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T AT&T

Filed: 5 Aug 19, 5:25pm
0000732717 us-gaap:OperatingSegmentsMember t:CommunicationsMember t:MobilityMember t:MediaContentServiceRevenueMember 2018-01-01 2018-06-30

 

 

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 June 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 1-8610

 

AT&T INC.

 

Incorporated under the laws of the State of Delaware

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

 

208 S. Akard St., Dallas, Texas 75202

Telephone Number: (210) 821-4105

 

 

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

 

 


 

 

 

Name of each exchange

Title of each class

Trading Symbol(s)

on which registered

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. 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

 

 

 

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. 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

 

 

 

 

 

 

Name of each exchange

Title of each class

Trading Symbol(s)

on which registered

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 July 31, 2019, there were 7,307 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

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

Service

$

41,023

 

$

34,906

 

$

81,707

 

$

68,552

Equipment

 

3,934

 

 

4,080

 

 

8,077

 

 

8,472

Total operating revenues

 

44,957

 

 

38,986

 

 

89,784

 

 

77,024

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

Equipment

 

4,061

 

 

4,377

 

 

8,563

 

 

9,225

Broadcast, programming and operations

 

7,730

 

 

5,449

 

 

15,382

 

 

10,615

Other cost of revenues (exclusive of depreciation and

amortization shown separately below)

 

8,721

 

 

7,632

 

 

17,306

 

 

15,564

Selling, general and administrative

 

9,844

 

 

8,684

 

 

19,493

 

 

16,581

Depreciation and amortization

 

7,101

 

 

6,378

 

 

14,307

 

 

12,372

Total operating expenses

 

37,457

 

 

32,520

 

 

75,051

 

 

64,357

Operating Income

 

7,500

 

 

6,466

 

 

14,733

 

 

12,667

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,149)

 

 

(2,023)

 

 

(4,290)

 

 

(3,794)

Equity in net income (loss) of affiliates

 

40

 

 

(16)

 

 

33

 

 

(7)

Other income (expense) – net

 

(318)

 

 

2,353

 

 

(32)

 

 

4,055

Total other income (expense)

 

(2,427)

 

 

314

 

 

(4,289)

 

 

254

Income Before Income Taxes

 

5,073

 

 

6,780

 

 

10,444

 

 

12,921

Income tax expense

 

1,099

 

 

1,532

 

 

2,122

 

 

2,914

Net Income

 

3,974

 

 

5,248

 

 

8,322

 

 

10,007

Less: Net Income Attributable to Noncontrolling Interest

 

(261)

 

 

(116)

 

 

(513)

 

 

(213)

Net Income Attributable to AT&T

$

3,713

 

$

5,132

 

$

7,809

 

$

9,794

Basic Earnings Per Share Attributable to AT&T

$

0.51

 

$

0.81

 

$

1.06

 

$

1.56

Diluted Earnings Per Share Attributable to AT&T

$

0.51

 

$

0.81

 

$

1.06

 

$

1.56

Weighted Average Number of Common Shares

Outstanding – Basic (in millions)

 

7,323

 

 

6,351

 

 

7,318

 

 

6,257

Weighted Average Number of Common Shares

Outstanding with Dilution (in millions)

 

7,353

 

 

6,374

 

 

7,347

 

 

6,277

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

4


 

AT&T INC.

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

Dollars in millions

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2019

 

2018

 

2019

 

2018

Net income

$

3,974

 

$

5,248

 

$

8,322

 

$

10,007

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency:

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment (includes $2, $(32), $2 and $(30) attributable to noncontrolling interest), net of taxes of $(1), $(318), $48 and $(143)

 

(127)

 

 

(918)

 

 

161

 

 

(810)

Securities:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses), net of taxes of $10, $0, $15and $(4)

 

26

 

 

-

 

 

42

 

 

(12)

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses), net of taxes of $(165), $(112), $(131) and $68

 

(617)

 

 

(421)

 

 

(490)

 

 

253

Reclassification adjustment included in net income, net of taxes of $3, $3, $5 and $6

 

6

 

 

11

 

 

17

 

 

23

Defined benefit postretirement plans:

 

 

 

 

 

 

 

 

 

 

 

Net prior service (cost) credit arising during period, net of taxes of $0, $(12), $0 and $173

 

-

 

 

(37)

 

 

-

 

 

530

Amortization of net prior service credit included in net income, net of taxes of $(107), $(109), $(220) and $(214)

 

(342)

 

 

(334)

 

 

(688)

 

 

(657)

Other comprehensive income (loss)

 

(1,054)

 

 

(1,699)

 

 

(958)

 

 

(673)

Total comprehensive income

 

2,920

 

 

3,549

 

 

7,364

 

 

9,334

Less: Total comprehensive income attributable to

noncontrolling interest

 

(263)

 

 

(84)

 

 

(515)

 

 

(183)

Total Comprehensive Income Attributable to AT&T

$

2,657

 

$

3,465

 

$

6,849

 

$

9,151

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

5


 

AT&T INC.

CONSOLIDATED BALANCE SHEETS

Dollars in millions except per share amounts

 

June 30,

 

December 31,

 

2019

 

2018

Assets

(Unaudited)

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

$

8,423

 

$

5,204

Accounts receivable - net of allowances for doubtful accounts of $1,086 and $907

 

22,381

 

 

26,472

Prepaid expenses

 

1,441

 

 

2,047

Other current assets

 

14,973

 

 

17,704

Total current assets

 

47,218

 

 

51,427

Noncurrent Inventories and Theatrical Film and Television Production Costs

 

10,685

 

 

7,713

Property, plant and equipment

 

334,916

 

 

330,690

Less: accumulated depreciation and amortization

 

(202,842)

 

 

(199,217)

Property, Plant and Equipment – Net

 

132,074

 

 

131,473

Goodwill

 

146,662

 

 

146,370

Licenses – Net

 

97,125

 

 

96,144

Trademarks and Trade Names – Net

 

24,088

 

 

24,345

Distribution Networks – Net

 

16,262

 

 

17,069

Other Intangible Assets – Net

 

23,284

 

 

26,269

Investments in and Advances to Equity Affiliates

 

4,133

 

 

6,245

Operating lease right-of-use assets

 

22,650

 

 

-

Other Assets

 

22,733

 

 

24,809

Total Assets

$

546,914

 

$

531,864

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Debt maturing within one year

$

12,772

 

$

10,255

Accounts payable and accrued liabilities

 

42,082

 

 

43,184

Advanced billings and customer deposits

 

5,734

 

 

5,948

Accrued taxes

 

2,062

 

 

1,179

Dividends payable

 

3,726

 

 

3,854

Total current liabilities

 

66,376

 

 

64,420

Long-Term Debt

 

157,790

 

 

166,250

Deferred Credits and Other Noncurrent Liabilities

 

 

 

 

 

Deferred income taxes

 

58,713

 

 

57,859

Postemployment benefit obligation

 

21,210

 

 

19,218

Operating lease liabilities

 

20,568

 

 

-

Other noncurrent liabilities

 

28,176

 

 

30,233

Total deferred credits and other noncurrent liabilities

 

128,667

 

 

107,310

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

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

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

 

7,621

 

 

7,621

Additional paid-in capital

 

125,109

 

 

125,525

Retained earnings

 

59,389

 

 

58,753

Treasury stock (315,719,351 at June 30, 2019 and 339,120,073 at December 31, 2018,

at cost)

 

(11,151)

 

 

(12,059)

Accumulated other comprehensive income

 

3,289

 

 

4,249

Noncontrolling interest

 

9,824

 

 

9,795

Total stockholders’ equity

 

194,081

 

 

193,884

Total Liabilities and Stockholders’ Equity

$

546,914

 

$

531,864

See Notes to Consolidated Financial Statements.

