UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
AMENDMENT NO. 1
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2017March 31, 2019 or | | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | | |
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See definition of "accelerated“accelerated filer," "large” “large accelerated filer," "smaller” “smaller reporting company"company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
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| | (Do not check if a smaller reporting company) | Smaller reporting company | |
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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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Act
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Common Shares (Par Value $1.00 Per Share) | | |
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Global Notes due March 15, 2023 | | |
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Global Notes due September 5, 2023 | | |
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Global Notes due September 5, 2023 | | |
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Global Notes due September 5, 2023 | | |
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Global Notes due May 19, 2023 | | |
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Global Notes due March 15, 2024 | | |
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Global Notes due December 17, 2025 | | |
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Global Notes due September 5, 2026 | | |
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2.90% AT&T Inc.
| T 26A
| New York Stock Exchange |
Global Notes due December 4, 2026
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Global Notes due September 5, 2029 | | |
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Global Notes due September 14, 2029 | | |
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Global Notes due December 17, 2029 | | |
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Global Notes due December 17, 2032 | | |
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Global Notes due November 18, 2033 | | |
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Global Notes due March 15, 2034 | | |
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Global Notes due March 15, 2035 | | |
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Global Notes due September 4, 2036 | | |
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Global Notes due April 30, 2040 | | |
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Global Notes due June 1, 2043 | | |
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Global Notes due June 1, 2044 | | |
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Global Notes due November 1, 2066 | | |
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Global Notes due August 1, 2067 | | |
At October 31, 2017,April 30, 2019, there were 6,1397,298 million common shares outstanding.
Explanatory Note
AT&T Inc. (AT&T) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 6, 2019 (the Original Filing) to correct the signature dates and hyperlinks related to Exhibits 31.1, 31.2 and 32 of the Original Filing.
This Amendment is limited in scope to the items identified above. This Amendment does not reflect events occurring after the filing of the Original Filing and no revisions are being made to the Company’s financial statements or disclosures pursuant to this Amendment.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC. | |
CONSOLIDATED STATEMENTS OF INCOME | |
Dollars in millions except per share amounts | |
(Unaudited) | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | |
Operating Revenues | | | | | | | | | | | | |
Service | | $ | 36,378 | | | $ | 37,272 | | | $ | 109,372 | | | $ | 111,515 | |
Equipment | | | 3,290 | | | | 3,618 | | | | 9,498 | | | | 10,430 | |
Total operating revenues | | | 39,668 | | | | 40,890 | | | | 118,870 | | | | 121,945 | |
| | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | |
Cost of services and sales | | | | | | | | | | | | | | | | |
Equipment | | | 4,191 | | | | 4,455 | | | | 12,177 | | | | 13,090 | |
Broadcast, programming and operations | | | 5,284 | | | | 4,909 | | | | 15,156 | | | | 14,239 | |
Other cost of services (exclusive of depreciation and amortization shown separately below) | | | 9,431 | | | | 9,526 | | | | 27,714 | | | | 28,436 | |
Selling, general and administrative | | | 8,317 | | | | 9,013 | | | | 24,917 | | | | 26,363 | |
Depreciation and amortization | | | 6,042 | | | | 6,579 | | | | 18,316 | | | | 19,718 | |
Total operating expenses | | | 33,265 | | | | 34,482 | | | | 98,280 | | | | 101,846 | |
Operating Income | | | 6,403 | | | | 6,408 | | | | 20,590 | | | | 20,099 | |
Other Income (Expense) | | | | | | | | | | | | | | | | |
Interest expense | | | (1,686 | ) | | | (1,224 | ) | | | (4,374 | ) | | | (3,689 | ) |
Equity in net income (loss) of affiliates | | | 11 | | | | 16 | | | | (148 | ) | | | 57 | |
Other income (expense) – net | | | 246 | | | | (7 | ) | | | 354 | | | | 154 | |
Total other income (expense) | | | (1,429 | ) | | | (1,215 | ) | | | (4,168 | ) | | | (3,478 | ) |
Income Before Income Taxes | | | 4,974 | | | | 5,193 | | | | 16,422 | | | | 16,621 | |
Income tax expense | | | 1,851 | | | | 1,775 | | | | 5,711 | | | | 5,803 | |
Net Income | | | 3,123 | | | | 3,418 | | | | 10,711 | | | | 10,818 | |
Less: Net Income Attributable to Noncontrolling Interest | | | (94 | ) | | | (90 | ) | | | (298 | ) | | | (279 | ) |
Net Income Attributable to AT&T | | $ | 3,029 | | | $ | 3,328 | | | $ | 10,413 | | | $ | 10,539 | |
Basic Earnings Per Share Attributable to AT&T | | $ | 0.49 | | | $ | 0.54 | | | $ | 1.69 | | | $ | 1.70 | |
Diluted Earnings Per Share Attributable to AT&T | | $ | 0.49 | | | $ | 0.54 | | | $ | 1.69 | | | $ | 1.70 | |
Weighted Average Number of Common Shares Outstanding – Basic (in millions) | | | 6,162 | | | | 6,168 | | | | 6,164 | | | | 6,171 | |
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions) | | | 6,182 | | | | 6,189 | | | | 6,184 | | | | 6,191 | |
Dividends Declared Per Common Share | | $ | 0.49 | | | $ | 0.48 | | | $ | 1.47 | | | $ | 1.44 | |
See Notes to Consolidated Financial Statements. | |
AT&T INC. |
CONSOLIDATED STATEMENTS OF INCOME |
Dollars in millions except per share amounts |
(Unaudited) |
| | Three months ended |
| | March 31, |
| | 2019 | | | 2018 |
Operating Revenues | | | | | |
Service | $ | 40,684 | | $ | 33,646 |
Equipment | | 4,143 | | | 4,392 |
Total operating revenues | | 44,827 | | | 38,038 |
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Operating Expenses | | | | | |
Cost of revenues | | | | | |
Equipment | | 4,502 | | | 4,848 |
Broadcast, programming and operations | | 7,652 | | | 5,166 |
Other cost of revenues (exclusive of depreciation and amortization shown separately below) | | 8,585 | | | 7,932 |
Selling, general and administrative | | 9,649 | | | 7,897 |
Depreciation and amortization | | 7,206 | | | 5,994 |
Total operating expenses | | 37,594 | | | 31,837 |
Operating Income | | 7,233 | | | 6,201 |
Other Income (Expense) | | | | | |
Interest expense | | (2,141) | | | (1,771) |
Equity in net income (loss) of affiliates | | (7) | | | 9 |
Other income (expense) – net | | 286 | | | 1,702 |
Total other income (expense) | | (1,862) | | | (60) |
Income Before Income Taxes | | 5,371 | | | 6,141 |
Income tax expense | | 1,023 | | | 1,382 |
Net Income | | 4,348 | | | 4,759 |
Less: Net Income Attributable to Noncontrolling Interest | | (252) | | | (97) |
Net Income Attributable to AT&T | $ | 4,096 | | $ | 4,662 |
Basic Earnings Per Share Attributable to AT&T | $ | 0.56 | | $ | 0.75 |
Diluted Earnings Per Share Attributable to AT&T | $ | 0.56 | | $ | 0.75 |
Weighted Average Number of Common Shares Outstanding – Basic (in millions) | | 7,313 | | | 6,161 |
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions) | | 7,342 | | | 6,180 |
See Notes to Consolidated Financial Statements. | | | | | |
AT&T INC. | |
CONSOLIDATED BALANCE SHEETS | |
Dollars in millions except per share amounts | |
| | September 30, | | | December 31, | |
| | 2017 | | | 2016 | |
Assets | | (Unaudited) | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | | $ | 48,499 | | | $ | 5,788 | |
Accounts receivable - net of allowances for doubtful accounts of $741 and $661 | | | 15,876 | | | | 16,794 | |
Prepaid expenses | | | 1,258 | | | | 1,555 | |
Other current assets | | | 10,724 | | | | 14,232 | |
Total current assets | | | 76,357 | | | | 38,369 | |
Property, plant and equipment | | | 326,240 | | | | 319,648 | |
Less: accumulated depreciation and amortization | | | (199,778 | ) | | | (194,749 | ) |
Property, Plant and Equipment – Net | | | 126,462 | | | | 124,899 | |
Goodwill | | | 105,668 | | | | 105,207 | |
Licenses | | | 96,071 | | | | 94,176 | |
Customer Lists and Relationships – Net | | | 11,573 | | | | 14,243 | |
Other Intangible Assets – Net | | | 7,775 | | | | 8,441 | |
Investments in Equity Affiliates | | | 1,627 | | | | 1,674 | |
Other Assets | | | 18,332 | | | | 16,812 | |
Total Assets | | $ | 443,865 | | | $ | 403,821 | |
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Liabilities and Stockholders' Equity | | | | | | | | |
Current Liabilities | | | | | | | | |
Debt maturing within one year | | $ | 8,551 | | | $ | 9,832 | |
Accounts payable and accrued liabilities | | | 28,928 | | | | 31,138 | |
Advanced billing and customer deposits | | | 4,503 | | | | 4,519 | |
Accrued taxes | | | 2,703 | | | | 2,079 | |
Dividends payable | | | 3,008 | | | | 3,008 | |
Total current liabilities | | | 47,693 | | | | 50,576 | |
Long-Term Debt | | | 154,728 | | | | 113,681 | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | | | |
Deferred income taxes | | | 64,381 | | | | 60,128 | |
Postemployment benefit obligation | | | 31,231 | | | | 33,578 | |
Other noncurrent liabilities | | | 19,723 | | | | 21,748 | |
Total deferred credits and other noncurrent liabilities | | | 115,335 | | | | 115,454 | |
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Stockholders' Equity | | | | | | | | |
Common stock ($1 par value, $14,000,000,000 authorized at September 30, 2017 and December 31, 2016: issued 6,495,231,088 at September 30, 2017 and December 31, 2016) | | | 6,495 | | | | 6,495 | |
Additional paid-in capital | | | 89,527 | | | | 89,604 | |
Retained earnings | | | 36,074 | | | | 34,734 | |
Treasury stock (355,897,357 at September 30, 2017 and 356,237,141 at December 31, 2016, at cost) | | | (12,716 | ) | | | (12,659 | ) |
Accumulated other comprehensive income | | | 5,580 | | | | 4,961 | |
Noncontrolling interest | | | 1,149 | | | | 975 | |
Total stockholders' equity | | | 126,109 | | | | 124,110 | |
Total Liabilities and Stockholders' Equity | | $ | 443,865 | | | $ | 403,821 | |
See Notes to Consolidated Financial Statements. | | | | | | | | |
AT&T INC. | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | |
Dollars in millions | |
(Unaudited) | | | | | | |
| | Nine months ended | |
| | September 30, | |
| | 2017 | | | 2016 | |
Operating Activities | | | | | | |
Net income | | $ | 10,711 | | | $ | 10,818 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 18,316 | | | | 19,718 | |
Undistributed loss (earnings) from investments in equity affiliates | | | 171 | | | | (22 | ) |
Provision for uncollectible accounts | | | 1,216 | | | | 1,036 | |
Deferred income tax expense | | | 3,254 | | | | 3,011 | |
Net loss (gain) from sale of investments, net of impairments | | | (114 | ) | | | (88 | ) |
Actuarial loss (gain) on pension and postretirement benefits | | | (259 | ) | | | - | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (652 | ) | | | (1,108 | ) |
Other current assets | | | (106 | ) | | | 1,805 | |
Accounts payable and other accrued liabilities | | | (1,437 | ) | | | (1,173 | ) |
Equipment installment receivables and related sales | | | 1,116 | | | | 207 | |
Deferred fulfillment costs | | | (1,102 | ) | | | (1,883 | ) |
Retirement benefit funding | | | (420 | ) | | | (770 | ) |
Other - net | | | (1,420 | ) | | | (2,349 | ) |
Total adjustments | | | 18,563 | | | | 18,384 | |
Net Cash Provided by Operating Activities | | | 29,274 | | | | 29,202 | |
| | | | | | | | |
Investing Activities | | | | | | | | |
Capital expenditures: | | | | | | | | |
Purchase of property and equipment | | | (15,756 | ) | | | (15,283 | ) |
Interest during construction | | | (718 | ) | | | (669 | ) |
Acquisitions, net of cash acquired | | | 1,154 | | | | (2,922 | ) |
Dispositions | | | 56 | | | | 184 | |
(Purchases) sales of securities, net | | | (2 | ) | | | 501 | |
Net Cash Used in Investing Activities | | | (15,266 | ) | | | (18,189 | ) |
| | | | | | | | |
Financing Activities | | | | | | | | |
Issuance of long-term debt | | | 46,761 | | | | 10,140 | |
Repayment of long-term debt | | | (10,309 | ) | | | (10,688 | ) |
Purchase of treasury stock | | | (460 | ) | | | (444 | ) |
Issuance of treasury stock | | | 26 | | | | 137 | |
Dividends paid | | | (9,030 | ) | | | (8,850 | ) |
Other | | | 1,715 | | | | (534 | ) |
Net Cash Provided by (Used in) Financing Activities | | | 28,703 | | | | (10,239 | ) |
