% at December 31, 2018 by 40 basis points each quarter to 3.30% at September 30, 2019. Our remeasurements also reflect actual returns on plan assets of 13.40% (nine-month rate). Our expected long-term rate of return on pension plan assets is an annualized 7.00% for 2019.

 

25


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2019

 

2018

 

2019

 

2018

Pension cost:

 

 

 

 

 

 

 

 

 

 

 

Service cost – benefits earned during the period

$

260

 

$

270

 

$

743

 

$

845

Interest cost on projected benefit obligation

 

463

 

 

551

 

 

1,520

 

 

1,542

Expected return on assets

 

(905)

 

 

(761)

 

 

(2,636)

 

 

(2,276)

Amortization of prior service credit

 

(28)

 

 

(28)

 

 

(85)

 

 

(87)

Actuarial (gain) loss

 

1,888

 

 

-

 

 

4,019

 

 

(1,796)

Net pension (credit) cost

$

1,678

 

$

32

 

$

3,561

 

$

(1,772)

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement cost:

 

 

 

 

 

 

 

 

 

 

 

Service cost – benefits earned during the period

$

19

 

$

27

 

$

55

 

$

82

Interest cost on accumulated postretirement benefit obligation

 

185

 

 

196

 

 

557

 

 

582

Expected return on assets

 

(57)

 

 

(76)

 

 

(169)

 

 

(228)

Amortization of prior service credit

 

(425)

 

 

(412)

 

 

(1,277)

 

 

(1,222)

Actuarial (gain) loss

 

-

 

 

-

 

 

-

 

 

(930)

Net postretirement (credit) cost

$

(278)

 

$

(265)

 

$

(834)

 

$

(1,716)

 

 

 

 

 

 

 

 

 

 

 

 

Combined net pension and postretirement (credit) cost

$

1,400

 

$

(233)

 

$

2,727

 

$

(3,488)

 

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental pension benefits costs not included in the table above were $24 and $24 in the third quarter and $74 and $65 for the first nine months of 2019 and 2018, respectively. During the third quarter of 2019, we recorded an actuarial loss of $29.

 

NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE

 

The Fair Value Measurement and Disclosure framework in ASC 820, “Fair Value Measurement,” provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.

 

The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2018.

 

26


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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, 2019

 

December 31, 2018

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

Amount

 

Value

 

Amount

 

Value

Notes and debentures1

$

160,758

 

$

180,801

 

$

171,529

 

$

172,287

Commercial paper

 

2,439

 

 

2,439

 

 

3,048

 

 

3,048

Bank borrowings

 

4

 

 

4

 

 

4

 

 

4

Investment securities2

 

3,599

 

 

3,599

 

 

3,409

 

 

3,409

1

Includes credit agreement borrowings.

2

Excludes investments accounted for under the equity method.

 

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

 

The following tables present the fair value leveling for investment securities and derivatives that are measured at fair value as of September 30, 2019 and December 31, 2018. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.

 

 

 

September 30, 2019

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Equity Securities

 

 

 

 

 

 

 

 

 

 

 

Domestic equities

$

781

 

$

-

 

$

-

 

$

781

International equities

 

171

 

 

-

 

 

-

 

 

171

Fixed income equities

 

227

 

 

-

 

 

-

 

 

227

Available-for-Sale Debt Securities

 

-

 

 

1,380

 

 

-

 

 

1,380

Asset Derivatives

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

-

 

 

2

 

 

-

 

 

2

Cross-currency swaps

 

-

 

 

70

 

 

-

 

 

70

Foreign exchange contracts

 

-

 

 

81

 

 

-

 

 

81

Liability Derivatives

 

 

 

 

 

 

 

 

 

 

 

Cross-currency swaps

 

-

 

 

(4,553)

 

 

-

 

 

(4,553)

Interest rate locks

 

-

 

 

(225)

 

 

-

 

 

(225)

Foreign exchange contracts

 

-

 

 

(2)

 

 

-

 

 

(2)

 

27


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

 