 

 

 

 

 

6


 

AT&T INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in millions

(Unaudited)

 

 

 

 

Six months ended

 

June 30,

 

2019

 

2018

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

$

8,322

 

$

10,007

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

 

 

 

 

 

Depreciation and amortization

 

14,307

 

 

12,372

Amortization of television and film costs

 

5,199

 

 

168

Undistributed earnings from investments in equity affiliates

 

76

 

 

235

Provision for uncollectible accounts

 

1,216

 

 

808

Deferred income tax expense

 

1,080

 

 

2,285

Net (gain) loss from investments, net of impairments

 

(905)

 

 

(29)

Actuarial (gain) loss on pension and postretirement benefits

 

2,131

 

 

(2,726)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

3,540

 

 

233

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

 

(5,422)

 

 

1,039

Accounts payable and other accrued liabilities

 

(3,056)

 

 

(3,890)

Equipment installment receivables and related sales

 

1,144

 

 

490

Deferred customer contract acquisition and fulfillment costs

 

(614)

 

 

(1,725)

Employee retirement benefits

 

(1,232)

 

 

(933)

Other - net

 

(450)

 

 

842

Total adjustments

 

17,014

 

 

9,169

Net Cash Provided by Operating Activities

 

25,336

 

 

19,176

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

Purchase of property and equipment

 

(10,542)

 

 

(10,959)

Interest during construction

 

(112)

 

 

(267)

Acquisitions, net of cash acquired

 

(320)

 

 

(40,715)

Dispositions

 

3,593

 

 

59

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

 

396

 

 

(218)

Advances to and investments in equity affiliates, net

 

(314)

 

 

(1,035)

Cash collections of deferred purchase price

 

-

 

 

500

Net Cash Used in Investing Activities

 

(7,299)

 

 

(52,635)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

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

 

119

 

 

2,227

Issuance of other short-term borrowings

 

3,067

 

 

4,839

Repayment of other short-term borrowings

 

(3,148)

 

 

-

Issuance of long-term debt

 

10,030

 

 

26,478

Repayment of long-term debt

 

(16,124)

 

 

(29,447)

Purchase of treasury stock

 

(240)

 

 

(564)

Issuance of treasury stock

 

455

 

 

12

Dividends paid

 

(7,436)

 

 

(6,144)

Other

 

(1,506)

 

 

(1,121)

Net Cash Used in Financing Activities

 

(14,783)

 

 

(3,720)

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

 

3,254

 

 

(37,179)

Cash and cash equivalents and restricted cash beginning of year

 

5,400

 

 

50,932

Cash and Cash Equivalents and Restricted Cash End of Period

$

8,654

 

$

13,753

See Notes to Consolidated Financial Statements.

7


 

AT&T INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Dollars and shares in millions except per share amounts

(Unaudited)

 

Three months ended

 

June 30, 2019

 

June 30, 2018

 

Shares

 

Amount

 

Shares

 

Amount

Common Stock

 

 

 

 

 

 

 

 

 

Balance at beginning of quarter

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

 

 

 

 

 

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

 

 

 

 

 

Balance at beginning of quarter

 

 

$

125,174

 

 

 

$

89,404

Issuance of common stock

 

 

 

-

 

 

 

 

35,473

Issuance of treasury stock

 

 

 

(50)

 

 

 

 

-

Share-based payments

 

 

 

(15)

 

 

 

 

1,083

Balance at end of period

 

 

$

125,109

 

 

 

$

125,960

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

 

 

 

Balance at beginning of quarter

 

 

$

59,424

 

 

 

$

55,067

Net income attributable to AT&T ($0.51 and $0.81 per

diluted share)

 

 

 

3,713

 

 

 

 

5,132

Dividends to stockholders ($0.51 and $0.50 per share)

 

 

 

(3,748)

 

 

 

 

(3,647)

Cumulative effect of accounting changes

 

 

 

-

 

 

 

 

3

Balance at end of period

 

 

$

59,389

 

 

 

$

56,555

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

Balance at beginning of quarter

(324)

 

$

(11,452)

 

(348)

 

$

(12,432)

Repurchase and acquisition of common stock

(2)

 

 

(72)

 

(14)

 

 

(443)

Issuance of treasury stock

10

 

 

373

 

1

 

 

3

Balance at end of period

(316)

 

$

(11,151)

 

(361)

 

$

(12,872)

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income

Attributable to AT&T, net of tax

 

 

 

 

 

 

 

 

 

Balance at beginning of quarter

 

 

$

4,345

 

 

 

$

7,386

Other comprehensive income attributable to AT&T

 

 

 

(1,056)

 

 

 

 

(1,667)

Amounts reclassified to retained earnings

 

 

 

-

 

 

 

 

(3)

Balance at end of period

 

 

$

3,289

 

 

 

$

5,716

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interest

 

 

 

 

 

 

 

 

 

Balance at beginning of quarter

 

 

$

9,839

 

 

 

$

1,156

Net income attributable to noncontrolling interest

 

 

 

261

 

 

 

 

116

Interest acquired by noncontrolling owners

 

 

 

1

 

 

 

 

8

Acquisition of noncontrolling interest

 

 

 

-

 

 

 

 

1

Distributions

 

 

 

(279)

 

 

 

 

(99)

Translation adjustments attributable to noncontrolling

interest, net of taxes

 

 

 

2

 

 

 

 

(32)

Cumulative effect of accounting changes

 

 

 

-

 

 

 

 

-

Balance at end of period

 

 

$

9,824

 

 

 

$

1,150

 

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity at beginning of quarter

 

 

$

194,951

 

 

 

$

147,076

Total Stockholders’ Equity at end of period

 

 

$

194,081

 

 

 

$

184,130

See Notes to Consolidated Financial Statements.

 

 

 

8


 

AT&T INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Dollars and shares in millions except per share amounts

(Unaudited)

 

Six months ended

 

June 30, 2019

 

June 30, 2018

 

Shares

 

Amount

 

Shares

 

Amount

Common Stock

 

 

 

 

 

 

 

 

 

Balance at beginning of year

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

 

 

 

 

 

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

$

125,525

 

 

 

$

89,563

Issuance of common stock

 

 

 

-

 

 

 

 

35,473

Issuance of treasury stock

 

 

 

(127)

 

 

 

 

(4)

Share-based payments

 

 

 

(289)

 

 

 

 

928

Balance at end of period

 

 

$

125,109

 

 

 

$

125,960

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

$

58,753

 

 

 

$

50,500

Net income attributable to AT&T ($1.06 and $1.56 per

diluted share)

 

 

 

7,809

 

 

 

 

9,794

Dividends to stockholders ($1.02 and $1.00 per share)

 

 

 

(7,489)

 

 

 

 

(6,739)

Cumulative effect of accounting changes

 

 

 

316

 

 

 

 

3,000

Balance at end of period

 

 

$

59,389

 

 

 

$

56,555

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

Balance at beginning of year

(339)

 

$

(12,059)

 

(356)

 

$

(12,714)

Repurchase and acquisition of common stock

(9)

 

 

(280)

 

(18)

 

 

(607)

Issuance of treasury stock

32

 

 

1,188

 

13

 

 

449

Balance at end of period

(316)

 

$

(11,151)

 

(361)

 

$

(12,872)

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income

Attributable to AT&T, net of tax

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

$

4,249

 

 

 

$

7,017

Other comprehensive income attributable to AT&T

 

 

 

(960)

 

 

 

 

(643)

Amounts reclassified to retained earnings

 

 

 

-

 

 

 

 

(658)

Balance at end of period

 

 

$

3,289

 

 

 

$

5,716

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interest

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

$

9,795

 

 

 

$

1,146

Net income attributable to noncontrolling interest

 

 

 

513

 

 

 

 

213

Interest acquired by noncontrolling owners

 

 

 

10

 

 

 

 

8

Acquisition on noncontrolling interest

 

 

 

-

 

 

 

 

1

Distributions

 

 

 

(525)

 

 

 

 

(223)

Translation adjustments attributable to noncontrolling

interest, net of taxes

 

 

 

2

 

 

 

 

(30)

Cumulative effect of accounting changes

 

 

 

29

 

 

 

 

35

Balance at end of period

 

 

$

9,824

 

 

 

$

1,150

 

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity at beginning of year

 

 

$

193,884

 

 

 

$

142,007

Total Stockholders’ Equity at end of period

 

 

$

194,081

 

 

 

$

184,130

See Notes to Consolidated Financial Statements.

 

 

 

 

9


AT&T INC.

JUNE 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 all the 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. We do not believe the standard will materially impact our future income statements or have a notable impact on our liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements.

 

10


AT&T INC.

JUNE 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.

 

 

 

 

 

 

NOTE 2. EARNINGS PER SHARE

 

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

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2019

 

2018

 

2019

 

2018

Numerators

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Net Income

$

3,974

 

$

5,248

 

$

8,322

 

$

10,007

Less: Net income attributable to noncontrolling interest

 

(261)

 

 

(116)

 

 

(513)

 

 

(213)

Net Income attributable to AT&T

 

3,713

 

 

5,132

 

 

7,809

 

 

9,794

Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

Share-based payment

 

4

 

 

4

 

 

10

 

 

9

Numerator for diluted earnings per share

$

3,717

 

$

5,136

 

$

7,819

 

$

9,803

Denominators (000,000)

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

7,323

 

 

6,351

 

 

7,318

 

 

6,257

Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

Share-based payment (in shares)

 

30

 

 

23

 

 

29

 

 

20

Denominator for diluted earnings per share

 

7,353

 

 

6,374

 

 

7,347

 

 

6,277

Basic earnings per share attributable to AT&T

$

0.51

 

$

0.81

 

$

1.06

 

$

1.56

Diluted earnings per share attributable to AT&T

$

0.51

 

$

0.81

 

$

1.06

 

$

1.56

11


AT&T INC.