Net increase in cash and cash equivalents | | | 42,711 | | | | 774 | |
Cash and cash equivalents beginning of year | | | 5,788 | | | | 5,121 | |
Cash and Cash Equivalents End of Period | | $ | 48,499 | | | $ | 5,895 | |
Cash paid during the nine months ended September 30 for: | | | | | | | | |
Interest | | $ | 5,031 | | | $ | 4,430 | |
Income taxes, net of refunds | | $ | 1,861 | | | $ | 3,166 | |
See Notes to Consolidated Financial Statements. | |
AT&T INC. | | | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | | |
Dollars in millions | | | | | |
(Unaudited) | | | | | |
| Three months ended |
| March 31, |
| 2019 | | 2018 |
Net income | $ | 4,348 | | $ | 4,759 |
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency: | | | | | |
Translation adjustment (includes $0 and $2 attributable to noncontrolling interest), net of taxes of $49 and $175 | | 288 | | | 108 |
Securities: | | | | | |
Net unrealized gains (losses), net of taxes of $5 and $(4) | | 16 | | | (12) |
Derivative instruments: | | | | | |
Net unrealized gains, net of taxes of $34 and $180 | | 127 | | | 674 |
Reclassification adjustment included in net income, net of taxes of $2 and $3 | | 11 | | | 12 |
Defined benefit postretirement plans: | | | | | |
Net prior service (cost) credit arising during period, net of taxes of $0 and $185 | | - | | | 567 |
Amortization of net prior service credit included in net income, net of taxes of $(113) and $(105) | | (346) | | | (323) |
Other comprehensive income (loss) | | 96 | | | 1,026 |
Total comprehensive income | | 4,444 | | | 5,785 |
Less: Total comprehensive income attributable to noncontrolling interest | | (252) | | | (99) |
Total Comprehensive Income Attributable to AT&T | $ | 4,192 | | $ | 5,686 |
See Notes to Consolidated Financial Statements. | | | | | |
AT&T INC. | |
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY | |
Dollars and shares in millions except per share amounts | |
(Unaudited) | |
| | September 30, 2017 | |
| | Shares | | | Amount | |
Common Stock | | | | | | |
Balance at beginning of year | | | 6,495 | | | $ | 6,495 | |
Issuance of stock | | | - | | | | - | |
Balance at end of period | | | 6,495 | | | $ | 6,495 | |
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Additional Paid-In Capital | | | | | | | | |
Balance at beginning of year | | | | | | $ | 89,604 | |
Issuance of treasury stock | | | | | | | 4 | |
Share-based payments | | | | | | | (81 | ) |
Balance at end of period | | | | | | $ | 89,527 | |
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Retained Earnings | | | | | | | | |
Balance at beginning of year | | | | | | $ | 34,734 | |
Net income attributable to AT&T ($1.69 per diluted share) | | | | | | | 10,413 | |
Dividends to stockholders ($1.47 per share) | | | | | | | (9,075 | ) |
Other | | | | | | | 2 | |
Balance at end of period | | | | | | $ | 36,074 | |
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Treasury Stock | | | | | | | | |
Balance at beginning of year | | | (356 | ) | | $ | (12,659 | ) |
Repurchase and acquisition of common stock | | | (14 | ) | | | (530 | ) |
Issuance of treasury stock | | | 14 | | | | 473 | |
Balance at end of period | | | (356 | ) | | $ | (12,716 | ) |
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Accumulated Other Comprehensive Income Attributable to AT&T, net of tax | | | | | | | | |
Balance at beginning of year | | | | | | $ | 4,961 | |
Other comprehensive income attributable to AT&T | | | | | | | 619 | |
Balance at end of period | | | | | | $ | 5,580 | |
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Noncontrolling Interest | | | | | | | | |
Balance at beginning of year | | | | | | $ | 975 | |
Net income attributable to noncontrolling interest | | | | | | | 298 | |
Distributions | | | | | | | (270 | ) |
Acquisition of noncontrolling interest | | | | | | | 140 | |
Translation adjustments attributable to noncontrolling interest, net of taxes | | | | | | | 6 | |
Balance at end of period | | | | | | $ | 1,149 | |
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Total Stockholders' Equity at beginning of year | | | | | | $ | 124,110 | |
Total Stockholders' Equity at end of period | | | | | | $ | 126,109 | |
See Notes to Consolidated Financial Statements. | | | | | | | | |
AT&T INC. |
CONSOLIDATED BALANCE SHEETS |
Dollars in millions except per share amounts |
| March 31, | | December 31, |
| 2019 | | 2018 |
Assets | (Unaudited) | | |
Current Assets | | | | | |
Cash and cash equivalents | $ | 6,516 | | $ | 5,204 |
Accounts receivable - net of allowances for doubtful accounts of $905 and $907 | | 23,863 | | | 26,472 |
Prepaid expenses | | 1,518 | | | 2,047 |
Other current assets | | 14,575 | | | 17,704 |
Total current assets | | 46,472 | | | 51,427 |
Noncurrent Inventories and Theatrical Film and Television Production Costs | | 10,270 | | | 7,713 |
Property, plant and equipment | | 332,517 | | | 330,690 |
Less: accumulated depreciation and amortization | | (200,466) | | | (199,217) |
Property, Plant and Equipment – Net | | 132,051 | | | 131,473 |
Goodwill | | 146,434 | | | 146,370 |
Licenses – Net | | 97,001 | | | 96,144 |
Trademarks and Trade Names – Net | | 24,218 | | | 24,345 |
Distribution Networks – Net | | 16,623 | | | 17,069 |
Other Intangible Assets – Net | | 24,732 | | | 26,269 |
Investments in and Advances to Equity Affiliates | | 6,230 | | | 6,245 |
Operating Lease Right-of-Use Assets | | 20,235 | | | - |
Other Assets | | 24,118 | | | 24,809 |
Total Assets | $ | 548,384 | | $ | 531,864 |
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Liabilities and Stockholders’ Equity | | | | | |
Current Liabilities | | | | | |
Debt maturing within one year | $ | 11,538 | | $ | 10,255 |
Accounts payable and accrued liabilities | | 42,306 | | | 43,184 |
Advanced billings and customer deposits | | 5,956 | | | 5,948 |
Accrued taxes | | 1,130 | | | 1,179 |
Dividends payable | | 3,722 | | | 3,854 |
Total current liabilities | | 64,652 | | | 64,420 |
Long-Term Debt | | 163,942 | | | 166,250 |
Deferred Credits and Other Noncurrent Liabilities | | | | | |
Deferred income taxes | | 59,207 | | | 57,859 |
Postemployment benefit obligation | | 19,664 | | | 19,218 |
Operating lease liabilities | | 18,253 | | | - |
Other noncurrent liabilities | | 27,715 | | | 30,233 |
Total deferred credits and other noncurrent liabilities | | 124,839 | | | 107,310 |
| | | | | |
Stockholders’ Equity | | | | | |
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2019 and December 31, 2018: issued 7,620,748,598 at March 31, 2019 and December 31, 2018) | | 7,621 | | | 7,621 |
Additional paid-in capital | | 125,174 | | | 125,525 |
Retained earnings | | 59,424 | | | 58,753 |
Treasury stock (323,523,763 at March 31, 2019 and 339,120,073 | | | | | |
at December 31, 2018, at cost) | | (11,452) | | | (12,059) |
Accumulated other comprehensive income | | 4,345 | | | 4,249 |
Noncontrolling interest | | 9,839 | | | 9,795 |
Total stockholders’ equity | | 194,951 | | | 193,884 |
Total Liabilities and Stockholders’ Equity | $ | 548,384 | | $ | 531,864 |
See Notes to Consolidated Financial Statements. | | | | | |
AT&T INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
Dollars in millions |
(Unaudited) | | | |
| Three months ended |
| March 31, |
| 2019 | | 2018 |
| | | | |
Operating Activities | | | | | |
Net income | $ | 4,348 | | $ | 4,759 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | | 7,206 | | | 5,994 |
Amortization of television and film costs | | 2,497 | | | - |
Undistributed earnings from investments in equity affiliates | | 112 | | | (2) |
Provision for uncollectible accounts | | 592 | | | 438 |
Deferred income tax expense | | 1,069 | | | 1,222 |
Net (gain) loss from investments, net of impairments | | (175) | | | 2 |
Actuarial (gain) loss on pension and postretirement benefits | | 432 | | | (930) |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | | 1,894 | | | (439) |
Other current assets, inventories and theatrical film and television production costs | | (2,510) | | | 614 |
Accounts payable and other accrued liabilities | | (3,686) | | | (1,962) |
Equipment installment receivables and related sales | | 652 | | | 505 |
Deferred customer contract acquisition and fulfillment costs | | (375) | | | (826) |
Retirement benefit funding | | - | | | (140) |
Other - net | | (1,004) | | | (288) |
Total adjustments | | 6,704 | | | 4,188 |
Net Cash Provided by Operating Activities | | 11,052 | | | 8,947 |
| | | | | |
Investing Activities | | | | | |
Capital expenditures: | | | | | |
Purchase of property and equipment | | (5,121) | | | (5,957) |
Interest during construction | | (61) | | | (161) |
Acquisitions, net of cash acquired | | (117) | | | (234) |
Dispositions | | 10 | | | 56 |
(Purchases) sales of securities, net | | (1) | | | (116) |
Advances to and investments in equity affiliates, net | | (111) | | | (1,007) |
Cash collections of deferred purchase price | | - | | | 267 |
Net Cash Used in Investing Activities | | (5,401) | | | (7,152) |
| | | | | |
Financing Activities | | | | | |
Net change in short-term borrowings with original maturities of three months or less | | (256) | | | - |
Issuance of other short-term borrowings | | 296 | | | - |
Repayment of other short-term borrowings | | (176) | | | - |
Issuance of long-term debt | | 9,182 | | | 2,565 |
Repayment of long-term debt | | (9,840) | | | (4,911) |
Purchase of treasury stock | | (189) | | | (145) |
Issuance of treasury stock | | 167 | | | 11 |
Dividends paid | | (3,714) | | | (3,070) |
Other | | 109 | | | 2,048 |
Net Cash Used in Financing Activities | | (4,421) | | | (3,502) |
Net increase (decrease) in cash and cash equivalents and restricted cash | | 1,230 | | | (1,707) |
Cash and cash equivalents and restricted cash beginning of year | | 5,400 | | | 50,932 |
Cash and Cash Equivalents and Restricted Cash End of Period | $ | 6,630 | | $ | 49,225 |
See Notes to Consolidated Financial Statements. |
AT&T INC. |
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY |
Dollars and shares in millions except per share amounts |
(Unaudited) | | | | | | | | | |
| March 31, 2019 | | March 31, 2018 |
| Shares | | Amount | | Shares | | Amount |
Common Stock | | | | | | | | | |
Balance at beginning of year | 7,621 | | $ | 7,621 | | 6,495 | | $ | 6,495 |
Issuance of stock | - | | | - | | - | | | - |
Balance at end of period | 7,621 | | $ | 7,621 | | 6,495 | | $ | 6,495 |
| | | | | | | | | |
Additional Paid-In Capital | | | | | | | | | |
Balance at beginning of year | | | $ | 125,525 | | | | $ | 89,563 |
Issuance of treasury stock | | | | (77) | | | | | (4) |
Share-based payments | | | | (274) | | | | | (155) |
Balance at end of period | | | $ | 125,174 | | | | $ | 89,404 |
| | | | | | | | | |
Retained Earnings | | | | | | | | | |
Balance at beginning of year | | | $ | 58,753 | | | | $ | 50,500 |
Net income attributable to AT&T ($0.56 and $0.75 per diluted share) | | | | 4,096 | | | | | 4,662 |
Dividends to stockholders ($0.51 and $0.50 per share) | | | | (3,741) | | | | | (3,092) |
Cumulative effect of accounting changes | | | | 316 | | | | | 2,997 |
Balance at end of period | | | $ | 59,424 | | | | $ | 55,067 |
| | | | | | | | | |
Treasury Stock | | | | | | | | | |
Balance at beginning of year | (339) | | $ | (12,059) | | (356) | | $ | (12,714) |
Repurchase and acquisition of common stock | (7) | | | (208) | | (4) | | | (164) |
Issuance of treasury stock | 22 | | | 815 | | 12 | | | 446 |
Balance at end of period | (324) | | $ | (11,452) | | (348) | | $ | (12,432) |
| | | | | | | | | |
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 | | | | 96 | | | | | 1,024 |
Amounts reclassified to retained earnings | | | | - | | | | | (655) |
Balance at end of period | | | $ | 4,345 | | | | $ | 7,386 |
| | | | | | | | | |
Noncontrolling Interest | | | | | | | | | |
Balance at beginning of year | | | $ | 9,795 | | | | $ | 1,146 |
Net income attributable to noncontrolling interest | | | | 252 | | | | | 97 |
Interest acquired by noncontrolling owners | | | | 9 | | | | | - |
Distributions | | | | (246) | | | | | (124) |
Translation adjustments attributable to noncontrolling interest, net of taxes | | | | - | | | | | 2 |
Cumulative effect of accounting changes | | | | 29 | | | | | 35 |
Balance at end of period | | | $ | 9,839 | | | | $ | 1,156 |
| | | | | | | | | |
Total Stockholders’ Equity at beginning of year | | | $ | 193,884 | | | | $ | 142,007 |
Total Stockholders’ Equity at end of period | | | $ | 194,951 | | | | $ | 147,076 |
See Notes to Consolidated Financial Statements. | | | |
AT&T INC.
SEPTEMBER 30, 2017
MARCH 31, 2019
For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. 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, 2016. The results for the interim periods are not necessarily indicative of those for the full year.
In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation 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 (formerly Time Warner Inc. and referred to as “Time Warner” or “WarnerMedia”), which was acquired on June 14, 2018 (see Note 8). 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. The consolidated financial statements include the accounts of the Company and our subsidiaries and affiliates over which we exercise control.