December 31, 2018

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Equity Securities

 

 

 

 

 

 

 

 

 

 

 

Domestic equities

$

1,061

 

$

-

 

$

-

 

$

1,061

International equities

 

256

 

 

-

 

 

-

 

 

256

Fixed income equities

 

172

 

 

-

 

 

-

 

 

172

Available-for-Sale Debt Securities

 

-

 

 

870

 

 

-

 

 

870

Asset Derivatives

 

 

 

 

 

 

 

 

 

 

 

Cross-currency swaps

 

-

 

 

472

 

 

-

 

 

472

Foreign exchange contracts

 

-

 

 

87

 

 

-

 

 

87

Liability Derivatives

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

-

 

 

(39)

 

 

-

 

 

(39)

Cross-currency swaps

 

-

 

 

(2,563)

 

 

-

 

 

(2,563)

Foreign exchange contracts

 

-

 

 

(2)

 

 

-

 

 

(2)

 

Investment Securities

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

 

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

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2019

 

2018

 

2019

 

2018

Total gains (losses) recognized on equity securities

$

21

 

$

80

 

$

231

 

$

88

Gains (Losses) recognized on equity securities sold

 

8

 

 

(2)

 

 

101

 

 

(4)

Unrealized gains (losses) recognized on equity securities

held at end of period

 

13

 

 

82

 

 

130

 

 

92

 

At September 30, 2019, available-for-sale debt securities totaling $1,380 have maturities as follows - less than one year: $102; one to three years: $177; three to five years: $164; five or more years: $937.

 

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.

 

28


AT&T INC.

SEPTEMBER 30, 2019

 

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, 2019 and 2018, no ineffectiveness was measured on fair value hedges.

 

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

 

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

 

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, 2019 and 2018, no ineffectiveness was measured on cash flow hedges.

 

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses from the settlement of 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 $62 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

 

Net Investment Hedging We have designated €1,450 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of our subsidiaries. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated OCI, net on the consolidated balance sheet. Net gains on net investment hedges recognized in accumulated OCI in the third quarter and for the first nine months of 2019 was $43.

 

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, 2019, we had posted collateral of $407 (a deposit asset) and held collateral of $38 (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 $122. If AT&T’s credit rating had been downgraded four ratings levels by Fitch Ratings, two levels by S&P, and two levels by Moody’s, we would have been required to post additional collateral of

29


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

$4,502. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- by S&P, we would have been required to post additional collateral of $288. At December 31, 2018, we had posted collateral of $1,675 (a deposit asset) and held collateral of $103 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

 

Following are the notional amounts of our outstanding derivative positions:

 

 

 

September 30,

 

December 31,

 

2019

 

2018

Interest rate swaps

$

853

 

$

3,483

Cross-currency swaps

 

42,792

 

 

42,192

Interest rate locks

 

3,500

 

 

-

Foreign exchange contracts

 

473

 

 

2,094

Total

$

47,618

 

$

47,769

 

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

 

Effect of Derivatives on the Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

Fair Value Hedging Relationships

2019

 

2018

 

2019

 

2018

Interest rate swaps (Interest expense):

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) on interest rate swaps

$

-

 

$

2

 

$

59

 

$

(60)

Gain (Loss) on long-term debt

 

-

 

 

(2)

 

 

(59)

 

 

60

 

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

 

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

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

Cash Flow Hedging Relationships

2019

 

2018

 

2019

 

2018

Cross-currency swaps:

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) recognized in accumulated OCI

$

(487)

 

$

(13)

 

$

(1,082)

 

$

308

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) recognized in accumulated OCI

 

5

 

 

17

 

 

2

 

 

17

Other income (expense) - net reclassified from

accumulated OCI into income

 

6

 

 

-

 

 

16

 

 

-

Interest rate locks:

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) recognized in accumulated OCI

 

(202)

 

 

-

 

 

(225)

 

 

-

Interest income (expense) reclassified from

accumulated OCI into income

 

(15)

 

 

(15)

 

 

(47)

 

 

(44)

 

30


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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. We paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,358, excluding Time Warner’s net debt at acquisition.