JUNE 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

 

159

 

 

42

 

 

(490)

 

 

-

 

 

(289)

Amounts reclassified

from accumulated OCI

 

-

 

 

-

 

 

17

1

 

(688)

2

 

(671)

Net other comprehensive

income (loss)

 

159

 

 

42

 

 

(473)

 

 

(688)

 

 

(960)

Balance as of June 30, 2019

$

(2,925)

 

$

40

 

$

345

 

$

5,829

 

$

3,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(780)

 

 

(12)

 

 

253

 

 

530

 

 

(9)

Amounts reclassified

from accumulated OCI

 

-

 

 

-

 

 

23

1

 

(657)

2

 

(634)

Net other comprehensive

income (loss)

 

(780)

 

 

(12)

 

 

276

 

 

(127)

 

 

(643)

Amounts reclassified to

retained earnings

 

-

 

 

(658)

3

 

-

 

 

-

 

 

(658)

Balance as of June 30, 2018

$

(2,834)

 

$

(10)

 

$

1,678

 

$

6,882

 

$

5,716

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

 

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 four 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

12


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

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.

 

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

Mobility provides nationwide wireless service and equipment.

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

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

 

The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content in various physical and digital formats globally. Historical financial results from AT&T’s Regional Sports Networks (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 is comprised of the historic Turner division as well as the financial results of our RSNs. This business unit 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.

JUNE 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 $112 in the second quarter and $262 for the first six months of 2019.

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

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

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

 

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

 

 

 

 

14


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

15


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended June 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

$

17,512

 

$

9,654

 

$

7,858

 

$

2,025

 

$

5,833

 

$

-

 

$

5,833

Entertainment Group

 

11,368

 

 

8,515

 

 

2,853

 

 

1,339

 

 

1,514

 

 

-

 

 

1,514

Business Wireline

 

6,628

 

 

3,982

 

 

2,646

 

 

1,256

 

 

1,390

 

 

-

 

 

1,390

Total Communications

 

35,508

 

 

22,151

 

 

13,357

 

 

4,620

 

 

8,737

 

 

-

 

 

8,737

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

3,410

 

 

2,217

 

 

1,193

 

 

39

 

 

1,154

 

 

11

 

 

1,165

Home Box Office

 

1,716

 

 

1,131

 

 

585

 

 

12

 

 

573

 

 

15

 

 

588

Warner Bros.

 

3,389

 

 

2,918

 

 

471

 

 

31

 

 

440

 

 

-

 

 

440

Other

 

(165)

 

 

23

 

 

(188)

 

 

9

 

 

(197)

 

 

29

 

 

(168)

Total WarnerMedia

 

8,350

 

 

6,289

 

 

2,061

 

 

91

 

 

1,970

 

 

55

 

 

2,025

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

1,032

 

 

881

 

 

151

 

 

165

 

 

(14)

 

 

12

 

 

(2)

Mexico

 

725

 

 

813

 

 

(88)

 

 

119

 

 

(207)

 

 

-

 

 

(207)

Total Latin America

 

1,757

 

 

1,694

 

 

63

 

 

284

 

 

(221)

 

 

12

 

 

(209)

Xandr

 

485

 

 

147

 

 

338

 

 

13

 

 

325

 

 

-

 

 

325

Segment Total

 

46,100

 

 

30,281

 

 

15,819

 

 

5,008

 

 

10,811

 

$

67

 

$

10,878

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

209

 

 

626

 

 

(417)

 

 

134

 

 

(551)

 

 

 

 

 

 

Acquisition-related items

 

(30)

 

 

316

 

 

(346)

 

 

1,960

 

 

(2,306)

 

 

 

 

 

 

Certain significant items

 

-

 

 

94

 

 

(94)

 

 

-

 

 

(94)

 

 

 

 

 

 

Eliminations and consolidations

 

(1,322)

 

 

(961)

 

 

(361)

 

 

(1)

 

 

(360)

 

 

 

 

 

 

AT&T Inc.

$

44,957

 

$

30,356

 

$

14,601

 

$

7,101

 

$

7,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2018

16


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

 

Revenues

 

 

Operations and Support Expenses

 

 

EBITDA

 

 

Depreciation and Amortization

 

 

Operating Income (Loss)

 

 

Equity in Net

Income (Loss) of

Affiliates

 

 

Segment Contribution

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

17,282

 

$

9,663

 

$

7,619

 

$

2,113

 

$

5,506

 

$

-

 

$

5,506

Entertainment Group

 

11,478

 

 

8,657

 

 

2,821

 

 

1,345

 

 

1,476

 

 

(1)

 

 

1,475

Business Wireline

 

6,650

 

 

4,038

 

 

2,612

 

 

1,180

 

 

1,432

 

 

1

 

 

1,433

Total Communications

 

35,410

 

 

22,358

 

 

13,052

 

 

4,638

 

 

8,414

 

 

-

 

 

8,414

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

667

 

 

372

 

 

295

 

 

11

 

 

284

 

 

5

 

 

289

Home Box Office

 

281

 

 

171

 

 

110

 

 

5

 

 

105

 

 

(1)

 

 

104

Warner Bros.

 

507

 

 

403

 

 

104

 

 

14

 

 

90

 

 

(1)

 

 

89

Other

 

(62)

 

 

(35)

 

 

(27)

 

 

1

 

 

(28)

 

 

(29)

 

 

(57)

Total WarnerMedia

 

1,393

 

 

911

 

 

482

 

 

31

 

 

451

 

 

(26)

 

 

425

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

1,254

 

 

1,016

 

 

238

 

 

186

 

 

52

 

 

15

 

 

67

Mexico

 

697

 

 

787

 

 

(90)

 

 

127

 

 

(217)

 

 

-

 

 

(217)

Total Latin America

 

1,951

 

 

1,803

 

 

148

 

 

313

 

 

(165)

 

 

15

 

 

(150)

Xandr

 

392

 

 

59

 

 

333

 

 

-

 

 

333

 

 

-

 

 

333

Segment Total

 

39,146

 

 

25,131

 

 

14,015

 

 

4,982

 

 

9,033

 

$

(11)

 

$

9,022

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

320

 

 

661

 

 

(341)

 

 

118

 

 

(459)

 

 

 

 

 

 

Acquisition-related items

 

-

 

 

321

 

 

(321)

 

 

1,278

 

 

(1,599)

 

 

 

 

 

 

Certain significant items

 

-

 

 

152

 

 

(152)

 

 

-

 

 

(152)

 

 

 

 

 

 

Eliminations and consolidations

 

(480)

 

 

(123)

 

 

(357)

 

 

-

 

 

(357)

 

 

 

 

 

 

AT&T Inc.

$

38,986

 

$

26,142

 

$

12,844

 

$

6,378

 

$

6,466

 

 

 

 

 

 

 

17


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the six months ended June 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

$

35,079

 

$

19,835

 

$

15,244

 

$

4,060

 

$

11,184

 

$

-

 

$

11,184

Entertainment Group

 

22,696

 

 

17,042

 

 

5,654

 

 

2,662

 

 

2,992

 

 

-

 

 

2,992

Business Wireline

 

13,126

 

 

8,022

 

 

5,104

 

 

2,491

 

 

2,613

 

 

-

 

 

2,613

Total Communications

 

70,901

 

 

44,899

 

 

26,002

 

 

9,213

 

 

16,789

 

 

-

 

 

16,789

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

6,853

 

 

4,353

 

 

2,500

 

 

99

 

 

2,401

 

 

36

 

 

2,437

Home Box Office

 

3,226

 

 

2,052

 

 

1,174

 

 

34

 

 

1,140

 

 

30

 

 

1,170

Warner Bros.

 

6,907

 

 

5,837

 

 

1,070

 

 

83

 

 

987

 

 

6

 

 

993

Other

 

(257)

 

 

40

 

 

(297)

 

 

18

 

 

(315)

 

 

50

 

 

(265)

Total WarnerMedia

 

16,729

 

 

12,282

 

 

4,447

 

 

234

 

 

4,213

 

 

122

 

 

4,335

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

2,099

 

 

1,747

 

 

352

 

 

334

 

 

18

 

 

12

 

 

30

Mexico

 

1,376

 

 

1,538

 

 

(162)

 

 

250

 

 

(412)

 

 

-

 

 

(412)

Total Latin America

 

3,475

 

 

3,285

 

 

190

 

 

584

 

 

(394)

 

 

12

 

 

(382)

Xandr

 

911

 

 

307

 

 

604

 

 

26

 

 

578

 

 

-

 

 

578

Segment Total

 

92,016

 

 

60,773

 

 

31,243

 

 

10,057

 

 

21,186

 

$

134

 

$

21,320

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

418

 

 

1,139

 

 

(721)

 

 

303

 

 

(1,024)

 

 

 

 

 

 

Acquisition-related items

 

(72)

 

 

389

 

 

(461)

 

 

3,948

 

 

(4,409)

 

 

 

 

 

 

Certain significant items

 

-

 

 

342

 

 

(342)

 

 

-

 

 

(342)

 

 

 

 

 

 

Eliminations and consolidations

 

(2,578)

 

 

(1,899)

 

 

(679)

 

 

(1)

 

 

(678)

 

 

 

 

 

 

AT&T Inc.