All significant intercompany transactions are eliminated in the consolidation process. Investments in unconsolidated subsidiaries and partnerships wherewhich 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'investees’ other comprehensive income (OCI) items, including cumulative translation adjustments.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.
Recently Adopted Accounting Standards and Other Changes
Income TaxesLeases As of January 1, 2017,2019, we adopted, with modified retrospective application, Accounting Standards Update (ASU) No. 2016-16, "Income Taxes2016-02, “Leases (Topic 740)" (ASU 2016-16)842), with” as modified retrospective application, resulting in our recognition of an immaterial adjustment to retained earnings. Under ASU 2016-16, we recognize the income tax effects of intercompany sales or transfers of assets other than inventory (e.g., intellectual property or property, plant and equipment) during the period of intercompany sale or transfer instead of the period of either sale or transfer to a third party or recognition of depreciation or impairment.
New Accounting Standards
Pension and Other Postretirement Benefits In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07)(ASC 842), which changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue to present service costs within our operating expenses but present amortization of prior service credits and other components of our net periodic benefit cost in "other income (expense) – net" in our consolidated statements of income. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017. See Note 5 for our components of net periodic benefit cost.
Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASC 606), and has modified the standard thereafter. This standard replaces existing revenue recognitionleasing rules with a comprehensive revenuelease measurement and recognition standard and expanded disclosure requirements.requirements (see Note 10). ASC 606,842 requires lessees to recognize most leases on their balance sheets as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adoptliabilities, 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 usingwas balance sheet recognition, given that the "modifiedrecognition of lease expense on our income statement is similar to our current accounting. Using the modified retrospective method." Under thattransition method of adoption, we will applydid not adjust the rulesbalance sheet for comparative periods but recorded a cumulative effect adjustment to all open contracts existing as ofretained earnings on January 1, 2018, recognizing2019. 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 beginning retained earningsarrangements 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 adjustment foroperating 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 change and providing additional disclosures comparing resultsadoption to previous accounting standards.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.
AT&T INC.
SEPTEMBER 30, 2017
MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
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.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months ended March 31, 2019 and nine months ended September 30, 2017 and 2016,2018, is shown in the table below:
| | Three months ended | | | Nine months ended | | Three months ended |
| | September 30, | | | September 30, | | March 31, |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | 2019 | | 2018 |
Numerators | | | | | | | | | | | | | | | | | |
Numerator for basic earnings per share: | | | | | | | | | | | | | | | | | |
Net Income | | $ | 3,123 | | | $ | 3,418 | | | $ | 10,711 | | | $ | 10,818 | | $ | 4,348 | | $ | 4,759 |
Less: Net income attributable to noncontrolling interest | | | (94 | ) | | | (90 | ) | | | (298 | ) | | | (279 | ) | | (252) | | | (97) |
Net Income attributable to AT&T | | | 3,029 | | | | 3,328 | | | | 10,413 | | | | 10,539 | | | 4,096 | | | 4,662 |
Dilutive potential common shares: | | | | | | | | | | | | | | | | | | | | | |
Share-based payment | | | 3 | | | | 3 | | | | 9 | | | | 9 | | | 6 | | | 5 |
Numerator for diluted earnings per share | | $ | 3,032 | | | $ | 3,331 | | | $ | 10,422 | | | $ | 10,548 | | $ | 4,102 | | $ | 4,667 |
Denominators (000,000) | | | | | | | | | | | | | | | | | | | | | |
Denominator for basic earnings per share: | | | | | | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding | | | 6,162 | | | | 6,168 | | | | 6,164 | | | | 6,171 | | | 7,313 | | | 6,161 |
Dilutive potential common shares: | | | | | | | | | | | | | | | | | | | | | |
Share-based payment (in shares) | | | 20 | | | | 21 | | | | 20 | | | | 20 | | | 29 | | | 19 |
Denominator for diluted earnings per share | | | 6,182 | | | | 6,189 | | | | 6,184 | | | | 6,191 | | | 7,342 | | | 6,180 |
Basic earnings per share attributable to AT&T | | $ | 0.49 | | | $ | 0.54 | | | $ | 1.69 | | | $ | 1.70 | | $ | 0.56 | | $ | 0.75 |
Diluted earnings per share attributable to AT&T | | $ | 0.49 | | | $ | 0.54 | | | $ | 1.69 | | | $ | 1.70 | | $ | 0.56 | | $ | 0.75 |
AT&T INC.
SEPTEMBER 30, 2017
MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Continued
Dollars in millions except per share amounts
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI)OCI are presented below. All amounts are net of tax and exclude noncontrolling interest.
| | Foreign Currency Translation Adjustment | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Defined Benefit Postretirement Plans | | Accumulated Other Comprehensive Income | | 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, 2016 | $ | (1,995) | | $ | 541 | | $ | 744 | | $ | 5,671 | | $ | 4,961 | |
Balance as of December 31, 2018 | | Balance as of December 31, 2018 | $ | (3,084) | | $ | (2) | | $ | 818 | | $ | 6,517 | | $ | 4,249 |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | | 484 | | | 128 | | | (174) | | | 969 | | | 1,407 | Other comprehensive income (loss) before reclassifications | | 288 | | | 16 | | | 127 | | | - | | | 431 |
Amounts reclassified from accumulated OCI | Amounts reclassified from accumulated OCI | | - | 1 | | (86) | 1 | | 29 | 2 | | (731) | 3 | | (788) | Amounts reclassified from accumulated OCI | | - | | | - | | | 11 | 1 | | (346) | 2 | | (335) |
Net other comprehensive income (loss) | Net other comprehensive income (loss) | | 484 | | | 42 | | | (145) | | | 238 | | | 619 | Net other comprehensive income (loss) | | 288 | | | 16 | | | 138 | | | (346) | | | 96 |
Balance as of September 30, 2017 | $ | (1,511) | | $ | 583 | | $ | 599 | | $ | 5,909 | | $ | 5,580 | |
Balance as of March 31, 2019 | | Balance as of March 31, 2019 | $ | (2,796) | | $ | 14 | | $ | 956 | | $ | 6,171 | | $ | 4,345 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustment | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Defined Benefit Postretirement Plans | | Accumulated Other Comprehensive Income | | 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, 2015 | $ | (1,198) | | $ | 484 | | $ | 16 | | $ | 6,032 | | $ | 5,334 | |
Balance as of December 31, 2017 | | Balance as of December 31, 2017 | $ | (2,054) | | $ | 660 | | $ | 1,402 | | $ | 7,009 | | $ | 7,017 |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | | (72) | | | 25 | | | 183 | | | - | | | 136 | Other comprehensive income (loss) before reclassifications | | 106 | | | (12) | | | 674 | | | 567 | | | 1,335 |
Amounts reclassified from accumulated OCI | Amounts reclassified from accumulated OCI | | - | 1 | | (5) | 1 | | 29 | 2 | | (644) | 3 | | (620) | Amounts reclassified from accumulated OCI | | - | | | - | | | 12 | 1 | | (323) | 2 | | (311) |
Net other comprehensive income (loss) | Net other comprehensive income (loss) | | (72) | | | 20 | | | 212 | | | (644) | | | (484) | Net other comprehensive income (loss) | | 106 | | | (12) | | | 686 | | | 244 | | | 1,024 |
Balance as of September 30, 2016 | $ | (1,270) | | $ | 504 | | $ | 228 | | $ | 5,388 | | $ | 4,850 | |
Amounts reclassified to retained earnings | | Amounts reclassified to retained earnings | | - | | | (655) | 3 | | - | | | - | | | (655) |
Balance as of March 31, 2018 | | Balance as of March 31, 2018 | $ | (1,948) | | $ | (7) | | $ | 2,088 | | $ | 7,253 | | $ | 7,386 |
1 | (Gains) losses are included in Other income (expense) - net in the consolidated statements of income. | (Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7). |
2 | (Gains) losses are included in Interest expense in the consolidated statements of income (see Note 6). | 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 | The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5). | With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings. |
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on Segment Contribution,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) Business Solutions,Communications, (2) Entertainment Group,WarnerMedia, (3) Consumer MobilityLatin America, and (4) International.Xandr.
We also evaluate segment and business unit performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contributionoperating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate segment operating performance. EBITDA does not give effect
AT&T INC.
SEPTEMBER 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
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 Business SolutionsCommunications segment provides wireless and wireline telecom, video and broadband services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete communications solution to our business customers.
The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customersconsumers located in the United StatesU.S. or in U.S. territories. We utilizeterritories 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 copper and IP-based wired network and our satellite technology.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 Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our network to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.
The InternationalLatin America segment provides entertainment services in Latin America and wireless services outside of the U.S. This segment contains the following business units:
● | Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean. |
● | Mexico provides wireless service and equipment to customers in Mexico. |
The Xandr segment provides advertising services and includes AppNexus, an advertising technology company we acquired in Mexico. Video entertainmentAugust 2018. Xander services utilize data insights to develop and deliver targeted advertising across video and digital platforms. Certain revenues in this segment are provided to primarily residential customers using satellite technology. We utilize our regionalalso reported by the Communications segment and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates.eliminated upon consolidation.
AT&T INC.MARCH 31, 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, Corporate and Otherinclude: includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.
Certain operating items are not allocated to our business segments, and those 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 $150 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. |
● | Acquisition-related items which consists of (1) items associated with the merger and integration of acquired businesses, and (2) the noncashincluding amortization of intangible assets acquired in acquisitions.assets. |
·● | Certain significant items which consists ofincludes (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3)(2) losses resulting from abandonment or impairment of assets and (4)(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.
For the three months ended March 31, 2019 |
| | Revenues | | | Operations and Support Expenses | | | EBITDA | | | Depreciation and Amortization | | | Operating Income (Loss) | | | Equity in Net Income (Loss) of Affiliates | | | Segment Contribution |
Communications | | | | | | | | | | | | | | | | | | | | |
Mobility | $ | 17,567 | | $ | 10,181 | | $ | 7,386 | | $ | 2,035 | | $ | 5,351 | | $ | - | | $ | 5,351 |
Entertainment Group | | 11,328 | | | 8,527 | | | 2,801 | | | 1,323 | | | 1,478 | | | - | | | 1,478 |
Business Wireline | | 6,498 | | | 4,040 | | | 2,458 | | | 1,235 | | | 1,223 | | | - | | | 1,223 |
Total Communications | | 35,393 | | | 22,748 | | | 12,645 | | | 4,593 | | | 8,052 | | | - | | | 8,052 |
WarnerMedia | | | | | | | | | | | | | | | | | | | | |
Turner | | 3,443 | | | 2,136 | | | 1,307 | | | 60 | | | 1,247 | | | 25 | | | 1,272 |
Home Box Office | | 1,510 | | | 921 | | | 589 | | | 22 | | | 567 | | | 15 | | | 582 |
Warner Bros. | | 3,518 | | | 2,919 | | | 599 | | | 52 | | | 547 | | | 6 | | | 553 |
Other | | (92) | | | 17 | | | (109) | | | 9 | | | (118) | | | 21 | | | (97) |
Total WarnerMedia | | 8,379 | | | 5,993 | | | 2,386 | | | 143 | | | 2,243 | | | 67 | | | 2,310 |
Latin America | | | | | | | | | | | | | | | | | | | | |
Vrio | | 1,067 | | | 866 | | | 201 | | | 169 | | | 32 | | | - | | | 32 |
Mexico | | 651 | | | 725 | | | (74) | | | 131 | | | (205) | | | - | | | (205) |
Total Latin America | | 1,718 | | | 1,591 | | | 127 | | | 300 | | | (173) | | | - | | | (173) |
Xandr | | 426 | | | 160 | | | 266 | | | 13 | | | 253 | | | - | | | 253 |
Segment Total | | 45,916 | | | 30,492 | | | 15,424 | | | 5,049 | | | 10,375 | | $ | 67 | | $ | 10,442 |
Corporate and Other | | | | | | | | | | | | | | | | | | | | |
Corporate | | 209 | | | 513 | | | (304) | | | 169 | | | (473) | | | | | | |
Acquisition-related items | | (42) | | | 73 | | | (115) | | | 1,988 | | | (2,103) | | | | | | |
Certain significant items | | - | | | 248 | | | (248) | | | - | | | (248) | | | | | | |
Eliminations and consolidations | | (1,256) | | | (938) | | | (318) | | | - | | | (318) | | | | | | |
AT&T Inc. | $ | 44,827 | | $ | 30,388 | | $ | 14,439 | | $ | 7,206 | | $ | 7,233 | | | | | | |
Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as our satellite fleet. Our domestic communications business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended March 31, 2018 |
| | Revenues | | | Operations and Support Expenses | | | EBITDA | | | Depreciation and Amortization | | | Operating Income (Loss) | | | Equity in Net Income (Loss) of Affiliates | | | Segment Contribution |
Communications | | | | | | | | | | | | | | | | | | | | |
Mobility | $ | 17,355 | | $ | 10,102 | | $ | 7,253 | | $ | 2,095 | | $ | 5,158 | | $ | - | | $ | 5,158 |
Entertainment Group | | 11,431 | | | 8,811 | | | 2,620 | | | 1,310 | | | 1,310 | | | (1) | | | 1,309 |
Business Wireline | | 6,747 | | | 4,016 | | | 2,731 | | | 1,170 | | | 1,561 | | | (1) | | | 1,560 |
Total Communications | | 35,533 | | | 22,929 | | | 12,604 | | | 4,575 | | | 8,029 | | | (2) | | | 8,027 |
WarnerMedia | | | | | | | | | | | | | | | | | | | | |
Turner | | 112 | | | 74 | | | 38 | | | 1 | | | 37 | | | 27 | | | 64 |
Home Box Office | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Warner Bros. | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Other | | - | | | 8 | | | (8) | | | - | | | (8) | | | (17) | | | (25) |
Total WarnerMedia | | 112 | | | 82 | | | 30 | | | 1 | | | 29 | | | 10 | | | 39 |
Latin America | | | | | | | | | | | | | | | | | | | | |
Vrio | | 1,354 | | | 1,001 | | | 353 | | | 205 | | | 148 | | | - | | | 148 |
Mexico | | 671 | | | 803 | | | (132) | | | 127 | | | (259) | | | - | | | (259) |
Total Latin America | | 2,025 | | | 1,804 | | | 221 | | | 332 | | | (111) | | | - | | | (111) |
Xandr | | 337 | | | 50 | | | 287 | | | 1 | | | 286 | | | - | | | 286 |
Segment Total | | 38,007 | | | 24,865 | | | 13,142 | | | 4,909 | | | 8,233 | | $ | 8 | | $ | 8,241 |
Corporate and Other | | | | | | | | | | | | | | | | | | | | |
Corporate | | 333 | | | 735 | | | (402) | | | 23 | | | (425) | | | | | | |
Acquisition-related items | | - | | | 67 | | | (67) | | | 1,062 | | | (1,129) | | | | | | |
Certain significant items | | - | | | 180 | | | (180) | | | - | | | (180) | | | | | | |
Eliminations and consolidations | | (302) | | | (4) | | | (298) | | | - | | | (298) | | | | | | |
AT&T Inc. | $ | 38,038 | | $ | 25,843 | | $ | 12,195 | | $ | 5,994 | | $ | 6,201 | | | | | | |
AT&T INC.