 

The fair values of the assets acquired and liabilities assumed were 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.

 

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.

 

31


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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

 

Assets acquired

 

 

 

Cash

 

$

1,889

Accounts receivable

 

 

9,020

All other current assets

 

 

2,913

Noncurrent inventory and theatrical film and television production costs

 

 

5,591

Property, plant and equipment

 

 

4,693

Intangible assets subject to amortization

 

 

 

Distribution network

 

 

18,040

Released television and film content

 

 

10,806

Trademarks and trade names

 

 

18,081

Other

 

 

10,300

Investments and other assets

 

 

9,438

Goodwill

 

 

38,801

Total assets acquired

 

 

129,572

 

 

 

 

Liabilities assumed

 

 

 

Current liabilities, excluding current portion of long-term debt

 

 

8,294

Debt maturing within one year

 

 

4,471

Long-term debt

 

 

18,394

Other noncurrent liabilities

 

 

19,054

Total liabilities assumed

 

 

50,213

Net assets acquired

 

 

79,359

Noncontrolling interest

 

 

(1)

Aggregate value of consideration paid

 

$

79,358

 

Purchased goodwill is not expected to be deductible for tax purposes. All of the goodwill was allocated to the WarnerMedia segment.

 

Dispositions

 

Hudson Yards In June 2019, we sold our ownership in Hudson Yards North Tower Holdings LLC under a sale-leaseback arrangement for cash proceeds of $2,081 and recorded a loss of approximately $100 resulting from transaction costs (primarily real estate transfer taxes).

 

Hulu In April 2019, we sold our ownership in Hulu for cash proceeds of $1,430 and recorded a gain of $740.

 

Held-for-Sale

 

In October 2019, we entered into an agreement to sell our wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands for approximately $1,950. We expect the transaction to close in the first half of 2020, subject to customary closing conditions.

 

In the third quarter of 2019, we applied held-for-sale treatment to the assets and liabilities of these operations, and, accordingly, included the assets in “Other current assets,” and the related liabilities in “Accounts payable and accrued liabilities,” on our consolidated balance sheet at September 30, 2019.

 

32


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The assets and liabilities primarily consist of approximately $700 of net property, plant and equipment; $1,100 of FCC licenses; $300 of goodwill; and $400 of net tax liabilities.

 

NOTE 9. SALES OF RECEIVABLES

 

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

 

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

 

Our equipment installment and WarnerMedia programs are discussed in detail below. A summary of the receivables and accounts being serviced is as follows:

 

 

 

September 30, 2019

 

December 31, 2018

 

 

Equipment

 

 

 

 

Equipment

 

 

 

 

 

Installment

 

WarnerMedia

 

Installment

 

WarnerMedia

Gross receivables:

$

4,425

 

$

3,147

 

$

5,994

 

$

-

Balance sheet classification

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

 

 

 

 

 

 

Notes receivable

 

2,528

 

 

-

 

 

3,457

 

 

-

Trade receivables

 

460

 

 

2,626

 

 

438

 

 

-

Other Assets

 

 

 

 

 

 

 

 

 

 

 

Noncurrent notes and trade receivables

 

1,437

 

 

521

 

 

2,099

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding portfolio of receivables derecognized from

our consolidated balance sheets

 

9,405

 

 

3,456

 

 

9,065

 

 

-

Cash proceeds received, net of remittances1

 

6,920

 

 

3,456

 

 

6,508

 

 

-

1

Represents amounts to which financial institutions remain entitled, excluding the deferred purchase price.