$

89,784

 

$

60,744

 

$

29,040

 

$

14,307

 

$

14,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2018

18


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

 

Revenues

 

 

Operations and Support Expenses

 

 

EBITDA

 

 

Depreciation and Amortization

 

 

Operating Income (Loss)

 

 

Equity in Net

Income (Loss) of

Affiliates

 

 

Segment Contribution

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

34,637

 

$

19,765

 

$

14,872

 

$

4,208

 

$

10,664

 

$

-

 

$

10,664

Entertainment Group

 

22,909

 

 

17,468

 

 

5,441

 

 

2,655

 

 

2,786

 

 

(2)

 

 

2,784

Business Wireline

 

13,397

 

 

8,054

 

 

5,343

 

 

2,350

 

 

2,993

 

 

-

 

 

2,993

Total Communications

 

70,943

 

 

45,287

 

 

25,656

 

 

9,213

 

 

16,443

 

 

(2)

 

 

16,441

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

779

 

 

446

 

 

333

 

 

12

 

 

321

 

 

32

 

 

353

Home Box Office

 

281

 

 

171

 

 

110

 

 

5

 

 

105

 

 

(1)

 

 

104

Warner Bros.

 

507

 

 

403

 

 

104

 

 

14

 

 

90

 

 

(1)

 

 

89

Other

 

(62)

 

 

(27)

 

 

(35)

 

 

1

 

 

(36)

 

 

(46)

 

 

(82)

Total WarnerMedia

 

1,505

 

 

993

 

 

512

 

 

32

 

 

480

 

 

(16)

 

 

464

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

2,608

 

 

2,017

 

 

591

 

 

391

 

 

200

 

 

15

 

 

215

Mexico

 

1,368

 

 

1,590

 

 

(222)

 

 

254

 

 

(476)

 

 

-

 

 

(476)

Total Latin America

 

3,976

 

 

3,607

 

 

369

 

 

645

 

 

(276)

 

 

15

 

 

(261)

Xandr

 

729

 

 

109

 

 

620

 

 

1

 

 

619

 

 

-

 

 

619

Segment Total

 

77,153

 

 

49,996

 

 

27,157

 

 

9,891

 

 

17,266

 

$

(3)

 

$

17,263

Corporate and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

653

 

 

1,396

 

 

(743)

 

 

141

 

 

(884)

 

 

 

 

 

 

Acquisition-related items

 

-

 

 

388

 

 

(388)

 

 

2,340

 

 

(2,728)

 

 

 

 

 

 

Certain significant items

 

-

 

 

332

 

 

(332)

 

 

-

 

 

(332)

 

 

 

 

 

 

Eliminations and consolidations

 

(782)

 

 

(127)

 

 

(655)

 

 

-

 

 

(655)

 

 

 

 

 

 

AT&T Inc.

$

77,024

 

$

51,985

 

$

25,039

 

$

12,372

 

$

12,667

 

 

 

 

 

 

 

19


AT&T INC.

JUNE 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

June 30,

 

 

Six months ended

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

Communications

$

8,737

 

$

8,414

 

$

16,789

 

$

16,441

WarnerMedia

 

2,025

 

 

425

 

 

4,335

 

 

464

Latin America

 

(209)

 

 

(150)

 

 

(382)

 

 

(261)

Xandr

 

325

 

 

333

 

 

578

 

 

619

Segment Contribution

 

10,878

 

 

9,022

 

 

21,320

 

 

17,263

Reconciling Items:

 

 

 

 

 

 

 

 

 

 

 

Corporate and Other

 

(551)

 

 

(459)

 

 

(1,024)

 

 

(884)

Merger and integration items

 

(346)

 

 

(340)

 

 

(461)

 

 

(432)

Amortization of intangibles acquired

 

(1,960)

 

 

(1,278)

 

 

(3,948)

 

 

(2,340)

Employee separation charges

 

(94)

 

 

(133)

 

 

(342)

 

 

(184)

Natural disaster items

 

-

 

 

-

 

 

-

 

 

(104)

Segment equity in net income of affiliates

 

(67)

 

 

11

 

 

(134)

 

 

3

Eliminations and consolidations

 

(360)

 

 

(357)

 

 

(678)

 

 

(655)

AT&T Operating Income

 

7,500

 

 

6,466

 

 

14,733

 

 

12,667

Interest Expense

 

(2,149)

 

 

(2,023)

 

 

(4,290)

 

 

(3,794)

Equity in net income (loss) of affiliates

 

40

 

 

(16)

 

 

33

 

 

(7)

Other income (expense) - net

 

(318)

 

 

2,353

 

 

(32)

 

 

4,055

Income Before Income Taxes

$

5,073

 

$

6,780

 

$

10,444

 

$

12,921

 

The following table presents intersegment revenues by segment:

 

Intersegment Reconciliation

 

 

 

 

 

 

 

 

 

 

 

Three months ended

June 30,

Six months ended

June 30,

 

2019

 

2018

2019

 

 

2018

Intersegment revenues

 

 

 

 

 

 

 

 

 

 

Communications

$

8

 

$

2

$

8

 

$

2

WarnerMedia

 

861

 

 

174

 

1,719

 

 

209

Latin America

 

-

 

 

-

 

-

 

 

-

Xandr

 

-

 

 

-

 

-

 

 

-

Total Intersegment Revenues

 

869

 

 

176

 

1,727

 

 

211

Consolidations

 

453

 

 

304

 

851

 

 

571

Eliminations and consolidations

$

1,322

 

$

480

$

2,578

 

$

782

 

20


AT&T INC.

JUNE 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 June 30, 2019

 

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

13,935

 

$

-

 

$

-

 

$

-

 

$

-

 

$

71

 

$

-

 

$

3,506

 

$

17,512

Entertainment Group

 

-

 

 

2,109

 

 

658

 

 

7,636

 

 

-

 

 

399

 

 

562

 

 

4

 

 

11,368

Business Wireline

 

-

 

 

3,221

 

 

2,331

 

 

-

 

 

-

 

 

-

 

 

898

 

 

178

 

 

6,628

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

-

 

 

-

 

 

-

 

 

1,943

 

 

111

 

 

1,266

 

 

90

 

 

-

 

 

3,410

Home Box Office

 

-

 

 

-

 

 

-

 

 

1,516

 

 

198

 

 

-

 

 

2

 

 

-

 

 

1,716

Warner Bros.

 

-

 

 

-

 

 

-

 

 

23

 

 

3,175

 

 

10

 

 

181

 

 

-

 

 

3,389

Eliminations and Other

 

-

 

 

-

 

 

-

 

 

54

 

 

(237)

 

 

9

 

 

9

 

 

-

 

 

(165)

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

-

 

 

-

 

 

-

 

 

1,032

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,032

Mexico

 

479

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

246

 

 

725

Xandr

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

485

 

 

-

 

 

-

 

 

485

Corporate and Other

 

(32)

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

211

 

 

-

 

 

179

Eliminations and

consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(840)

 

 

(399)

 

 

(83)

 

 

-

 

 

(1,322)

Total Operating Revenues

$

14,382

 

$

5,330

 

$

2,989

 

$

12,204

 

$

2,407

 

$

1,841

 

$

1,870

 

$

3,934

 

$

44,957

 

21


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended June 30, 2018

 

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

13,638

 

$

-

 

$

-

 

$

-

 

$

-

 

$

44

 

$

-

 

$

3,600

 

$

17,282

Entertainment Group

 

-

 

 

1,981

 

 

772

 

 

7,786

 

 

-

 

 

387

 

 

551

 

 

1

 

 

11,478

Business Wireline

 

-

 

 

3,031

 

 

2,730

 

 

-

 

 

-

 

 

-

 

 

690

 

 

199

 

 

6,650

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

-

 

 

-

 

 

-

 

 

410

 

 

21

 

 

223

 

 

13

 

 

-

 

 

667

Home Box Office

 

-

 

 

-

 

 

-

 

 

270

 

 

11

 

 

-

 

 

-

 

 

-

 

 

281

Warner Bros.