SEPTEMBER 30, 2017MARCH 31, 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 March 31, |
| | 2019 | | | 2018 |
Communications | $ | 8,052 | | $ | 8,027 |
WarnerMedia | | 2,310 | | | 39 |
Latin America | | (173) | | | (111) |
Xandr | | 253 | | | 286 |
Segment Contribution | | 10,442 | | | 8,241 |
Reconciling Items: | | | | | |
Corporate and Other | | (473) | | | (425) |
Merger and integration items | | (115) | | | (67) |
Amortization of intangibles acquired | | (1,988) | | | (1,062) |
Employee separation charges | | (248) | | | (51) |
Natural disaster items | | - | | | (104) |
Foreign currency devaluation | | - | | | (25) |
Segment equity in net income of affiliates | | (67) | | | (8) |
Eliminations and consolidations | | (318) | | | (298) |
AT&T Operating Income | | 7,233 | | | 6,201 |
Interest Expense | | 2,141 | | | 1,771 |
Equity in net income (loss) of affiliates | | (7) | | | 9 |
Other income (expense) - net | | 286 | | | 1,702 |
Income Before Income Taxes | $ | 5,371 | | $ | 6,141 |
The following table presents intersegment revenues by segment.
Intersegment Reconciliation | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
Intersegment revenues | | | | | |
Communications | $ | - | | $ | - |
WarnerMedia | | 858 | | | 31 |
Latin America | | - | | | - |
Xandr | | - | | | - |
Total Intersegment Revenues | | 858 | | | 31 |
Consolidations | | 398 | | | 271 |
Eliminations and consolidations | $ | 1,256 | | $ | 302 |
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended September 30, 2017 | |
| | Revenues | | | Operations and Support Expenses | | | EBITDA | | | Depreciation and Amortization | | | Operating Income (Loss) | | | Equity in Net Income (Loss) of Affiliates | | | Segment Contribution | |
Business Solutions | | $ | 17,061 | | | $ | 10,233 | | | $ | 6,828 | | | $ | 2,325 | | | $ | 4,503 | | | $ | - | | | $ | 4,503 | |
Entertainment Group | | | 12,648 | | | | 9,953 | | | | 2,695 | | | | 1,379 | | | | 1,316 | | | | (6 | ) | | | 1,310 | |
Consumer Mobility | | | 7,748 | | | | 4,551 | | | | 3,197 | | | | 877 | | | | 2,320 | | | | - | | | | 2,320 | |
International | | | 2,099 | | | | 1,937 | | | | 162 | | | | 304 | | | | (142 | ) | | | 17 | | | | (125 | ) |
Segment Total | | | 39,556 | | | | 26,674 | | | | 12,882 | | | | 4,885 | | | | 7,997 | | | $ | 11 | | | $ | 8,008 | |
Corporate and Other | | | 201 | | | | 89 | | | | 112 | | | | 21 | | | | 91 | | | | | | | | | |
Acquisition-related items | | | - | | | | 134 | | | | (134 | ) | | | 1,136 | | | | (1,270 | ) | | | | | | | | |
Certain significant items | | | (89 | ) | | | 326 | | | | (415 | ) | | | - | | | | (415 | ) | | | | | | | | |
AT&T Inc. | | $ | 39,668 | | | $ | 27,223 | | | $ | 12,445 | | | $ | 6,042 | | | $ | 6,403 | | | | | | | | | |
For the nine months ended September 30, 2017 | |
| | Revenues | | | Operations and Support Expenses | | | EBITDA | | | Depreciation and Amortization | | | Operating Income (Loss) | | | Equity in Net Income (Loss) of Affiliates | | | Segment Contribution | |
Business Solutions | | $ | 51,016 | | | $ | 30,722 | | | $ | 20,294 | | | $ | 6,972 | | | $ | 13,322 | | | $ | - | | | $ | 13,322 | |
Entertainment Group | | | 37,953 | | | | 29,112 | | | | 8,841 | | | | 4,256 | | | | 4,585 | | | | (23 | ) | | | 4,562 | |
Consumer Mobility | | | 23,279 | | | | 13,599 | | | | 9,680 | | | | 2,621 | | | | 7,059 | | | | - | | | | 7,059 | |
International | | | 6,054 | | | | 5,468 | | | | 586 | | | | 905 | | | | (319 | ) | | | 62 | | | | (257 | ) |
Segment Total | | | 118,302 | | | | 78,901 | | | | 39,401 | | | | 14,754 | | | | 24,647 | | | $ | 39 | | | $ | 24,686 | |
Corporate and Other | | | 657 | | | | 397 | | | | 260 | | | | 54 | | | | 206 | | | | | | | | | |
Acquisition-related items | | | - | | | | 622 | | | | (622 | ) | | | 3,508 | | | | (4,130 | ) | | | | | | | | |
Certain significant items | | | (89 | ) | | | 44 | | | | (133 | ) | | | - | | | | (133 | ) | | | | | | | | |
AT&T Inc. | | $ | 118,870 | | | $ | 79,964 | | | $ | 38,906 | | | $ | 18,316 | | | $ | 20,590 | | | | | | | | | |
NOTE 5. REVENUE RECOGNITION
Revenue Categories |
The following tables set forth reported revenue by category: |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2019 |
| Service Revenues | | | | | | |
| | Wireless | | | Advanced Data | | | Legacy Voice & Data | | | Subscription | | | Content | | | Advertising | | | Other | | | Equipment | | | Total |
Communications | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mobility | $ | 13,725 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 67 | | $ | - | | $ | 3,775 | | $ | 17,567 |
Entertainment Group | | - | | | 2,070 | | | 683 | | | 7,724 | | | - | | | 350 | | | 501 | | | - | | | 11,328 |
Business Wireline | | - | | | 3,186 | | | 2,404 | | | - | | | - | | | - | | | 749 | | | 159 | | | 6,498 |
WarnerMedia | | | | | | | | | | | | | | | | | | | | | | | | | | |
Turner | | - | | | - | | | - | | | 1,965 | | | 135 | | | 1,261 | | | 82 | | | - | | | 3,443 |
Home Box Office | | - | | | - | | | - | | | 1,334 | | | 173 | | | - | | | 3 | | | - | | | 1,510 |
Warner Bros. | | - | | | - | | | - | | | 21 | | | 3,332 | | | 10 | | | 155 | | | - | | | 3,518 |
Eliminations and Other | | - | | | - | | | - | | | 49 | | | (152) | | | 8 | | | 3 | | | - | | | (92) |
Latin America | | | | | | | | | | | | | | | | | | | | | | | | | | |
Vrio | | - | | | - | | | - | | | 1,067 | | | - | | | - | | | - | | | - | | | 1,067 |
Mexico | | 442 | | | - | | | - | | | - | | | - | | | - | | | - | | | 209 | | | 651 |
Xandr | | - | | | - | | | - | | | - | | | - | | | 426 | | | - | | | - | | | 426 |
Corporate and Other | | - | | | - | | | - | | | - | | | - | | | - | | | 167 | | | - | | | 167 |
Eliminations and consolidations | | - | | | - | | | - | | | - | | | (837) | | | (350) | | | (69) | | | - | | | (1,256) |
Total Operating Revenues | $ | 14,167 | | $ | 5,256 | | $ | 3,087 | | $ | 12,160 | | $ | 2,651 | | $ | 1,772 | | $ | 1,591 | | $ | 4,143 | | $ | 44,827 |
For the three months ended March 31, 2018 |
| Service Revenues | | | | | | |
| | Wireless | | | Advanced Data | | | Legacy Voice & Data | | | Subscription | | | Content | | | Advertising | | | Other | | | Equipment | | | Total |
Communications | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mobility | $ | 13,362 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 41 | | $ | - | | $ | 3,952 | | $ | 17,355 |
Entertainment Group | | - | | | 1,878 | | | 806 | | | 7,891 | | | - | | | 334 | | | 519 | | | 3 | | | 11,431 |
Business Wireline | | - | | | 3,043 | | | 2,865 | | | - | | | - | | | - | | | 669 | | | 170 | | | 6,747 |
WarnerMedia | | | | | | | | | | | | | | | | | | | | | | | | | | |
Turner | | - | | | - | | | - | | | 98 | | | - | | | 14 | | | - | | | - | | | 112 |
Home Box Office | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Warner Bros. | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Eliminations and Other | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Latin America | | | | | | | | | | | | | | | | | | | | | | | | | | |
Vrio | | - | | | - | | | - | | | 1,354 | | | - | | | - | | | - | | | - | | | 1,354 |
Mexico | | 404 | | | - | | | - | | | - | | | - | | | - | | | - | | | 267 | | | 671 |
Xandr | | - | | | - | | | - | | | - | | | - | | | 337 | | | - | | | - | | | 337 |
Corporate and Other | | - | | | - | | | - | | | - | | | - | | | - | | | 333 | | | - | | | 333 |
Eliminations and consolidations | | - | | | - | | | - | | | - | | | - | | | (334) | | | 32 | | | - | | | (302) |
Total Operating Revenues | $ | 13,766 | | $ | 4,921 | | $ | 3,671 | | $ | 9,343 | | $ | - | | $ | 392 | | $ | 1,553 | | $ | 4,392 | | $ | 38,038 |
AT&T INC.
SEPTEMBER 30, 2017MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Continued
Dollars in millions except per share amounts
For the three months ended September 30, 2016 | |
| Revenues | | Operations and Support Expenses | | EBITDA | | Depreciation and Amortization | | Operating Income (Loss) | | Equity in Net Income (Loss) of Affiliates | | Segment Contribution | |
Business Solutions | | $ | 17,767 | | | $ | 10,925 | | | $ | 6,842 | | | $ | 2,539 | | | $ | 4,303 | | | $ | - | | | $ | 4,303 | |
Entertainment Group | | | 12,720 | | | | 9,728 | | | | 2,992 | | | | 1,504 | | | | 1,488 | | | | - | | | | 1,488 | |
Consumer Mobility | | | 8,267 | | | | 4,751 | | | | 3,516 | | | | 944 | | | | 2,572 | | | | - | | | | 2,572 | |
International | | | 1,879 | | | | 1,640 | | | | 239 | | | | 293 | | | | (54 | ) | | | 1 | | | | (53 | ) |
Segment Total | | | 40,633 | | | | 27,044 | | | | 13,589 | | | | 5,280 | | | | 8,309 | | | $ | 1 | | | $ | 8,310 | |
Corporate and Other | | | 270 | | | | 270 | | | | - | | | | 17 | | | | (17 | ) | | | | | | | | |
Acquisition-related items | | | - | | | | 290 | | | | (290 | ) | | | 1,282 | | | | (1,572 | ) | | | | | | | | |
Certain significant items | | | (13 | ) | | | 299 | | | | (312 | ) | | | - | | | | (312 | ) | | | | | | | | |
AT&T Inc. | | $ | 40,890 | | | $ | 27,903 | | | $ | 12,987 | | | $ | 6,579 | | | $ | 6,408 | | | | | | | | | |
For the nine months ended September 30, 2016 | |
| Revenues | | Operations and Support Expenses | | EBITDA | | Depreciation and Amortization | | Operating Income (Loss) | | Equity in Net Income (Loss) of Affiliates | | Segment Contribution | |
Business Solutions | | $ | 52,955 | | | $ | 32,584 | | | $ | 20,371 | | | $ | 7,568 | | | $ | 12,803 | | | $ | - | | | $ | 12,803 | |
Entertainment Group | | | 38,089 | | | | 28,875 | | | | 9,214 | | | | 4,481 | | | | 4,733 | | | | 1 | | | | 4,734 | |
Consumer Mobility | | | 24,781 | | | | 14,343 | | | | 10,438 | | | | 2,798 | | | | 7,640 | | | | - | | | | 7,640 | |
International | | | 5,374 | | | | 4,951 | | | | 423 | | | | 868 | | | | (445 | ) | | | 24 | | | | (421 | ) |
Segment Total | | | 121,199 | | | | 80,753 | | | | 40,446 | | | | 15,715 | | | | 24,731 | | | $ | 25 | | | $ | 24,756 | |
Corporate and Other | | | 759 | | | | 940 | | | | (181 | ) | | | 54 | | | | (235 | ) | | | | | | | | |
Acquisition-related items | | | - | | | | 818 | | | | (818 | ) | | | 3,949 | | | | (4,767 | ) | | | | | | | | |
Certain significant items | | | (13 | ) | | | (383 | ) | | | 370 | | | | - | | | | 370 | | | | | | | | | |
AT&T Inc. | | $ | 121,945 | | | $ | 82,128 | | | $ | 39,817 | | | $ | 19,718 | | | $ | 20,099 | | | | | | | | | |
Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from two to five years. Costs to fulfill customer contracts are deferred and amortized over periods ranging generally from four to five years, reflecting the estimated economic lives of the respective customer relationships, subject to an assessment of the recoverability of such costs. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.
Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $4,297 and $11,592 as of March 31, 2019, respectively, of which $2,143 and $4,214 were included in Other current assets on our consolidated balance sheets. For the three months ended March 31, 2019, we amortized $547 and $1,098 of these costs, respectively.
Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $3,974 and $11,540 as of December 31, 2018, respectively, of which $1,901 and $4,090 were included in Other current assets on our consolidated balance sheets. For the three months ended March 31, 2018, we amortized $263 and $1,047 of these costs, respectively.
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration (i.e., we must perform additional services or satisfy another performance obligation in order to bill and receive consideration). The contract asset will decrease as services are provided and billed. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Reductions in the contract liability will be recorded as we satisfy the performance obligations.
The following table presents contract assets and liabilities at March 31, 2019 and December 31, 2018:
| | | March 31, | | | December 31, |
| | | 2019 | | | 2018 |
| | | | | | |
Contract asset | | $ | 2,198 | | $ | 1,896 |
Contract liability | | | 6,899 | | | 6,856 |
Our beginning of period contract liability recorded as customer contract revenue during 2019 was $4,379.
Our consolidated balance sheets at March 31, 2019 and December 31, 2018 included approximately $1,462 and $1,244, respectively, for the current portion of our contract asset in “Other current assets” and $5,715 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 March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $39,627 of which we expect to recognize approximately 80% by the end of 2020, with the balance recognized thereafter.
AT&T INC.
SEPTEMBER 30, 2017MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Continued
Dollars in millions except per share amounts
The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income. |
| | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Business Solutions | | $ | 4,503 | | | $ | 4,303 | | | $ | 13,322 | | | $ | 12,803 | |
Entertainment Group | | | 1,310 | | | | 1,488 | | | | 4,562 | | | | 4,734 | |
Consumer Mobility | | | 2,320 | | | | 2,572 | | | | 7,059 | | | | 7,640 | |
International | | | (125 | ) | | | (53 | ) | | | (257 | ) | | | (421 | ) |
Segment Contribution | | | 8,008 | | | | 8,310 | | | | 24,686 | | | | 24,756 | |
Reconciling Items: | | | | | | | | | | | | | | | | |
Corporate and Other | | | 91 | | | | (17 | ) | | | 206 | | | | (235 | ) |
Merger and integration charges | | | (134 | ) | | | (290 | ) | | | (622 | ) | | | (818 | ) |
Amortization of intangibles acquired | | | (1,136 | ) | | | (1,282 | ) | | | (3,508 | ) | | | (3,949 | ) |
Actuarial gain (loss) | | | - | | | | - | | | | 259 | | | | - | |
Employee separation costs | | | (208 | ) | | | (260 | ) | | | (268 | ) | | | (314 | ) |
Gain (loss) on wireless spectrum transactions | | | - | | | | (22 | ) | | | 181 | | | | 714 | |
Natural disaster costs and revenue credits | | | (207 | ) | | | (30 | ) | | | (207 | ) | | | (30 | ) |
Venezuela devaluation | | | - | | | | - | | | | (98 | ) | | | - | |
Segment equity in net (income) loss of affiliates | | | (11 | ) | | | (1 | ) | | | (39 | ) | | | (25 | ) |
AT&T Operating Income | | | 6,403 | | | | 6,408 | | | | 20,590 | | | | 20,099 | |
Interest expense | | | 1,686 | | | | 1,224 | | | | 4,374 | | | | 3,689 | |
Equity in net income (loss) of affiliates | | | 11 | | | | 16 | | | | (148 | ) | | | 57 | |
Other income (expense) - net | | | 246 | | | | (7 | ) | | | 354 | | | | 154 | |
Income Before Income Taxes | | $ | 4,974 | | | $ | 5,193 | | | $ | 16,422 | | | $ | 16,621 | |
NOTE 5.6. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.
In 2013,During the quarter, for certain management participants in our pension plan who terminated employment before April 1, 2019, we madeoffered 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.” During the first quarter, we also committed to a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility II),plan to offer certain terminated vested pension plan participants the primary holding company for our domestic wireless business, to the pension trust used to pay benefits under our qualified pension plans. The preferred equity interest had a value of $9,354 at September 30, 2017. The trust is entitledopportunity to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by Mobility II to the trust,their benefit in equal amounts and accounted for as contributions. Mobility II distributed $420 to the trust during the nine months ended September 30, 2017. So long as those distributions are made, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.lump-sum amount.
The preferred equity interest is not transferable by the trust except through its put and call features. In early September 2017, AT&T notified the trust and the fiduciary of the preferred equity interest that AT&T committed that it would not exercise its call option of the preferred interest until at least September 9, 2022, which resulted in an increase in the fair value of the preferred interest of approximately $1,245.
AT&T INC.
SEPTEMBER 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
We recognize actuarial gains and losses on pension and postretirement plan assets in our operatingconsolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. DuringWe anticipate total distributions from the second quarterpension plan will exceed the threshold of 2017, a substantiveservice and interest costs for 2019, requiring us to follow settlement accounting. We have remeasured our pension benefit obligations at March 31, 2019, and will remeasure our pension benefit obligation at each quarter-end of 2019 as we expect settlements to occur during each quarter.
As part of our first-quarter 2019 remeasurement, we decreased the weighted-average discount rate used to measure our pension benefit obligation from 4.50% to 4.10%. The discount rate in effect for determining pension service and interest costs after remeasurement is 4.30% and 3.70%, respectively. The remeasurement reflects an actual return on plan change involving the frequencyassets of considering potential health reimbursement account credit increases was communicated5.80% (quarterly rate) relative to our retirees. This plan change triggered a remeasurementexpected long-term rate of our postretirement obligations and resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by $1,563. Such credits amortize through earnings over a period approximating the average service period to full eligibility. Upon our adoption of ASU 2017-07, the amortization of these prior service credits will be recorded in other income (expense) – net.7.00% (annual rate).
The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portionThe service cost component of thesenet periodic pension cost (benefit) is recorded in operating expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service creditsconsolidated statements of income while the remaining components are reportedrecorded in our segment results while interest costs and expected return on plan assets are included with Corporate and Other (see Note 4).“Other income (expense) – net.”
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Pension cost: | | | | | | | | | | | | |
Service cost – benefits earned during the period | | $ | 282 | | | $ | 278 | | | $ | 846 | | | $ | 834 | |
Interest cost on projected benefit obligation | | | 484 | | | | 495 | | | | 1,452 | | | | 1,485 | |
Expected return on assets | | | (783 | ) | | | (778 | ) | | | (2,350 | ) | | | (2,336 | ) |
Amortization of prior service credit | | | (31 | ) | | | (26 | ) | | | (93 | ) | | | (77 | ) |
Net pension (credit) cost | | $ | (48 | ) | | $ | (31 | ) | | $ | (145 | ) | | $ | (94 | ) |
| | | | | | | | | | | | | | | | |
Postretirement cost: | | | | | | | | | | | | | | | | |
Service cost – benefits earned during the period | | $ | 32 | | | $ | 48 | | | $ | 107 | | | $ | 144 | |
Interest cost on accumulated postretirement benefit obligation | | | 193 | | | | 243 | | | | 617 | | | | 729 | |
Expected return on assets | | | (81 | ) | | | (88 | ) | | | (240 | ) | | | (266 | ) |
Amortization of prior service credit | | | (382 | ) | | | (320 | ) | | | (1,084 | ) | | | (958 | ) |
Actuarial (gain) loss | | | - | | | | - | | | | (259 | ) | | | - | |
Net postretirement (credit) cost | | $ | (238 | ) | | $ | (117 | ) | | $ | (859 | ) | | $ | (351 | ) |
| | | | | | | | | | | | | | | | |
Combined net pension and postretirement (credit) cost | | $ | (286 | ) | | $ | (148 | ) | | $ | (1,004 | ) | | $ | (445 | ) |
| Three months ended |
| March 31, |
| 2019 | | 2018 |
Pension cost: | | | | | |
Service cost – benefits earned during the period | $ | 240 | | $ | 291 |
Interest cost on projected benefit obligation | | 549 | | | 487 |
Expected return on assets | | (851) | | | (760) |
Amortization of prior service credit | | (33) | | | (30) |
Actuarial (gain) loss | | 432 | | | - |
Net pension (credit) cost | $ | 337 | | $ | (12) |
| | | | | |
Postretirement cost: | | | | | |
Service cost – benefits earned during the period | $ | 18 | | $ | 29 |
Interest cost on accumulated postretirement benefit obligation | | 186 | | | 191 |
Expected return on assets | | (56) | | | (77) |
Amortization of prior service credit | | (426) | | | (397) |
Actuarial (gain) loss | | - | | | (930) |
Net postretirement (credit) cost | $ | (278) | | $ | (1,184) |
| | | | | |
Combined net pension and postretirement (credit) cost | $ | 59 | | $ | (1,196) |
As part of our second-quarter 2017 remeasurement, we decreased the weighted-average discount rate used to measure our postretirement benefit obligation to 4.10%. The discount rate19
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in effect for determining postretirement service and interest costs after remeasurement is 4.50% and 3.30%, respectively.millions except per share amounts
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the thirdfirst quarter ended 20172019 and 2016,2018, net supplemental pension benefits costs not included in the table above were $22$25 and $23. For the first nine months of 2017 and 2016, net supplemental pension benefit costs were $67 and $70.
AT&T INC.
SEPTEMBER 30, 2017$21.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 6.7. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest prioritybased on the reliability of the inputs used to unadjusteddetermine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets or liabilities (Level 1 measurements)assets. Level 2 refers to fair values estimated using significant other observable inputs and the lowest priority toLevel 3 includes fair values estimated using significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access. |
Level 2 | Inputs to the valuation methodology include: |
· | Quoted prices for similar assets and liabilities in active markets. |
· | Quoted prices for identical or similar assets or liabilities in inactive markets. |
· | Inputs other than quoted market prices that are observable for the asset or liability. |
· | Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
· | Fair value is often based on developed models in which there are few, if any, external observations. |
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, 2016.2018.
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:
| September 30, 2017 | | December 31, 2016 | |
| Carrying | | Fair | | Carrying | | Fair | |
| Amount | | Value | | Amount | | Value | |
Notes and debentures 1 | | $ | 162,450 | | | $ | 171,025 | | | $ | 122,381 | | | $ | 128,726 | |
Bank borrowings | | | 2 | | | | 2 | | | | 4 | | | | 4 | |
Investment securities | | | 2,565 | | | | 2,565 | | | | 2,587 | | | | 2,587 | |
1 Includes credit agreement borrowings. | | | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| | Carrying | | Fair | | Carrying | | Fair |
| | Amount | | Value | | Amount | | Value |
Notes and debentures1 | $ | 170,532 | | $ | 179,576 | | $ | 171,529 | | $ | 172,287 |
Commercial paper | | 2,957 | | | 2,957 | | | 3,048 | | | 3,048 |
Bank borrowings | | 4 | | | 4 | | | 4 | | | 4 |
Investment securities2 | | 3,606 | | | 3,606 | | | 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.
AT&T INC.