 

Equipment Installment Receivables

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

 

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

 

33


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The following table sets forth a summary of equipment installment receivables sold during the three and nine months ended September 30, 2019 and 2018:

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

 

2019

 

2018

 

2019

 

2018

Gross receivables sold

$

2,098

 

$

2,161

 

$

7,043

 

$

7,077

Net receivables sold1

 

2,014

 

 

2,064

 

 

6,693

 

 

6,670

Cash proceeds received

 

1,700

 

 

1,752

 

 

5,895

 

 

5,679

Deferred purchase price recorded

 

352

 

 

335

 

 

922

 

 

1,161

Guarantee obligation recorded

 

67

 

 

75

 

 

261

 

 

270

1

Receivables net of allowance, imputed interest and equipment trade-in right guarantees.

 

The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently 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 previously transferred equipment installment receivables, which we repurchased in exchange for the associated deferred purchase price during the three and nine months ended September 30, 2019 and 2018:

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

 

2019

 

2018

 

2019

 

2018

Fair value of repurchased receivables

$

268

 

$

-

 

$

926

 

$

1,481

Carrying value of deferred purchase price

 

259

 

 

-

 

 

891

 

 

1,393

Gain (loss) on repurchases1

$

9

 

$

-

 

$

35

 

$

88

1

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

 

At September 30, 2019 and December 31, 2018, our deferred purchase price receivable was $2,300 and $2,370, respectively, of which $1,605 and $1,448 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at September 30, 2019 and December 31, 2018 was $427 and $439, respectively, of which $152 and $196 are included in “Accounts payable and accrued liabilities” on our consolidated balance sheets, with the remainder in “Other noncurrent liabilities.” Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.

 

WarnerMedia Receivables

In March 2019, we entered into a revolving agreement to transfer $1,400 of certain receivables from our WarnerMedia business to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred. As customers pay their balances, we transfer additional receivables into the program, resulting in our gross receivables sold exceeding net cash flow impacts (e.g., collect and reinvest). In June 2019, we expanded the program another $2,600 for a total maximum outstanding amount of $4,000, of which approximately $3,456 is outstanding at September 30, 2019. The transferred receivables are fully guaranteed by our subsidiary, which holds additional receivables in the amount of $,3147 that are pledged as collateral under this agreement. The transfers are recorded at fair value of the proceeds received and obligations assumed less derecognized receivables. Our maximum exposure to loss related to selling these receivables is limited to the amount outstanding.

 

34


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The following table sets forth a summary of WarnerMedia receivables sold during the three and nine months ended September 30, 2019 and 2018:

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

 

2019

 

2018

 

2019

 

2018

Gross receivables sold/cash proceeds received1

$

2,873

 

$

-

 

$

8,725

 

$

-

Collections reinvested under revolving agreement

 

2,873

 

 

-

 

 

5,000

 

 

-

Collections not reinvested

 

269

 

 

-

 

 

269

 

 

-

Net cash proceeds received (remitted)

$

(269)

 

$

-

 

$

3,456

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Net receivables sold2

$

2,864

 

$

-

 

$

8,361

 

$

-

Obligations recorded

 

39

 

 

-

 

 

475

 

 

-

1

Includes initial sale of receivables of $0 for the three months ended and $3,725 for the nine months ended September 30, 2019.

2

Receivables net of allowance, return and incentive reserves and imputed interest

 

NOTE 10. LEASES

 

We have operating and finance leases for certain facilities and equipment used in our operations. As of September 30, 2019, our leases have remaining lease terms of up to 15 years. Some of our real estate operating leases contain renewal options that may be exercised, and some of our leases include options to terminate the leases within one year.

 

Subsequent to the adoption of ASC 842 on January 1, 2019, we recognize a right-of-use asset for both operating and finance leases, and an operating lease liability that represents the present value of our obligation to make payments over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use the unsecured borrowing rate and risk-adjust that rate to approximate a collateralized rate in the currency of the lease, which is updated on a quarterly basis for measurement of new lease obligations.