 

-

 

 

-

 

 

-

 

 

7

 

 

455

 

 

8

 

 

37

 

 

-

 

 

507

Eliminations and Other

 

-

 

 

-

 

 

-

 

 

-

 

 

(56)

 

 

(6)

 

 

-

 

 

-

 

 

(62)

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

-

 

 

-

 

 

-

 

 

1,254

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,254

Mexico

 

417

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

280

 

 

697

Xandr

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

392

 

 

-

 

 

-

 

 

392

Corporate and Other

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

320

 

 

-

 

 

320

Eliminations and

consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(174)

 

 

(387)

 

 

81

 

 

-

 

 

(480)

Total Operating Revenues

$

14,055

 

$

5,012

 

$

3,502

 

$

9,727

 

$

257

 

$

661

 

$

1,692

 

$

4,080

 

$

38,986

 

22


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the six months ended June 30, 2019

 

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

27,660

 

$

-

 

$

-

 

$

-

 

$

-

 

$

138

 

$

-

 

$

7,281

 

$

35,079

Entertainment Group

 

-

 

 

4,179

 

 

1,341

 

 

15,360

 

 

-

 

 

749

 

 

1,063

 

 

4

 

 

22,696

Business Wireline

 

-

 

 

6,407

 

 

4,735

 

 

-

 

 

-

 

 

-

 

 

1,647

 

 

337

 

 

13,126

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

-

 

 

-

 

 

-

 

 

3,908

 

 

246

 

 

2,527

 

 

172

 

 

-

 

 

6,853

Home Box Office

 

-

 

 

-

 

 

-

 

 

2,850

 

 

371

 

 

-

 

 

5

 

 

-

 

 

3,226

Warner Bros.

 

-

 

 

-

 

 

-

 

 

44

 

 

6,507

 

 

20

 

 

336

 

 

-

 

 

6,907

Eliminations and Other

 

-

 

 

-

 

 

-

 

 

103

 

 

(389)

 

 

17

 

 

12

 

 

-

 

 

(257)

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

-

 

 

-

 

 

-

 

 

2,099

 

 

-

 

 

-

 

 

-

 

 

-

 

 

2,099

Mexico

 

921

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

455

 

 

1,376

Xandr

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

911

 

 

-

 

 

-

 

 

911

Corporate and Other

 

(32)

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

378

 

 

-

 

 

346

Eliminations and

consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,677)

 

 

(749)

 

 

(152)

 

 

-

 

 

(2,578)

Total Operating Revenues

$

28,549

 

$

10,586

 

$

6,076

 

$

24,364

 

$

5,058

 

$

3,613

 

$

3,461

 

$

8,077

 

$

89,784

 

23


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the six months ended June 30, 2018

 

Service Revenues

 

 

 

 

 

 

 

 

Wireless

 

 

Advanced Data

 

 

Legacy Voice & Data

 

 

Subscription

 

 

Content

 

 

Advertising

 

 

Other

 

 

Equipment

 

 

Total

Communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

27,000

 

$

-

 

$

-

 

$

-

 

$

-

 

$

85

 

$

-

 

$

7,552

 

$

34,637

Entertainment Group

 

-

 

 

3,859

 

 

1,578

 

 

15,677

 

 

-

 

 

721

 

 

1,070

 

 

4

 

 

22,909

Business Wireline

 

-

 

 

6,074

 

 

5,595

 

 

-

 

 

-

 

 

-

 

 

1,359

 

 

369

 

 

13,397

WarnerMedia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turner

 

-

 

 

-

 

 

-

 

 

508

 

 

21

 

 

237

 

 

13

 

 

-

 

 

779

Home Box Office

 

-

 

 

-

 

 

-

 

 

270

 

 

11

 

 

-

 

 

-

 

 

-

 

 

281

Warner Bros.

 

-

 

 

-

 

 

-

 

 

7

 

 

455

 

 

8

 

 

37

 

 

-

 

 

507

Eliminations and Other

 

-

 

 

-

 

 

-

 

 

-

 

 

(56)

 

 

(6)

 

 

-

 

 

-

 

 

(62)

Latin America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vrio

 

-

 

 

-

 

 

-

 

 

2,608

 

 

-

 

 

-

 

 

-

 

 

-

 

 

2,608

Mexico

 

821

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

547

 

 

1,368

Xandr

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

729

 

 

-

 

 

-

 

 

729

Corporate and Other

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

653

 

 

-

 

 

653

Eliminations and

consolidations

 

-

 

 

-

 

 

-

 

 

-

 

 

(209)

 

 

(721)

 

 

148

 

 

-

 

 

(782)

Total Operating Revenues

$

27,821

 

$

9,933

 

$

7,173

 

$

19,070

 

$

222

 

$

1,053

 

$

3,280

 

$

8,472

 

$

77,024

 

24


AT&T INC.

JUNE 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:

 

 

 

 

June 30,

 

 

December 31,

Consolidated Balance Sheets

 

2019

 

 

2018

Deferred Acquisition Costs

 

 

 

 

 

Other current assets

$

1,952

 

$

1,901

Other Assets

 

2,760

 

 

2,073

Total deferred customer contract acquisition costs

 

4,712

 

 

3,974

 

 

 

 

 

 

Deferred Fulfillment Costs

 

 

 

 

 

Other current assets

 

4,620

 

 

4,090

Other Assets

 

6,796

 

 

7,450

Total deferred customer contract fulfillment costs

$

11,416

 

$

11,540

 

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

 

 

 

June 30,

 

 

June 30,

Consolidated Statements of Income

 

2019

 

 

2018

Deferred acquisition cost amortization

$

1,026

 

$

595

Deferred fulfillment cost amortization

 

2,381

 

 

1,889

 

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:

 

 

 

June 30,

 

 

December 31,

Consolidated Balance Sheets

 

 

2019

 

 

2018

 

 

 

 

 

 

 

Contract asset

 

$

2,188

 

$

1,896

Contract liability

 

 

6,653

 

 

6,856

 

 

Our January 1, 2019 contract liability recorded as customer contract revenue during 2019 was $4,974.

 

25


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Our consolidated balance sheets at June 30, 2019 and December 31, 2018 included approximately $1,463 and $1,244, respectively, for the current portion of our contract asset in “Other current assets” and $5,533 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 June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $40,646, of which we expect to recognize approximately 80% 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. For the quarter ended March 31, 2019, we recorded special termination benefits of $93 associated with this offer in “Other income (expense) – net.” We also committed to a plan to offer 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 anticipate total distributions from the pension plan will exceed the threshold of service and interest costs for 2019, requiring us to follow settlement accounting and remeasure our pension benefit obligation each quarter-end of 2019. These remeasurements resulted in the recognition of actuarial losses of $432 and $1,699 in the first and second quarters of 2019, respectively.

 

As part of our 2019 remeasurements, we decreased the weighted-average discount rate used to measure our pension benefit obligation from 4.50% at December 31, 2018 to 4.10% at March 31, 2019, and to 3.70% at June 30, 2019. The discount rate in effect for determining pension service and interest costs after remeasurement is 3.90% and 3.25%, respectively. Our remeasurements also reflect actual returns on plan assets of 10.0% (six-month rate). Our expected long-term rate of return on pension plan assets is an annualized 7.00% for the remainder of 2019.

 

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.”

 

 

 

 

26


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2019

 

2018

 

2019

 

2018

Pension cost:

 

 

 

 

 

 

 

 

 

 

 

Service cost – benefits earned during the period

$

243

 

$

284

 

$

483

 

$

575

Interest cost on projected benefit obligation

 

508

 

 

504

 

 

1,057

 

 

991

Expected return on assets

 

(880)

 

 

(755)

 

 

(1,731)

 

 

(1,515)

Amortization of prior service credit

 

(24)

 

 

(29)

 

 

(57)

 

 

(59)

Actuarial (gain) loss

 

1,699

 

 

(1,796)

 

 

2,131

 

 

(1,796)

Net pension (credit) cost

$

1,546

 

$

(1,792)

 

$

1,883

 

$

(1,804)

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement cost:

 

 

 

 

 

 

 

 

 

 

 

Service cost – benefits earned during the period

$

18

 

$

26

 

$

36

 

$

55

Interest cost on accumulated postretirement benefit obligation

 

186

 

 

195

 

 

372

 

 

386

Expected return on assets

 

(56)

 

 

(75)

 

 

(112)

 

 

(152)

Amortization of prior service credit

 

(426)

 

 

(413)

 

 

(852)

 

 

(810)

Actuarial (gain) loss

 

-

 

 

-

 

 

-

 

 

(930)

Net postretirement (credit) cost

$

(278)

 

$

(267)

 

$

(556)

 

$

(1,451)

 

 

 

 

 

 

 

 

 

 

 

 

Combined net pension and postretirement (credit) cost

$

1,268

 

$

(2,059)

 

$

1,327

 

$

(3,255)

 

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 $25 and $21 in the second quarter and $50 and $42 for the first six months of 2019 and 2018, respectively.