SEPTEMBER 30, 2017MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Continued
Dollars in millions except per share amounts
Following is the fair value leveling for available-for-saleinvestment securities that are measured at fair value and derivatives as of September 30, 2017March 31, 2019 and December 31, 2016:2018. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.
| | September 30, 2017 | | | March 31, 2019 |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total |
Available-for-Sale Securities | | | | | | | | | | | | | |
Equity Securities | | Equity Securities | | | | | | | | | | | |
Domestic equities | | $ | 1,274 | | | $ | - | | | $ | - | | | $ | 1,274 | | Domestic equities | $ | 1,092 | | $ | - | | $ | - | | $ | 1,092 |
International equities | | | 380 | | | | - | | | | - | | | | 380 | | International equities | | 263 | | | - | | | - | | | 263 |
Fixed income bonds | | | - | | | | 659 | | | | - | | | | 659 | | |
Asset Derivatives 1 | | | | | | | | | | | | | | | | | |
Fixed income equities | | Fixed income equities | | 208 | | | - | | | - | | | 208 |
Available-for-Sale Debt Securities | | Available-for-Sale Debt Securities | | - | | | 989 | | | - | | | 989 |
Asset Derivatives | | Asset Derivatives | | | | | | | | | | | |
Interest rate swaps | | | - | | | | 45 | | | | - | | | | 45 | | Interest rate swaps | | - | | | 2 | | | - | | | 2 |
Cross-currency swaps | | | - | | | | 967 | | | | - | | | | 967 | | Cross-currency swaps | | - | | | 427 | | | - | | | 427 |
Liability Derivatives 1 | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | Foreign exchange contracts | | - | | | 87 | | | - | | | 87 |
Liability Derivatives | | Liability Derivatives | | | | | | | | | | | |
Interest rate swaps | | | - | | | | (34 | ) | | | - | | | | (34 | ) | Interest rate swaps | | - | | | (13) | | | - | | | (13) |
Cross-currency swaps | | | - | | | | (1,809 | ) | | | - | | | | (1,809 | ) | Cross-currency swaps | | - | | | (2,697) | | | - | | | (2,697) |
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of | |
interest rate swaps, "Other current assets" in our consolidated balance sheets. | |
Foreign exchange contracts | | Foreign exchange contracts | | - | | | (6) | | | - | | | (6) |
| | December 31, 2016 | | | December 31, 2018 |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total |
Available-for-Sale Securities | | | | | | | | | | | | | |
Equity Securities | | Equity Securities | | | | | | | | | | | |
Domestic equities | | $ | 1,215 | | | $ | - | | | $ | - | | | $ | 1,215 | | Domestic equities | $ | 1,061 | | $ | - | | $ | - | | $ | 1,061 |
International equities | | | 594 | | | | - | | | | - | | | | 594 | | International equities | | 256 | | | - | | | - | | | 256 |
Fixed income bonds | | | - | | | | 508 | | | | - | | | | 508 | | |
Asset Derivatives 1 | | | | | | | | | | | | | | | | | |
Fixed income equities | | Fixed income equities | | 172 | | | - | | | - | | | 172 |
Available-for-Sale Debt Securities | | Available-for-Sale Debt Securities | | - | | | 870 | | | - | | | 870 |
Asset Derivatives | | Asset Derivatives | | | | | | | | | | | |
Cross-currency swaps | | Cross-currency swaps | | - | | | 472 | | | - | | | 472 |
Foreign exchange contracts | | Foreign exchange contracts | | - | | | 87 | | | - | | | 87 |
Liability Derivatives | | Liability Derivatives | | | | | | | | | | | |
Interest rate swaps | | | - | | | | 79 | | | | - | | | | 79 | | Interest rate swaps | | - | | | (39) | | | - | | | (39) |
Cross-currency swaps | | | - | | | | 89 | | | | - | | | | 89 | | Cross-currency swaps | | - | | | (2,563) | | | - | | | (2,563) |
Liability Derivatives 1 | | | | | | | | | | | | | | | | | |
Interest rate swaps | | | - | | | | (14 | ) | | | - | | | | (14 | ) | |
Cross-currency swaps | | | - | | | | (3,867 | ) | | | - | | | | (3,867 | ) | |
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of | |
interest rate swaps, "Other current assets" in our consolidated balance sheets. | |
Foreign exchange contracts | | Foreign exchange contracts | | - | | | (2) | | | - | | | (2) |
Investment Securities
Our investment securities include equities, fixed income bondsboth equity and other securities.debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our available-for-saleinvestment securities wasare estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The components comprising total gains and losses on equity securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, onas follows:
| Three months ended |
| March 31, |
| 2019 | | 2018 |
Total gains (losses) recognized on equity securities | $ | 160 | | $ | (13) |
Gains (Losses) recognized on equity securities sold | | 86 | | | 52 |
Unrealized gains (losses) recognized on equity securities held at end of period | | 74 | | | (65) |
At March 31, 2019, available-for-sale debt securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $509totaling $989 have maturities ofas follows - less than one year, $33 withinyear: $46; one to three years, $32 withinyears: $178; three to five years and $85years: $98; for five or more years.years: $667.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in "Other“Other current assets"assets” and our investment securities are recorded in "Other Assets"“Other Assets” on the consolidated balance sheets.
AT&T INC.
SEPTEMBER 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.
Fair Value Hedging We designate 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 interest rate swapsfair value hedges impact interest expense inthe same category on the consolidated statements of income.income as the item being hedged. Unrealized gains on interest rate swapsfair value hedges are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair valuesvalue of derivative instruments designated as fair value hedges are offset against the interest rate swaps are exactly offset by changeschange in the fair value of the underlying debt. Gainshedged assets or losses realized upon early termination of our fair value hedges are recognized in interest expense.liabilities through earnings. In the ninethree months ended September 30, 2017March 31, 2019 and September 30, 2016,2018, no ineffectiveness was measured on interest rate swaps designated as 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 Euro, British pound sterling, Canadian dollar and Swiss franc denominatedforeign-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.
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expensethe 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“Other income (expense) – net"net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swapscash flow hedges each quarter. In the ninethree months ended September 30, 2017March 31, 2019 and September 30, 2016,2018, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other“Other income (expense) – net"net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $59$63 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.
Net Investment HedgingWe hedgehave designated €700 million aggregate principal amount of debt as a portionhedge of the exchange risk involvedvariability 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 anticipation of highly probablea foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provideoperation is recorded as a currency at a fixed rate. Gains and losses at the time we settle or take deliverytranslation adjustment within accumulated other comprehensive income, net on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. In the nine months ended September 30, 2017 and September 30, 2016, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.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 September 30, 2017,March 31, 2019, we had posted
AT&T INC.
SEPTEMBER 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
collateral of $837$334 (a deposit asset) and held collateral of $338$166 (a receipt liability). Under the agreements, if AT&T's&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in September,March, we would have been required to post additional collateral of $141.$175. If DIRECTV Holdings LLC'sAT&T’s credit rating had been downgraded below BBB- (S&P),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 $221.$1,360. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- by S&P, we would have been required to post additional collateral of $258. At December 31, 2016,2018, we had posted collateral of $3,242$1,675 (a deposit asset) and held no collateral.collateral of $103 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.
Following are the notional amounts of our outstanding derivative positions:
| September 30, | | December 31, | |
| 2017 | | 2016 | |
Interest rate swaps | | $ | 10,775 | | | $ | 9,650 | |
Cross-currency swaps | | | 38,694 | | | | 29,642 | |
Total | | $ | 49,469 | | | $ | 39,292 | |
Following are the related hedged items affecting our financial position and performance: | |
| | | | | | | | | | | | |
Effect of Derivatives on the Consolidated Statements of Income | | | | | | | | | | |
| Three months ended | | Nine months ended | |
| September 30, | | September 30, | |
Fair Value Hedging Relationships | 2017 | | 2016 | | 2017 | | 2016 | |
Interest rate swaps (Interest expense): | | | | | | | | | | | | |
Gain (Loss) on interest rate swaps | | $ | (3 | ) | | $ | (54 | ) | | $ | (51 | ) | | $ | 17 | |
Gain (Loss) on long-term debt | | | 3 | | | | 54 | | | | 51 | | | | (17 | ) |
| March 31, | | December 31, |
2019 | | 2018 |
Interest rate swaps | $ | 1,633 | | $ | 3,483 |
Cross-currency swaps | | 42,192 | | | 42,192 |
Foreign exchange contracts | | 1,238 | | | 2,094 |
Total | $ | 45,063 | | $ | 47,769 |
Following are the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income | | | | | |
| Three months ended |
| March 31, |
Fair Value Hedging Relationships | 2019 | | 2018 |
Interest rate swaps (Interest expense): | | | | | |
Gain (Loss) on interest rate swaps | $ | 24 | | $ | (53) |
Gain (Loss) on long-term debt | | (24) | | | 53 |
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
In addition, the net swap settlements that accrued and settled in the quarter ended September 30March 31 were offset against interest expense.
| Three months ended | | Nine months ended | |
| September 30, | | September 30, | |
Cash Flow Hedging Relationships | 2017 | | 2016 | | 2017 | | 2016 | |
Cross-currency swaps: | | | | | | | | | | | | |
Gain (Loss) recognized in accumulated OCI | | $ | 429 | | | $ | 686 | | | $ | (268 | ) | | $ | 282 | |
Interest rate locks: | | | | | | | | | | | | | | | | |
Gain (Loss) recognized in accumulated OCI | | | 79 | | | | - | | | | - | | | | - | |
Interest income (expense) reclassified from accumulated OCI into income | | | (15 | ) | | | (15 | ) | | | (44 | ) | | | (44 | ) |
| Three months ended |
| March 31, |
Cash Flow Hedging Relationships | 2019 | | 2018 |
Cross-currency swaps: | | | | | |
Gain (Loss) recognized in accumulated OCI | $ | 168 | | $ | 854 |
Foreign exchange contracts: | | | | | |
Gain (Loss) recognized in accumulated OCI | | (7) | | | - |
Other income (expense) - net reclassified from accumulated OCI into income | | 3 | | | - |
Interest rate locks: | | | | | |
Interest income (expense) reclassified from accumulated OCI into income | | (16) | | | (15) |
NOTE 7.8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Auction 1000 On April 13, 2017, the Federal Communications Commission (FCC) announced that we were the successful bidder for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017, which was recorded as cash from investing activities on our consolidated statements of cash flows.
AT&T INC.
SEPTEMBER 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Dispositions
YP Holdings LLC In June 2017, YP Holdings LLC was acquired by Dex Media. Our results include a gain of $36 for our portion of the proceeds.
Pending Acquisitions
Time Warner Inc. On October 22, 2016,June 14, 2018, we entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per sharecompleted our acquisition of Time Warner, common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at September 30, 2017, the total transaction value is approximately $105,834. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a
number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash.
Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most respected and successful media brands. The deal combines Time Warner'sWarner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world's largest pay-TV subscriber bases and leading scale in TV, mobile and broadband distribution. We expect that the transaction will advance our direct-to-consumer efforts and provide us with the ability to develop innovative new offerings.
The Merger Agreement was approved by Time Warner shareholders on February 15, 2017. The transaction has been approved by all requisite foreign jurisdictions and remains subject to review byIn July 2018, the U.S. Department of Justice.Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. On February 26, 2019, the D.C. Circuit unanimously affirmed our win. AT&T’s representations to the DOJ regarding its operation of Turner expired on February 28, 2019. The transaction is expectedDOJ did not ask the D.C. Circuit to closerehear its appeal before year-end 2017. If the Merger is terminated as a result of reaching the termination date (and atapplicable April 12, 2019 deadline, and it stated publicly on February 26, 2018 that time one or more“[t]he department has no plans to seek further review” of the conditions relatingD.C. Circuit’s decision. The DOJ’s deadline to certain regulatory approvals have not been satisfied) or therefile a petition for writ of certiorari with the United States Supreme Court is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would be obligated to payMay 28, 2019.
We paid Time Warner $500. On October 20, 2017, to facilitate obtaining final regulatory approval required to close the merger,shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,358, excluding Time Warner elected to extend the October 22, 2017 termination dateWarner’s net debt at acquisition. The fair values of the agreementassets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, “Fair Value Measurement,” 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 short periodrequired 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.
FirstNet On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet will provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000, in part recoverable from FirstNet, over the life of the 25-year contract to build, operate and maintain the network. AT&T will construct and operate the network and provide sustainability payments to FirstNet. Sustainability payments are required to be used for the operating expenses of FirstNet and to fund network improvements included in our $40,000 estimate. FirstNet's operating expenses are anticipated to be in the $75-$100 range annually, and when adjusted for inflation, we expect to be in the $3,000 range over the life of the 25-year contract. After FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will be reinvested into the network. As of November 2, 2017, 30 states and territories have opted-in to the program, representing 38%, or approximately $6,900, of this total sustainability payment commitment. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states and territories electing to participate in FirstNet.
States have until December 28, 2017 to elect to opt-out of the federally funded program, after which any state that did not formally make an election will automatically be opted-in. We do not expect FirstNet to materially impact our 2017 results.
AT&T INC.
SEPTEMBER 30, 2017MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Continued
Dollars in millions except per share amounts
The following table summarizes the preliminary estimated fair values of the Time Warner assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date:
Assets acquired | | | |
Cash | | $ | 1,889 |
Accounts receivable | | | 9,052 |
All other current assets | | | 2,913 |
Noncurrent inventory and theatrical film and television production costs | | | 5,591 |
Property, plant and equipment | | | 4,785 |
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 | | | 9,449 |
Goodwill | | | 38,569 |
Total assets acquired | | | 129,475 |
| | | |
Liabilities assumed | | | |
Current liabilities, excluding current portion of long-term debt | | | 8,303 |
Debt maturing within one year | | | 4,471 |
Long-term debt | | | 18,394 |
Other noncurrent liabilities | | | 18,948 |
Total liabilities assumed | | | 50,116 |
Net assets acquired | | | 79,359 |
Noncontrolling interest | | | (1) |
Aggregate value of consideration paid | | $ | 79,358 |
These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecorded pre-acquisition contingencies where the related asset or liability, or an impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units within the WarnerMedia segment any changes in goodwill should be recorded.
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 8.9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
As described further below, 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 licensed programming and advertising. 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.
As of March 31, 2019 and December 31, 2018, gross receivables included on our consolidated balance sheets, related to these programs, are $6,611 and $5,994, respectively, of which $3,072 and $3,457 are notes receivable that are included in “Accounts receivable - net.”
The outstanding portfolio of receivables derecognized from our consolidated balance sheets, but which we continue to service, was $10,863 and $9,065 at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $8,387.