 

The components of lease expense were as follows:

 

 

Three months ended

 

Nine months ended

 

September 30, 2019

 

September 30, 2019

Operating lease cost

$

1,481

 

$

4,333

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

Amortization of right-of-use assets

$

67

 

$

203

Interest on lease obligation

 

42

 

 

126

Total finance lease cost

$

109

 

$

329

 

35


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Supplemental balance sheet information related to leases is as follows:

 

At September 30, 2019

 

 

 

Operating Leases

 

 

 

Operating lease right-of-use assets

$

24,477

 

 

 

 

 

Accounts payable and accrued liabilities

$

3,453

 

Operating lease obligation

 

22,288

 

Total operating lease obligation

$

25,741

 

 

 

 

 

Finance Leases

 

 

 

Property, plant and equipment, at cost

$

3,438

 

Accumulated depreciation and amortization

 

(1,215)

 

Property, plant and equipment, net

$

2,223

 

 

 

 

 

Current portion of long-term debt

$

153

 

Long-term debt

 

1,823

 

Total finance lease obligation

$

1,976

 

 

 

 

 

Weighted-Average Remaining Lease Term

 

 

 

Operating leases

 

8.7

yrs

Finance leases

 

10.4

yrs

 

 

 

 

Weighted-Average Discount Rate

 

 

 

Operating leases

 

4.3

%

Finance leases

 

8.4

%

36


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Future minimum maturities of lease obligations are as follows:

 

At September 30, 2019

Operating

 

Finance

 

Leases

 

Leases

Remainder of 2019

$

1,168

 

$

100

2020

 

4,643

 

 

306

2021

 

4,258

 

 

287

2022

 

3,993

 

 

276

2023

 

3,609

 

 

264

2024

 

2,923

 

 

247

Thereafter

 

11,706

 

 

1,591

Total lease payments

 

32,300

 

 

3,071

Less imputed interest

 

(6,559)

 

 

(1,095)

Total

$

25,741

 

$

1,976

 

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 components comprising cash and cash equivalents and restricted cash are as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2019

 

 

2018

 

 

2018

 

 

2017

Cash and cash equivalents

 

$

6,588

 

$

8,657

 

$

5,204

 

$

50,498

Restricted cash in Other current assets

 

 

15

 

 

56

 

 

61

 

 

6

Restricted cash in Other Assets

 

 

179

 

 

75

 

 

135

 

 

428

Cash and cash equivalents and restricted cash

 

$

6,782

 

$

8,788

 

$

5,400

 

$

50,932

 

Supplemental disclosures for the statement of cash flows related to operating leases are as follows:

 

 

 

Nine months ended

 

 

September 30,

 

 

2019

 

2018

Cash Flows from Operating Activities

 

 

 

 

 

 

Cash paid for amounts included in lease obligations

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

3,338

 

$

3,694

 

 

 

 

 

 

 

Supplemental Lease Cash Flow Disclosures

 

 

 

 

 

 

Operating lease right-of-use assets obtained

 

 

 

 

 

 

in exchange for new operating lease obligations

 

 

7,068

 

 

-

37


AT&T INC.

SEPTEMBER 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Cash paid (received) from interest and income taxes during the period are as follows:

 

 

Nine months ended

 

September 30,

 

 

2019

 

 

2018

Interest

$

6,938

 

$

6,943

Income taxes, net of refunds

 

420

 

 

(537)

 

Other Noncash Investing and Financing Activities In 2019, we recorded approximately $1,920 of new vendor financing commitments related to capital investments, and we have repaid $2,601 of such obligations during the year. In connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing), which are excluded from our investing activities and reported as financing activities.

 

Preferred Interests Issued by Subsidiary In September 2019, we issued $1,500 nonconvertible cumulative preferred interests in a wireless subsidiary that holds interests in various tower assets (Tower Holdings).

The membership interests in Tower Holdings consist of (1) common interests, which are held by a consolidated subsidiary of AT&T, and (2) these newly issued preferred interests (Tower preferred interests), which pay an initial preferred distribution of 5.0% annually, subject to declaration, resetting every five years. The declaration and payment of distributions on the preferred interests do not impose any limitation on cash movements between affiliates, or our ability to declare a dividend on or repurchase AT&T shares. We can call the Tower preferred interests beginning five years from the issuance date or upon the receipt of proceeds from the sale of the underlying assets. The preferred interests are included in “Noncontrolling interest” on the consolidated balance sheet.