 

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

 

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

 

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:

 

27


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

 

June 30, 2019

 

December 31, 2018

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

Amount

 

Value

 

Amount

 

Value

Notes and debentures1

$

165,443

 

$

181,230

 

$

171,529

 

$

172,287

Commercial paper

 

3,164

 

 

3,164

 

 

3,048

 

 

3,048

Bank borrowings

 

4

 

 

4

 

 

4

 

 

4

Investment securities2

 

3,518

 

 

3,518

 

 

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.

 

Following is the fair value leveling for investment securities and derivatives that are measured at fair value as of June 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.

 

 

 

June 30, 2019

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Equity Securities

 

 

 

 

 

 

 

 

 

 

 

Domestic equities

$

1,016

 

$

-

 

$

-

 

$

1,016

International equities

 

235

 

 

-

 

 

-

 

 

235

Fixed income equities

 

209

 

 

-

 

 

-

 

 

209

Available-for-Sale Debt Securities

 

-

 

 

1,031

 

 

-

 

 

1,031

Asset Derivatives

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

-

 

 

26

 

 

-

 

 

26

Cross-currency swaps

 

-

 

 

307

 

 

-

 

 

307

Foreign exchange contracts

 

-

 

 

68

 

 

-

 

 

68

Liability Derivatives

 

 

 

 

 

 

 

 

 

 

 

Cross-currency swaps

 

-

 

 

(2,929)

 

 

-

 

 

(2,929)

Interest rate locks

 

-

 

 

(23)

 

 

-

 

 

(23)

Foreign exchange contracts

 

-

 

 

(3)

 

 

-

 

 

(3)

 

28


AT&T INC.

JUNE 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 on equity securities are as follows:

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2019

 

2018

 

2019

 

2018

Total gains (losses) recognized on equity securities

$

50

 

$

21

 

$

210

 

$

8

Gains (Losses) recognized on equity securities sold

 

69

 

 

(3)

 

 

155

 

 

49

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

 

(19)

 

 

24

 

 

55

 

 

(41)

 

 

At June 30, 2019, available-for-sale debt securities totaling $1,031 have maturities as follows - less than one year: $26; one to three years: $185; three to five years: $151; five or more years: $669.

 

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.

 

29


AT&T INC.

JUNE 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 six months ended June 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 six months ended June 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 $63 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

 

Net Investment Hedging We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated OCI, net on the consolidated balance sheet.

 

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 June 30, 2019, we had posted collateral of $242 (a deposit asset) and held collateral of $86 (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 June, we would have been required to post additional collateral of $137. 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 $2,668. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- by S&P, we would have been required to post additional

30


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

collateral of $262. 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:

 

 

 

 

 

 

June 30,

 

December 31,

 

2019

 

2018

Interest rate swaps1

$

1,633

 

$

3,483

Cross-currency swaps

 

40,311

 

 

42,192

Interest rate locks

 

2,000

 

 

-

Foreign exchange contracts

 

669

 

 

2,094

Total

$

44,613

 

$

47,769

1

In July 2019 we settled interest rate swaps with a notional value of $780.

 

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

 

Effect of Derivatives on the Consolidated Statements of Income

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

Fair Value Hedging Relationships

2019

 

2018

 

2019

 

2018

Interest rate swaps (Interest expense):

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) on interest rate swaps

$

35

 

$

(9)

 

$

59

 

$

(62)

Gain (Loss) on long-term debt

 

(35)

 

 

9

 

 

(59)

 

 

62

 

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

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

Cash Flow Hedging Relationships

2019

 

2018

 

2019

 

2018

Cross-currency swaps:

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) recognized in accumulated OCI

$

(763)

 

$

(533)

 

$

(595)

 

$

321

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) recognized in accumulated OCI

 

4

 

 

-

 

 

(3)

 

 

-

Other income (expense) - net reclassified from

accumulated OCI into income

 

7

 

 

-

 

 

10

 

 

-

Interest rate locks:

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) recognized in accumulated OCI

 

(23)

 

 

-

 

 

(23)

 

 

-

Interest income (expense) reclassified from

accumulated OCI into income

 

(16)

 

 

(14)

 

 

(32)

 

 

(29)

 

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

31


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

$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.

 

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

32


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

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 $102 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.

 

 

 

 

 

NOTE 9. SALES OF RECEIVABLES

 

We have agreements with various third-party financial institutions pertaining to the sale 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:

 

 

 

June 30, 2019

 

December 31, 2018

 

 

Equipment

 

 

 

 

Equipment

 

 

 

 

 

Installment

 

WarnerMedia

 

Installment

 

WarnerMedia

Gross receivables:

$

4,519

 

$

2,769

 

$

5,994

 

$

-

Balance sheet classification

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

 

 

 

 

 

 

Notes receivable

 

2,599

 

 

-

 

 

3,457

 

 

-

Trade receivables

 

449

 

 

2,286

 

 

438

 

 

-

Other Assets

 

 

 

 

 

 

 

 

 

 

 

Noncurrent notes and trade receivables

 

1,471

 

 

483

 

 

2,099

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding portfolio of receivables derecognized from

our consolidated balance sheets

 

9,528

 

 

3,725

 

 

9,065

 

 

-

Cash proceeds received, net of remittances1

 

7,073

 

 

3,725

 

 

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

33


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation for this estimated amount at the time the receivables are transferred.

 

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

 

 

 

Three months ended

 

Six months ended

 

 

June 30,

 

June 30,

 

 

2019

 

2018

 

2019

 

2018

Gross receivables sold

$

2,244

 

$

1,906

 

$

4,945

 

$

4,916

Net receivables sold1

 

2,133

 

 

1,811

 

 

4,679

 

 

4,606

Cash proceeds received

 

1,920

 

 

1,532

 

 

4,195

 

 

3,927

Deferred purchase price recorded

 

261

 

 

307

 

 

570

 

 

826

Guarantee obligation recorded

 

93

 

 

72

 

 

194

 

 

195

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 six months ended June 30, 2019 and 2018:

 

 

 

Three months ended

 

Six months ended

 

 

June 30,

 

June 30,

 

 

2019

 

2018

 

2019

 

2018

Fair value of repurchased receivables

$

235

 

$

1,481

 

$

658

 

$

1,481

Carrying value of deferred purchase price

 

225

 

 

1,393

 

 

632

 

 

1,393

Gain (loss) on repurchases1

$

10

 

$

88

 

$

26

 

$

88

1

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

 

 

At June 30, 2019 and December 31, 2018, our deferred purchase price receivable was $2,242 and $2,370, respectively, of which $1,531 and $1,448 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at June 30, 2019 and December 31, 2018 was $454 and $439, respectively, of which $91 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. In June 2019, we expanded the program another $2,600 for a total maximum outstanding amount of $4,000, of which approximately $3,725 is outstanding at June 30, 2019. The transferred receivables are fully guaranteed by our subsidiary, which holds additional receivables in the amount of $2,769 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.

JUNE 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 six months ended June 30, 2019 and 2018:

 

 

 

 

Three months ended

 

Six months ended

 

 

June 30,

 

June 30,

 

 

2019

 

2018

 

2019

 

2018

Initial sale of receivables

$

2,325

 

$

-

 

$

3,725

 

$

-

Collections reinvested under revolving agreement

 

2,127

 

 

-

 

 

2,127

 

 

-

Gross receivables sold/cash proceeds received

 

4,452

 

 

-

 

 

5,852

 

 

-

Net receivables sold1

 

4,134

 

 

-

 

 

5,497

 

 

-

Obligations recorded

 

384

 

 

-

 

 

436

 

 

-

1

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 operations. As of June 30, 2019, our leases have remaining lease terms of 1 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 have recognized a right-of-use asset for both operating and finance leases, and an operating lease liability that represents the present value of our obligation to make payments over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use the unsecured borrowing rate and risk-adjust that rate to approximate a collateralized rate in the currency of the lease, which is updated on a quarterly basis for measurement of new lease obligations.