The following table sets forth a summary of receivables sold during the three months ended March 31, 2019 and 2018:
| | Three months ended |
| | March 31, |
| | 2019 | | 2018 |
Gross receivables sold | $ | 4,101 | | $ | 3,010 |
Net receivables sold1 | | 3,909 | | | 2,795 |
Cash proceeds received | | 3,675 | | | 2,395 |
Deferred purchase price recorded | | 309 | | | 519 |
Guarantee obligation recorded | | 138 | | | 123 |
1 | Receivables net of allowance, imputed interest and trade-in right guarantees. |
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.
Equipment Installment Receivables
We offer our customers the option to purchase certain wireless devices in installments over a specified period of up to 30 monthstime and, in many cases, once certain conditions are met, they have the rightmay be eligible to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of September 30, 2017 and December 31, 2016, gross equipment installment receivables of $4,176 and $5,665 were included on our consolidated balance sheets, of which $2,485 and $3,425 are notes receivable that are included in "Accounts receivable - net."paid or settled.
In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement,We maintain a program, under which we transfer certaina portion of these receivables to the Purchasersin exchange for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, inIn 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 Purchasersfinancial institutions equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. Since inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $4,019.
The following table sets forth a summary of equipment installment receivables sold during the three and nine months ended September 30, 2017 and 2016:
| Three months ended | | | Nine months ended | |
| September 30, | | | September 30, | |
| 2017 | | | 2016 | | | 2017 | | | 2016 | |
Gross receivables sold | | $ | 1,619 | | | $ | 1,485 | | | $ | 6,217 | | | $ | 5,812 | |
Net receivables sold 1 | | | 1,478 | | | | 1,336 | | | | 5,698 | | | | 5,263 | |
Cash proceeds received | | | 1,292 | | | | 891 | | | | 4,139 | | | | 3,538 | |
Deferred purchase price recorded | | | 285 | | | | 463 | | | | 1,767 | | | | 1,745 | |
Guarantee obligation recorded | | | 65 | | | | - | | | | 139 | | | | - | |
1 Receivables net of allowance, imputed interest and trade-in right guarantees. |
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 6)7).
AT&T INC.
SEPTEMBER 30, 2017MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Continued
Dollars in millions except per share amounts
The following table shows the previously transferred equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price and cash during the three months ended March 31, 2019 and nine months ended September 30, 2017 and 2016:2018:
| Three months ended | | Nine months ended | | | Three months ended |
| September 30, | | September 30, | | | March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2019 | | 2018 |
Fair value of repurchased receivables | | $ | 567 | | | $ | 749 | | | $ | 1,281 | | | $ | 1,281 | | Fair value of repurchased receivables | $ | 423 | | $ | - |
Carrying value of deferred purchase price | | | 507 | | | | 722 | | | | 1,147 | | | | 1,261 | | Carrying value of deferred purchase price | | 407 | | | - |
Gain (loss) on repurchases 1 | | $ | 60 | | | $ | 27 | | | $ | 134 | | | $ | 20 | | Gain (loss) on repurchases1 | $ | 16 | | $ | - |
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income. | |
1 | | These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income. |
At September 30, 2017March 31, 2019 and December 31, 2016,2018, our deferred purchase price receivable was $3,170$2,240 and $3,090,$2,370, respectively, of which $2,023$1,418 and $1,606$1,448 are included in "Other“Other current assets"assets” on our consolidated balance sheets, with the remainder in "Other“Other Assets."” The guarantee obligation at March 31, 2019 and December 31, 2018 was $430 and $439, respectively, of which $160 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.
The sales of equipment installmentProgramming and Advertising Receivables
In March 2019, we entered into a revolving agreement to transfer certain receivables did not have a material impact onfrom our consolidated statements of income orWarnerMedia business to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activitiesvarious financial institutions in our consolidated statements of cash flows because the cash receivedexchange for cash. These receivables originate from the Purchasers upon both the sale of licensed programming and advertising. Upon sale, we reclassify the allowance against these receivables to a guarantee liability. We have fully guaranteed the repayment of the transferred receivables and have also pledged, as collateral under this agreement, additional receivables in the collectionamount of $1,402. Our maximum exposure to loss related to selling these receivables is limited to the outstanding $1,400 of sold receivables.
NOTE 10. LEASES
We have operating and finance leases for certain facilities and equipment used in operations. Our leases have remaining lease terms of 1 year to 13 years. Some of our real estate operating leases contain renewal options that may be exercised, and some of our leases include options to terminate the leases within one year.
We have recognized a right-of-use asset for both operating and finance leases, and an operating lease liability that represents the present value of our obligation to make payments over the lease term. The present value of the deferred purchase pricelease payments is not subjectcalculated 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 significant interestpay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use the unsecured borrowing rate risk.and risk-adjust that rate to approximate a collateralized rate in the currency of the lease, which will be updated on a quarterly basis for measurement of new lease liabilities.
The components of lease expense were as follows:
| Three months ended |
| March 31, 2019 |
Operating lease cost | $ | 1,242 |
| | |
Finance lease cost: | | |
Amortization of right-of-use assets | $ | 66 |
Interest on lease obligation | | 42 |
Total finance lease cost | $ | 108 |
AT&T INC.MARCH 31, 2019
Derecognized Installment ReceivablesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no longer considered our assets.Dollars in millions except per share amounts
| | 2017 | |
Outstanding derecognized receivables at January 1, | | $ | 7,232 | |
Gross receivables sold | | | 6,217 | |
Collections on cash purchase price | | | (3,556 | ) |
Collections on deferred purchase price | | | (665 | ) |
Trade ins and other | | | (295 | ) |
Fair value of repurchased receivables | | | (1,281 | ) |
Outstanding derecognized receivables at September 30, | | $ | 7,652 | |
Supplemental balance sheet information related to leases is as follows:
At March 31, 2019 | |
| |
Operating Leases | | | |
Operating lease right-of-use assets | $ | 20,235 | |
| | | |
Accounts payable and accrued liabilities | $ | 3,072 | |
Operating lease obligation | | 18,253 | |
Total operating lease obligation | $ | 21,325 | |
| | | |
Finance Leases | | | |
Property, plant and equipment, at cost | $ | 3,377 | |
Accumulated depreciation and amortization | | (1,173) | |
Property, plant and equipment, net | $ | 2,204 | |
| | | |
Current portion of long-term debt | $ | 135 | |
Long-term debt | | 1,852 | |
Total finance lease obligation | $ | 1,987 | |
| | | |
Weighted-Average Remaining Lease Term | | | |
Operating leases | | 7.9 | yrs |
Finance leases | | 10.9 | yrs |
| | | |
Weighted-Average Discount Rate | | | |
Operating leases | | 4.7 | % |
Finance leases | | 8.6 | % |
Future minimum maturities of lease liabilities are as follows:
At March 31, 2019 | Operating | | Finance |
| Leases | | Leases |
Remainder of 2019 | $ | 3,201 | | $ | 246 |
2020 | | 3,981 | | | 290 |
2021 | | 3,533 | | | 279 |
2022 | | 3,231 | | | 263 |
2023 | | 2,893 | | | 254 |
Thereafter | | 9,633 | | | 1,828 |
Total lease payments | | 26,472 | | | 3,160 |
Less imputed interest | | (5,147) | | | (1,173) |
Total | $ | 21,325 | | $ | 1,987 |
AT&T INC.MARCH 31, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 11. ADDITIONAL FINANCIAL INFORMATION
Cash and Cash Flows
We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments.
| | March 31, | | December 31, |
Cash and Cash Equivalents and Restricted Cash | | | 2019 | | | 2018 | | | 2018 | | | 2017 |
Cash and cash equivalents | | $ | 6,516 | | $ | 48,872 | | $ | 5,204 | | $ | 50,498 |
Restricted cash in Other current assets | | | 20 | | | 8 | | | 61 | | | 6 |
Restricted cash in Other Assets | | | 94 | | | 345 | | | 135 | | | 428 |
Cash and cash equivalents and restricted cash | | $ | 6,630 | | $ | 49,225 | | $ | 5,400 | | $ | 50,932 |
| Three months ended |
| March 31, |
Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | 2019 | | 2018 |
Operating cash flows from operating leases | $ | 1,332 | | $ | 1,207 |
| | Three months ended |
| | March 31, |
Cash Paid (Received) During the Period for: | | | 2019 | | | 2018 |
Interest | | $ | 2,507 | | $ | 2,408 |
Income taxes, net of refunds | | | (379) | | | (1,089) |
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
RESULTS OF OPERATIONS
OVERVIEWAT&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 communicationstelecommunications, media and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally.technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refersnotes (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 accompanying Notes to Consolidated Financial Statements.acquisition are excluded.
Consolidated Results We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our financialsegment results presented in the third quarterNote 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 the first nine months of 2017investments managed within each segment. Percentage increases and 2016decreases that are summarized as follows:not considered meaningful are denoted with a dash.
| | Third Quarter | | | Nine-Month Period | |
| | | | | | | | Percent | | | | | | | | | Percent | |
| | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Operating Revenues | | | | | | | | | | | | | | | | | | |
Service | | $ | 36,378 | | | $ | 37,272 | | | | (2.4 | )% | | $ | 109,372 | | | $ | 111,515 | | | | (1.9 | )% |
Equipment | | | 3,290 | | | | 3,618 | | | | (9.1 | ) | | | 9,498 | | | | 10,430 | | | | (8.9 | ) |
Total Operating Revenues | | | 39,668 | | | | 40,890 | | | | (3.0 | ) | | | 118,870 | | | | 121,945 | | | | (2.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of services and sales | | | | | | | | | | | | | | | | | | | | | | | | |
Equipment | | | 4,191 | | | | 4,455 | | | | (5.9 | ) | | | 12,177 | | | | 13,090 | | | | (7.0 | ) |
Broadcast, programming and operations | | | 5,284 | | | | 4,909 | | | | 7.6 | | | | 15,156 | | | | 14,239 | | | | 6.4 | |
Other cost of services | | | 9,431 | | | | 9,526 | | | | (1.0 | ) | | | 27,714 | | | | 28,436 | | | | (2.5 | ) |
Selling, general and administrative | | | 8,317 | | | | 9,013 | | | | (7.7 | ) | | | 24,917 | | | | 26,363 | | | | (5.5 | ) |
Depreciation and amortization | | | 6,042 | | | | 6,579 | | | | (8.2 | ) | | | 18,316 | | | | 19,718 | | | | (7.1 | ) |
Total Operating Expenses | | | 33,265 | | | | 34,482 | | | | (3.5 | ) | | | 98,280 | | | | 101,846 | | | | (3.5 | ) |
Operating Income | | | 6,403 | | | | 6,408 | | | | (0.1 | ) | | | 20,590 | | | | 20,099 | | | | 2.4 | |
Income Before Income Taxes | | | 4,974 | | | | 5,193 | | | | (4.2 | ) | | | 16,422 | | | | 16,621 | | | | (1.2 | ) |
Net Income | | | 3,123 | | | | 3,418 | | | | (8.6 | ) | | | 10,711 | | | | 10,818 | | | | (1.0 | ) |
Net Income Attributable to AT&T | | $ | 3,029 | | | $ | 3,328 | | | | (9.0 | )% | | $ | 10,413 | | | $ | 10,539 | | | | (1.2 | )% |
| First Quarter | |
| | | | | | Percent | |
| 2019 | | 2018 | Change | |
Operating Revenues | | | | | | | |
Communications | $ | 35,393 | | $ | 35,533 | (0.4) | % |
WarnerMedia | | 8,379 | | | 112 | - | |
Latin America | | 1,718 | | | 2,025 | (15.2) | |
Xandr | | 426 | | | 337 | 26.4 | |
Corporate and other | | 167 | | | 333 | (49.8) | |
Eliminations and consolidation | | (1,256) | | | (302) | - | |
AT&T Operating Revenues | | 44,827 | | | 38,038 | 17.8 | |
| | | | | | | |
Operating Contribution | | | | | | | |
Communications | | 8,052 | | | 8,027 | 0.3 | |
WarnerMedia | | 2,310 | | | 39 | - | |
Latin America | | (173) | | | (111) | (55.9) | |
Xandr | | 253 | | | 286 | (11.5) | |
Segment Operating Contribution | $ | 10,442 | | $ | 8,241 | 26.7 | % |
Overview
Operating revenues The Communications segmentdecreased $1,222, or 3.0%, provides services to businesses and consumers located in the third quarterU.S. or in U.S. territories and $3,075, or 2.5%, forbusinesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the first nine months of 2017.following business units:
Service revenues decreased $894, or 2.4%, in the third quarter and $2,143, or 1.9%, for the first nine months of 2017. The decreases were primarily due to continued declines in legacy wireline voice and data products and lower wireless service revenues reflecting increased adoption of unlimited plans. Additionally, we waived $89 in service revenues for customers in areas affected by natural disasters during the third quarter of 2017. These were partially offset by increased revenues from strategic business services.
| 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. |
Equipment revenues decreased $328, or 9.1%, in the third quarter and $932, or 8.9%, for the first nine months of 2017. The decreases were primarily due to lower wireless handset sales and upgrades. Equipment revenue is becoming increasingly unpredictable as many customers are choosing to upgrade devices less frequently or are bringing their own devices.
| Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers. |
Operating expenses decreased $1,217, or 3.5%, in the third quarter and $3,566, or 3.5%, for the first nine months of 2017.
Equipment expenses decreased $264, or 5.9%, in the third quarter and $913, or 7.0%, for the first nine months of 2017. The decreases were driven by a decline in devices sold reflecting a change in customer buying habits.