 

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

 

 

38


AT&T INC.

SEPTEMBER 30, 2019

 

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

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

 

OVERVIEW

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

 

We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our segment results presented in Note 4 and discussed below follow our internal management reporting. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items and equity in net income (loss) of affiliates for investments managed within each segment. Percentage increases and decreases that are not considered meaningful are denoted with a dash. We have recast our segment results for all prior periods presented to exclude our wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands from our Mobility and Business Wireline business units of the Communications segment, instead reporting them with Corporate and Other (see Note 8).

 

 

Third Quarter

 

 

Nine-Month Period

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

2019

 

2018

Change

 

 

2019

 

2018

Change

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Communications

$

35,401

 

$

36,007

(1.7)

%

 

$

105,837

 

$

106,498

(0.6)

%

WarnerMedia

 

7,846

 

 

8,204

(4.4)

 

 

 

24,575

 

 

9,709

-

 

Latin America

 

1,730

 

 

1,833

(5.6)

 

 

 

5,205

 

 

5,809

(10.4)

 

Xandr

 

504

 

 

445

13.3

 

 

 

1,415

 

 

1,174

20.5

 

Corporate and other

 

407

 

 

531

(23.4)

 

 

 

1,218

 

 

1,636

(25.6)

 

Eliminations and consolidation

 

(1,300)

 

 

(1,281)

(1.5)

 

 

 

(3,878)

 

 

(2,063)

(88.0)

 

AT&T Operating Revenues

 

44,588

 

 

45,739

(2.5)

 

 

 

134,372

 

 

122,763

9.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Communications

 

8,036

 

 

8,150

(1.4)

 

 

 

24,718

 

 

24,498

0.9

 

WarnerMedia

 

2,544

 

 

2,528

0.6

 

 

 

6,879

 

 

2,992

-

 

Latin America

 

(166)

 

 

(201)

17.4

 

 

 

(548)

 

 

(462)

(18.6)

 

Xandr

 

327

 

 

333

(1.8)

 

 

 

905

 

 

952

(4.9)

 

Segment Operating Contribution

$

10,741

 

$

10,810

(0.6)

%

 

$

31,954

 

$

27,980

14.2

%

 

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

Mobility provides nationwide wireless service and equipment.

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.

 

39


AT&T INC.

SEPTEMBER 30, 2019

 

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 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:

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

Home Box Office consists of premium pay television and OTT 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:

Mexico provides wireless service and equipment to customers in Mexico.

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

 

The Xandr segment provides advertising services and includes our recently acquired AppNexus. These services utilize data insights to develop and deliver targeted advertising across video and digital platforms.

 

RESULTS OF OPERATIONS

 

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

 

 

Third Quarter

 

 

Nine-Month Period

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

2019

 

2018

Change

 

 

2019

 

2018

Change

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

$

40,317

 

$

41,297

(2.4)

%

 

$

122,024

 

$

109,849

11.1

%

Equipment

 

4,271

 

 

4,442

(3.8)

 

 

 

12,348

 

 

12,914

(4.4)

 

Total Operating Revenues

 

44,588

 

 

45,739

(2.5)

 

 

 

134,372

 

 

122,763

9.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

29,738

 

 

30,304

(1.9)

 

 

 

90,482

 

 

82,289

10.0

 

Depreciation and amortization

 

6,949

 

 

8,166

(14.9)

 

 

 

21,256

 

 

20,538

3.5

 

Total Operating Expenses

 

36,687

 

 

38,470

(4.6)

 

 

 

111,738

 

 

102,827

8.7

 

Operating Income

 

7,901

 

 

7,269

8.7

 

 

 

22,634

 

 

19,936

13.5

 

Interest expense

 

2,083

 

 

2,051

1.6

 

 

 

6,373

 

 

5,845

9.0

 

Equity in net income (loss)

of affiliates

 

3

 

 

(64)

-

 

 

 

36

 

 

(71)

-

 