 

The components of lease expense were as follows:

 

 

 

Three months ended

 

Six months ended

 

June 30, 2019

 

June 30, 2019

Operating lease cost

$

1,610

 

$

2,852

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

Amortization of right-of-use assets

$

70

 

$

136

Interest on lease obligation

 

42

 

 

84

Total finance lease cost

$

112

 

$

220

 

Supplemental balance sheet information related to leases is as follows:

 

35


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

At June 30, 2019

 

 

 

Operating Leases

 

 

 

Operating lease right-of-use assets

$

22,650

 

 

 

 

 

Accounts payable and accrued liabilities

$

3,344

 

Operating lease obligation

 

20,568

 

Total operating lease obligation

$

23,912

 

 

 

 

 

Finance Leases

 

 

 

Property, plant and equipment, at cost

$

3,362

 

Accumulated depreciation and amortization

 

(1,178)

 

Property, plant and equipment, net

$

2,184

 

 

 

 

 

Current portion of long-term debt

$

137

 

Long-term debt

 

1,809

 

Total finance lease obligation

$

1,946

 

 

 

 

 

Weighted-Average Remaining Lease Term

 

 

 

Operating leases

 

8.4

yrs

Finance leases

 

10.7

yrs

 

 

 

 

Weighted-Average Discount Rate

 

 

 

Operating leases

 

4.7

%

Finance leases

 

8.5

%

 

Future minimum maturities of lease obligations are as follows:

 

At June 30, 2019

Operating

 

Finance

 

Leases

 

Leases

Remainder of 2019

$

2,250

 

$

169

2020

 

4,276

 

 

296

2021

 

3,841

 

 

274

2022

 

3,561

 

 

264

2023

 

3,228

 

 

253

Thereafter

 

12,502

 

 

1,814

Total lease payments

 

29,658

 

 

3,070

Less imputed interest

 

(5,746)

 

 

(1,124)

Total

$

23,912

 

$

1,946

 

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:

 

36


AT&T INC.

JUNE 30, 2019

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

 

June 30,

 

December 31,

 

 

 

2019

 

 

2018

 

 

2018

 

 

2017

Cash and cash equivalents

 

$

8,423

 

$

13,523

 

$

5,204

 

$

50,498

Restricted cash in Other current assets

 

 

15

 

 

12

 

 

61

 

 

6

Restricted cash in Other Assets

 

 

216

 

 

218

 

 

135

 

 

428

Cash and cash equivalents and restricted cash

 

$

8,654

 

$

13,753

 

$

5,400

 

$

50,932

 

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

 

 

 

Six months ended

 

 

June 30,

 

 

2019

 

2018

Cash Flows from Operating Activities

 

 

 

 

 

 

Cash paid for amounts included in lease obligations

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

2,464

 

$

2,458

 

 

 

 

 

 

 

Supplemental Lease Cash Flow Disclosures

 

 

 

 

 

 

Operating lease right-of-use assets obtained

in exchange for new operating lease obligations

 

 

3,899

 

 

-

 

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

 

 

Six months ended

 

June 30,

 

 

2019

 

 

2018

Interest

$

4,410

 

$

4,045

Income taxes, net of refunds

 

(32)

 

 

(757)

 

Other Noncash Investing and Financing Activities In 2019, we recorded approximately $1,265 of new vendor financing commitments related to capital investments, and we have repaid $1,836 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.

37


AT&T INC.

JUNE 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.

 

 

Second Quarter

 

 

Six-Month Period

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

2019

 

2018

Change

 

 

2019

 

2018

Change

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Communications

$

35,508

 

$

35,410

0.3

%

 

$

70,901

 

$

70,943

(0.1)

%

WarnerMedia

 

8,350

 

 

1,393

-

 

 

 

16,729

 

 

1,505

-

 

Latin America

 

1,757

 

 

1,951

(9.9)

��

 

 

3,475

 

 

3,976

(12.6)

 

Xandr

 

485

 

 

392

23.7

 

 

 

911

 

 

729

25.0

 

Corporate and other

 

179

 

 

320

(44.1)

 

 

 

346

 

 

653

(47.0)

 

Eliminations and consolidation

 

(1,322)

 

 

(480)

-

 

 

 

(2,578)

 

 

(782)

-

 

AT&T Operating Revenues

 

44,957

 

 

38,986

15.3

 

 

 

89,784

 

 

77,024

16.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Communications

 

8,737

 

 

8,414

3.8

 

 

 

16,789

 

 

16,441

2.1

 

WarnerMedia

 

2,025

 

 

425

-

 

 

 

4,335

 

 

464

-

 

Latin America

 

(209)

 

 

(150)

(39.3)

 

 

 

(382)

 

 

(261)

(46.4)

 

Xandr

 

325

 

 

333

(2.4)

 

 

 

578

 

 

619

(6.6)

 

Segment Operating Contribution

$

10,878

 

$

9,022

20.6

%

 

$

21,320

 

$

17,263

23.5

%

 

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

Mobility provides nationwide wireless service and equipment.

Entertainment Group provides video, 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.

 

38


AT&T INC.

JUNE 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 is comprised of the historic Turner division as well as the financial results of our RSNs. This business unit 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.

 

 

Second Quarter

 

 

Six-Month Period

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

2019

 

2018

Change

 

 

2019

 

2018

Change

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

$

41,023

 

$

34,906

17.5

%

 

$

81,707

 

$

68,552

19.2

%

Equipment

 

3,934

 

 

4,080

(3.6)

 

 

 

8,077

 

 

8,472

(4.7)

 

Total Operating Revenues

 

44,957

 

 

38,986

15.3

 

 

 

89,784

 

 

77,024

16.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

30,356

 

 

26,142

16.1

 

 

 

60,744

 

 

51,985

16.8

 

Depreciation and amortization

 

7,101

 

 

6,378

11.3

 

 

 

14,307

 

 

12,372

15.6

 

Total Operating Expenses

 

37,457

 

 

32,520

15.2

 

 

 

75,051

 

 

64,357

16.6

 

Operating Income

 

7,500

 

 

6,466

16.0

 

 

 

14,733

 

 

12,667

16.3

 

Interest expense

 

2,149

 

 

2,023

6.2

 

 

 

4,290

 

 

3,794

13.1

 

Equity in net income (loss)

of affiliates

 

40

 

 

(16)

-

 

 

 

33

 

 

(7)

-

 

Other income (expense) – net

 

(318)

 

 

2,353

-

 

 

 

(32)

 

 

4,055

-

 

Income Before Income Taxes

 

5,073

 

 

6,780

(25.2)

 

 

 

10,444

 

 

12,921

(19.2)

 

Net Income

 

3,974

 

 

5,248

(24.3)

 

 

 

8,322

 

 

10,007

(16.8)

 

Net Income Attributable to AT&T

$

3,713

 

$

5,132

(27.7)

%

 

$

7,809

 

$

9,794

(20.3)

%

 

Operating revenues increased in the second quarter and the first six months of 2019. The increase was primarily due to our 2018 acquisition of Time Warner. Partially offsetting these increases in revenues were declines in our Latin America segment, which were negatively impacted by foreign exchange pressure. Revenues in our Communications segment were

39


AT&T INC.

JUNE 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

 

stable with growth in wireless service, strategic and managed business services and IP broadband revenues offsetting lower legacy services, video and wireless equipment revenues.

 

Operations and support expenses increased in the second quarter and the first six months of 2019. The increase was primarily due to our 2018 acquisition of Time Warner. This increase was partially offset by lower costs in our Communications segment, including lower wireless equipment costs and lower content and other costs related to lower video volumes, foreign exchange rate impacts in our Latin America segment, and lower expenses due to our continued focus on cost management.

 

Depreciation and amortization expense increased in the second quarter and for the first six months of 2019. Depreciation expense increased $27, or 0.5% in the second quarter and $163, or 1.6% for the first six months of 2019 primarily due to the Time Warner acquisition.

 

Amortization expense increased $696, or 50.6% in the second quarter and $1,772, or 72.7% for the first six months of 2019 primarily due to the amortization of intangibles associated with WarnerMedia.

 

Operating income increased in the second quarter and the first six months of 2019. Our operating income margin for the second quarter increased from 16.6% in 2018 to 16.7% in 2019 and maintained at 16.4% for the first six months of 2018 and 2019.

 

Interest expense increased in the second quarter and first six months of 2019. The increase was primarily due to lower capitalized interest associated with putting spectrum into network service and higher debt balances related to our acquisition of Time Warner. The increase also reflects higher interest rates.

 

 

Equity in net income of affiliates increased in the second quarter and for the first six months of 2019, primarily due to changes in our investment portfolio resulting from acquisition-related activity.

 

Other income (expense) – net decreased earnings in the second quarter and for the first six months of 2019. The decreases were primarily due to actuarial losses of $1,699 in the second quarter and $2,131 for the first six months of 2019, compared to actuarial gains of $1,796 and $2,726 in the comparable prior year. Offsetting the decline from the remeasurement of our benefit plans was a $740 gain on the second-quarter 2019 sale of our investment in Hulu and lower premiums on debt redemptions.

 

Income taxes decreased in the second quarter and for the first six months of 2019. Our effective tax rate was 21.7% for the second quarter and 20.3% for the first six months of 2019, versus 22.6% for the second quarter and for the first six months of 2018. The decrease in income tax expense and the effective tax rate was primarily due to lower income before income taxes, including impacts of actuarial losses of $1,699 in the second quarter and $2,131 for the first six months of 2019, compared to actuarial gains of $1,796 and $2,726 in 2018.