Other income (expense) – net

 

(935)

 

 

1,053

-

 

 

 

(967)

 

 

5,108

-

 

Income Before Income Taxes

 

4,886

 

 

6,207

(21.3)

 

 

 

15,330

 

 

19,128

(19.9)

 

Net Income

 

3,949

 

 

4,816

(18.0)

 

 

 

12,271

 

 

14,823

(17.2)

 

Net Income Attributable to AT&T

$

3,700

 

$

4,718

(21.6)

%

 

$

11,509

 

$

14,512

(20.7)

%

 

Operating revenues decreased in the third quarter and increased in the first nine months of 2019. The decrease in the third quarter was primarily due to declines in our Communications, WarnerMedia and Latin America segments. Communications segment decreases were due to continued declines in legacy and video services and lower wireless device upgrades, partially offset by growth in advanced data and wireless services. WarnerMedia segment declines were driven by lower theatrical

40


AT&T INC.

SEPTEMBER 30, 2019

 

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

 

product compared to a more favorable mix of box office releases in the prior year, partially offset by higher international licenses revenues at Home Box Office. Latin America revenues were negatively impacted by foreign exchange pressures.

 

The increase in the first nine months was primarily due to our 2018 acquisition of Time Warner. Partially offsetting the increase were declines in the Communications segment driven by continued pressure in legacy and video services and lower wireless equipment upgrades that were offset by growth in advanced data and wireless services, and foreign exchange pressures in our Latin America segment.

 

Operations and support expenses decreased in the third quarter and increased in the first nine months of 2019. The decrease in the third quarter was primarily due to declines in content costs reflecting continued declines in premium TV subscribers and postpaid smartphone volumes in the Communications segment. Lower film and television production costs in the WarnerMedia segment and foreign exchange rate impacts in the Latin America segment also contributed to lower expense in 2019.

 

The increase in the first nine months of 2019 was primarily due to our 2018 acquisition of Time Warner. The increase was partially offset by lower costs in our Communications segment, including lower content and wireless equipment costs, foreign exchange rate impacts in our Latin America segment, and lower expenses due to our continued focus on cost management.

 

Depreciation and amortization expense decreased in the third quarter and increased for the first nine months of 2019. Depreciation expense increased $5, or 0.1% in the third quarter and $168, or 1.1% for the first nine months of 2019. The increase in the nine-month period was primarily due to the Time Warner acquisition.

 

Amortization expense decreased $1,222, or 39.4% in the third quarter and increased $550, or 9.9% for the first nine months of 2019 primarily due to the amortization of intangibles associated with WarnerMedia. We expect continued quarterly declines in amortization expense, reflecting the accelerated method of amortization applied on the WarnerMedia intangibles.

 

Operating income increased in the third quarter and the first nine months of 2019. Our operating income margin for the third quarter increased from 15.9% in 2018 to 17.7% in 2019 and for the first nine months increased from 16.2% in 2018 to 16.8% in 2019.

 

Interest expense increased in the third quarter and first nine months of 2019. The increase was primarily due to lower capitalized interest associated with putting spectrum into network service. Higher debt balances related to our acquisition of Time Warner also contributed to higher expense for the nine-month period.

 

Equity in net income of affiliates increased in the third quarter and for the first nine months of 2019, primarily due to changes in our investment portfolio resulting from acquisitions and the second-quarter 2019 sale of Hulu.

 

Other income (expense) – net decreased in the third quarter and for the first nine months of 2019. The decrease in the quarter was primarily due to the recognition of a $1,917 actuarial loss in 2019 with no comparable remeasurement in 2018, and higher income in the prior year resulting from a gain on our third-quarter 2018 Otter Media transaction.

 

The decrease for the first nine months was primarily due to the recognition of an actuarial loss of $4,048 in 2019, compared to actuarial gain of $2,726 in 2018, and the prior-year gain on the Otter Media transaction. Partially offsetting the declines was a $740 gain on the second-quarter 2019 sale of our investment in Hulu and lower premiums on debt redemptions.