 

40


AT&T INC.

JUNE 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

 

COMMUNICATIONS SEGMENT

Second Quarter

 

 

Six-Month Period

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

2019

 

2018

Change

 

 

2019

 

2018

Change

 

Segment Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

$

17,512

 

$

17,282

1.3

%

 

$

35,079

 

$

34,637

1.3

%

Entertainment Group

 

11,368

 

 

11,478

(1.0)

 

 

 

22,696

 

 

22,909

(0.9)

 

Business Wireline

 

6,628

 

 

6,650

(0.3)

 

 

 

13,126

 

 

13,397

(2.0)

 

Total Segment Operating Revenues

 

35,508

 

 

35,410

0.3

 

 

 

70,901

 

 

70,943

(0.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mobility

 

5,833

 

 

5,506

5.9

 

 

 

11,184

 

 

10,664

4.9

 

Entertainment Group

 

1,514

 

 

1,475

2.6

 

 

 

2,992

 

 

2,784

7.5

 

Business Wireline

 

1,390

 

 

1,433

(3.0)

 

 

 

2,613

 

 

2,993

(12.7)

 

Total Segment Operating Contribution

$

8,737

 

$

8,414

3.8

%

 

$

16,789

 

$

16,441

2.1

%

 

Selected Subscribers and Connections

 

 

 

 

June 30,

(000s)

2019

 

2018

Total domestic broadband connections

15,698

 

15,772

Network access lines in service

9,207

 

10,832

U-verse VoIP connections

4,766

 

5,449

 

Operating revenues increased in the second quarter and decreased for the first six months of 2019. The increase in the quarter was driven by increases in our Mobility business unit, partially offset by declines in our Entertainment Group and Business Wireline business units. Revenues reflect higher wireless service, growth in strategic and managed business services and IP broadband, and licensing of intellectual property assets, which were partially offset by continued declines in legacy voice and data products, the shift to over-the-top (OTT) video offerings and decreased equipment revenues.

 

The decrease for the first six months was primarily due to the declines in our Business Wireline and Entertainment Group business units, offset by increases in our Mobility business unit. The decrease reflects the shift away from legacy communications and linear video offerings, and lower equipment revenues, largely offset by higher wireless service and advanced data revenues.

 

Operating contribution increased in the second quarter and for the first six months of 2019, reflecting improvement in our Mobility and Entertainment Group business units, partially offset by declines in our Business Wireline business unit. Our Communications segment operating income margin in the second quarter increased from 23.8% in 2018 to 24.6% in 2019 and for the first six months increased from 23.2% in 2018 to 23.7% in 2019.

 

41


AT&T INC.

JUNE 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

 

Communications Business Unit Discussion

Mobility Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

Six-Month Period

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

2019

 

2018

Change

 

2019

 

2018

Change

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service

$

14,006

 

$

13,682

2.4

%

 

$

27,798

 

$

27,085

2.6

%

Equipment

 

3,506

 

 

3,600

(2.6)

 

 

 

7,281

 

 

7,552

(3.6)

 

Total Operating Revenues

 

17,512

 

 

17,282

1.3

 

 

 

35,079

 

 

34,637

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

9,654

 

 

9,663

(0.1)

 

 

 

19,835

 

 

19,765

0.4

 

Depreciation and amortization

 

2,025

 

 

2,113

(4.2)

 

 

 

4,060

 

 

4,208

(3.5)

 

Total Operating Expenses

 

11,679

 

 

11,776

(0.8)

 

 

 

23,895

 

 

23,973

(0.3)

 

Operating Income

 

5,833

 

 

5,506

5.9

 

 

 

11,184

 

 

10,664

4.9

 

Equity in Net Income of Affiliates

 

-

 

 

-

-

 

 

 

-

 

 

-

-

 

Operating Contribution

$

5,833

 

$

5,506

5.9

%

 

$

11,184

 

$

10,664

4.9

%

 

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

 

42


AT&T INC.

JUNE 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

 

 

 

 

 

 

 

 

 

June 30,

Percent

(in 000s)

 

 

 

 

 

 

2019

 

2018

Change

Wireless Subscribers

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid smartphones

 

 

 

 

 

 

 

60,737

 

60,183

0.9

%

Postpaid feature phones and

data-centric devices

 

 

 

 

 

 

 

15,545

 

17,189

(9.6)

 

Postpaid

 

 

 

 

 

 

 

76,282

 

77,372

(1.4)

 

Prepaid

 

 

 

 

 

 

 

17,602

 

16,217

8.5

 

Reseller

 

 

 

 

 

 

 

7,392

 

8,582

(13.9)

 

Connected devices1

 

 

 

 

 

 

 

58,389

 

44,718

30.6

 

Total Wireless Subscribers

 

 

 

 

 

 

 

159,665

 

146,889

8.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid Phone Subscribers

 

 

 

 

 

 

 

63,415

 

63,543

(0.2)

 

Total Phone Subscribers

 

 

 

 

 

 

 

80,003

 

78,919

1.4

%

1

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

 

 

Six-Month Period

 

 

 

 

 

 

Percent

 

 

 

 

 

Percent

(in 000s)

2019

 

2018

Change

 

 

2019

 

2018

Change

Wireless Net Additions2

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid

(154)

 

73

-

%

 

 

(358)

 

122

-

%

Prepaid

341

 

453

(24.7)

 

 

 

437

 

694

(37.0)

 

Reseller

(214)

 

(444)

51.8

 

 

 

(467)

 

(832)

43.9

 

Connected devices1

3,959

 

2,982

32.8

 

 

 

7,047

 

5,710

23.4

 

Wireless Net Subscriber Additions

3,932

 

3,064

28.3

 

 

 

6,659

 

5,694

16.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid Phone Net Additions

72

 

51

41.2

 

 

 

152

 

(9)

-

 

Total Phone Net Additions

355

 

407

(12.8)

%

 

 

520

 

539

(3.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid Churn3

1.08

 

1.02

6

BP

 

 

1.12

 

1.04

8

BP

Postpaid Phone-Only Churn3

0.86

 

0.82

4

BP

 

 

0.89

 

0.83

6

BP

1

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

2

Excludes acquisition-related additions during the period.

3

Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number

 

of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for

 

each month of that period.

 

Service revenue increased in the second quarter and for the first six months of 2019 largely due to growth in Cricket and AT&T PREPAIDSM subscribers and higher postpaid average revenue per subscriber (ARPU).

 

ARPU

ARPU increased in the second quarter and for the first six months primarily due to postpaid price actions that were not in effect in the comparative prior year.

 

Churn

43


AT&T INC.

JUNE 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 effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn and postpaid phone-only churn were higher due to tablet and involuntary churn. Also contributing to higher churn for the first six months was continued competitive pricing in the industry.

 

Equipment revenue decreased in the second quarter and for the first six months of 2019 driven by lower postpaid smartphone sales, resulting from the continuing trend of customers choosing to upgrade devices less frequently or bring their own.

 

Operations and support expenses decreased in the second quarter and increased for the first six months of 2019. The decrease in the quarter was primarily due to lower postpaid smartphone volumes and increased operational efficiencies, partially offset by higher bad debt expense and commission deferral amortization. In the second quarter of 2019, we extended the estimated economic life of our customers, which resulted in a decline of commission deferral amortization on a sequential basis.

 

The increase for the first six months was primarily due to increased bad debt expense and higher commission deferral amortization in the six-month period, partially offset by lower postpaid smartphone volumes and increased operational efficiencies.

 

Depreciation expense decreased in the second quarter and for the first six months of 2019 primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.

 

Operating income increased in the second quarter and for the first six months of 2019. Our Mobility operating income margin in the second quarter increased from 31.9% in 2018 to 33.3% in 2019, and for the first six months increased from 30.8% in 2018 to 31.9% in 2019. Our Mobility EBITDA margin in the second quarter increased from 44.1% in 2018 to 44.9% in 2019, and for the first six months increased from 42.9% in 2018 to 43.5% in 2019. EBITDA is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization.

 

Subscriber Relationships

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

 

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

 

Connected Devices

Connected devices include data-centric devices such as wholesale automobile system, monitoring devices, fleet management and session-based tablets. Connected device subscribers increased in 2019, and during the second quarter and for the first six months of 2019, we added approximately 2.1 million and 4.0 million wholesale connected cars through agreements with various carmakers, and experienced strong growth in other Internet of Things (IoT) connections. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

 

 

44


AT&T INC.

JUNE 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

 

Entertainment Group Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter

 

 

Six-Month Period

 

 

 

 

 

 

 

Percent