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management'sManagement’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 AT&T's Regional Sports Networks (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. |
Broadcast, programmingThe Latin America segment provides entertainment and operationswireless services outside of the U.S. This segment contains the following business units:
| Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean. |
| Mexico provides wireless service and equipment to customers in Mexico. |
The Xandr expenses increased $375, or 7.6%, in the third quartersegment provides advertising services and $917, or 6.4%, for the first nine months of 2017, reflecting annual content cost increasesincludes our recently acquired AppNexus. These services utilize data insights to develop and additional programming costs for DIRECTV NOW.deliver targeted advertising across video and digital platforms.
RESULTS OF OPERATIONS
Other cost of servicesConsolidated Results expenses decreased $95, or 1.0%,Our financial results are summarized in the third quarterfollowing discussions. Additional analysis is discussed in our “Segment Results” section. Percentage increases and $722, or 2.5%, fordecreases that are not considered meaningful are denoted with a dash. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
| First Quarter | |
| | | | | | Percent | |
| 2019 | | 2018 | Change | |
Operating Revenues | | | | | | | |
Service | $ | 40,684 | | $ | 33,646 | 20.9 | % |
Equipment | | 4,143 | | | 4,392 | (5.7) | |
Total Operating Revenues | | 44,827 | | | 38,038 | 17.8 | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 30,388 | | | 25,843 | 17.6 | |
Depreciation and amortization | | 7,206 | | | 5,994 | 20.2 | |
Total Operating Expenses | | 37,594 | | | 31,837 | 18.1 | |
Operating Income | | 7,233 | | | 6,201 | 16.6 | |
Interest expense | | 2,141 | | | 1,771 | 20.9 | |
Equity in net income (loss) of affiliates | | (7) | | | 9 | - | |
Other income (expense) – net | | 286 | | | 1,702 | (83.2) | |
Income Before Income Taxes | | 5,371 | | | 6,141 | (12.5) | |
Net Income | | 4,348 | | | 4,759 | (8.6) | |
Net Income Attributable to AT&T | $ | 4,096 | | $ | 4,662 | (12.1) | % |
Operating revenues increased in the first nine monthsquarter of 2017.2019. The decreases reflect our continued focus on cost management and the utilization of automation and digitalization where appropriate, as well as lower Federal Universal Service Fund (USF) rates and fees. The decrease for the first nine months also includes an actuarial gain from the second-quarter 2017 remeasurement of our postretirement benefit obligation. These expense declines were partially offset by an increase in amortization of deferred customer fulfillment cost.
Selling, general and administrative expenses decreased $696, or 7.7%, in the third quarter and $1,446, or 5.5%, for the first nine months of 2017. The decreases were attributable to our disciplined cost management, lower selling and wireless commission costs from reduced volumes, fewer advertising costs, and, for the nine month period, the actuarial gain resulting from the second-quarter remeasurement of our postretirement benefit obligation. The decreases in the third quarter were partially offset by costs arising from natural disasters, and, for the first nine months, lower gains on wireless spectrum transactions during 2017 than in the comparable period of 2016. We are continuing to assess network damage from the natural disasters that occurred in the third quarter as well as the recent fires in California, and expect additional pressure in the fourth quarter.
Depreciation and amortization expense decreased $537, or 8.2%, in the third quarter and $1,402, or 7.1%, for the first nine months of 2017. Depreciation expense decreased $393, or 7.4%, in the third quarter and $962, or 6.1%, for the first nine months of 2017. The decreases werewas primarily due to our fourth-quarter 2016 change2018 acquisition of Time Warner. Partially offsetting these increases in estimated useful livesrevenues were declines in our Latin America segment and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease in the third quarterCommunications segment, driven by lower legacy services, video and $980 of the decrease for the first nine months. Also contributing to lower depreciation expenseswireless equipment revenues. Revenues were network assets becoming fully depreciated. These decreases were partially offsetalso negatively impacted by increases resulting from ongoing capital spending for upgrades and expansion.foreign exchange pressure.
Amortization expense decreased $144, or 11.2%, in the third quarter and $440, or 11.1%, for the first nine months of 2017 due to lower amortization of intangibles for the customer lists associated with acquisitions.31
Operating income decreased $5, or 0.1%, in the third quarter and increased $491, or 2.4%, for the first nine months of 2017. Our operating income margin in the third quarter increased from 15.7% in 2016 to 16.1% in 2017, and for the first nine months increased from 16.5% in 2016 to 17.3% in 2017.
Interest expense increased $462, or 37.7%, in the third quarter and $685, or 18.6%, for the first nine months of 2017. The increases were primarily due to higher debt balances in anticipation of closing our acquisition of Time Warner Inc. (Time Warner) and an increase in average interest rates when compared to the prior year. Financing fees related to pending acquisitions also contributed to higher interest expense in 2017.
Equity in net income (loss) of affiliates decreased $5, or 31.3%, in the third quarter and $205 for the first nine months of 2017, predominantly from losses from our legacy publishing business (which we sold in June 2017), partially offset by income from our investments in video-related businesses.
Other income (expense) – net increased $253 in the third quarter and $200 for the first nine months. The increases were primarily due to higher net gains from the sale of non-strategic assets and investments of $123 and $26, respectively, and growth in interest and dividend income of $91 and $146, including interest on cash held in anticipation of closing our acquisition of Time Warner.
Income taxes increased $76, or 4.3%, in the third quarter and decreased $92, or 1.6%, for the first nine months of 2017. Our effective tax rate was 37.2% in the third quarter and 34.8% for the first nine months of 2017, as compared to 34.2% in the third quarter and 34.9% for the first nine months of 2016. The increase in the third quarter was primarily due to state-level legislation changes that resulted in a remeasurement of our deferred tax liabilities offset by lower income before income taxes. The decrease for the first nine months of 2017 was primarily due to lower income before income taxes and the
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management'sManagement’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
Operations and support expenses increased in the first quarter of 2019. The increase was primarily due to our 2018 acquisition of Time Warner, partially offset by lower equipment costs in our Communications and Latin America segments and lower expenses due to our continued focus on cost management.recognition
Depreciation and amortization expense increased in the first quarter of tax benefits2019. Depreciation expense increased $285, or 5.8%, primarily due to the Time Warner acquisition as well as ongoing capital spending for network upgrades and expansion.
Amortization expense increased $927 in 2019 primarily due to the amortization of intangibles associated with WarnerMedia.
Operating income increased in the first quarter of 2019. Our operating income margin in the first quarter decreased from 16.3% in 2018 to 16.1% in 2019.
Interest expense increased in the first quarter of 2019. The increase was primarily due to higher debt balances related to the restructuringour acquisition of a portion of our wireless business offset by state-level legislation changes.
Selected Financial and Operating Data | | | | | | |
| | September 30, | |
Subscribers and connections in (000s) | | 2017 | | | 2016 | |
Domestic wireless subscribers | | | 138,826 | | | | 133,338 | |
Mexican wireless subscribers | | | 13,779 | | | | 10,698 | |
North American wireless subscribers | | | 152,605 | | | | 144,036 | |
| | | | | | | | |
North American branded subscribers | | | 106,098 | | | | 100,821 | |
North American branded net additions | | | 2,782 | | | | 3,881 | |
| | | | | | | | |
Domestic satellite and over-the-top video subscribers | | | 21,392 | | | | 20,777 | |
AT&T U-verse® (U-verse) video subscribers | | | 3,718 | | | | 4,544 | |
Latin America satellite video subscribers 1 | | | 13,490 | | | | 12,476 | |
Total video subscribers | | | 38,600 | | | | 37,797 | |
| | | | | | | | |
Total domestic broadband connections | | | 15,715 | | | | 15,618 | |
| | | | | | | | |
Network access lines in service | | | 12,249 | | | | 14,603 | |
U-verse VoIP connections | | | 5,774 | | | | 5,707 | |
| | | | | | | | |
Debt ratio 2 | | | 56.4 | % | | | 50.1 | % |
Net debt ratio 3 | | | 39.7 | % | | | 47.8 | % |
Ratio of earnings to fixed charges 4 | | | 3.55 | | | | 3.91 | |
Number of AT&T employees | | | 256,800 | | | | 273,140 | |
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. At June 30, 2017, SKY Mexico had 8.0 million subscribers.
2 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.
3 Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.
Time Warner, including interest expense on Time Warner notes.
Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equityEquity in net income (loss) of affiliates for decreased in the first quarter of 2019, primarily due to basis amortization of Time Warner investments, managed within each segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.which were acquired in the second quarter of 2018.
WeOther income (expense) – net decreased in the first quarter of 2019. The decrease was primarily due to actuarial losses of $432 in 2019 compared to an actuarial gain of $930 in the comparable prior year. First-quarter 2019 also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution, excluding equityincludes $45 of debt redemption expenses.
Income taxes decreased in netthe first quarter of 2019. Our effective tax rate was 19.0% for the first quarter of 2019, versus 22.5% for the comparable year prior. The decrease in income (loss)tax expense was primarily due to lower income before income taxes and the impacts of affiliates and depreciation and amortization. We believe EBITDAtax settlements in the first quarter of 2019. The decrease in our effective tax rate was primarily due to be a relevant and useful measurement to our investors as it is partthe impacts 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.tax settlements.
COMMUNICATIONS SEGMENT | First Quarter | |
| | | | | | Percent | |
| 2019 | | 2018 | Change | |
Segment Operating Revenues | | | | | | | |
Mobility | $ | 17,567 | | $ | 17,355 | 1.2 | % |
Entertainment Group | | 11,328 | | | 11,431 | (0.9) | |
Business Wireline | | 6,498 | | | 6,747 | (3.7) | |
Total Segment Operating Revenues | | 35,393 | | | 35,533 | (0.4) | |
| | | | | | | |
Segment Operating Contribution | | | | | | | |
Mobility | | 5,351 | | | 5,158 | 3.7 | |
Entertainment Group | | 1,478 | | | 1,309 | 12.9 | |
Business Wireline | | 1,223 | | | 1,560 | (21.6) | |
Total Segment Operating Contribution | $ | 8,052 | | $ | 8,027 | 0.3 | % |
AT&T INC.MARCH 31, 2019
SEPTEMBER 30, 2017
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Selected Subscribers and Connections | | | |
| First Quarter |
(000s) | 2019 | | 2018 |
Total domestic broadband connections | 15,737 | | 15,775 |
Network access lines in service | 9,576 | | 11,288 |
U-verse VoIP connections | 4,935 | | 5,585 |
The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete integrated communications solution to our business customers.
The Operating revenues decreased in the first quarter of 2019, driven by declines in our Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers locatedBusiness Wireline business units, partially offset by increases in the United States orour Mobility business unit. The decreases reflect continued declines in U.S. territories. We utilize our copper and IP-based wired network and our satellite technology.
The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our networks to providelegacy voice and data services, including high-speed internet,products, decreased equipment revenues from lower postpaid smartphone sales and the shift to over-the-top (OTT) video offerings, largely offset by higher wireless service and home monitoring services over wireless devices.advanced data revenues.
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Our operating assets are utilized by multiple segmentsOperating contribution increased in the first quarter of 2019, reflecting improvement in our Mobility and consist of our wireless and wired networks as well as an international satellite fleet. Our domestic communications business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our asset base. Therefore asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment. In expectation of the close of our acquisition of Time Warner, we are beginning to realign our operations and strategies. We are pushing down administrative activities into theEntertainment Group business units, partially offset by declines in our Business Wireline business unit. Our Communications segment operating income margin in the first quarter increased from 22.6% in 2018 to better manage costs and serve our customers.22.8% in 2019.
Business Solutions | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2017 | | | 2016 | | | Percent Change | | | 2017 | | | 2016 | | | Percent Change | |
|
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Wireless service | | $ | 8,034 | | | $ | 8,050 | | | | (0.2 | )% | | $ | 23,969 | | | $ | 23,868 | | | | 0.4 | % |
Fixed strategic services | | | 3,087 | | | | 2,913 | | | | 6.0 | | | | 9,089 | | | | 8,469 | | | | 7.3 | |
Legacy voice and data services | | | 3,434 | | | | 4,042 | | | | (15.0 | ) | | | 10,572 | | | | 12,577 | | | | (15.9 | ) |
Other service and equipment | | | 852 | | | | 886 | | | | (3.8 | ) | | | 2,513 | | | | 2,619 | | | | (4.0 | ) |
Wireless equipment | | | 1,654 | | | | 1,876 | | | | (11.8 | ) | | | 4,873 | | | | 5,422 | | | | (10.1 | ) |
Total Segment Operating Revenues | | | 17,061 | | | | 17,767 | | | | (4.0 | ) | | | 51,016 | | | | 52,955 | | | | (3.7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 10,233 | | | | 10,925 | | | | (6.3 | ) | | | 30,722 | | | | 32,584 | | | | (5.7 | ) |
Depreciation and amortization | | | 2,325 | | | | 2,539 | | | | (8.4 | ) | | | 6,972 | | | | 7,568 | | | | (7.9 | ) |
Total Segment Operating Expenses | | | 12,558 | | | | 13,464 | | | | (6.7 | ) | | | 37,694 | | | | 40,152 | | | | (6.1 | ) |
Segment Operating Income | | | 4,503 | | | | 4,303 | | | | 4.6 | | | | 13,322 | | | | 12,803 | | | | 4.1 | |
Equity in Net Income of Affiliates | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Segment Contribution | | $ | 4,503 | | | $ | 4,303 | | | | 4.6 | % | | $ | 13,322 | | | $ | 12,803 | | | | 4.1 | % |
Communications Business Unit Discussion |
Mobility Results | | | | | | | |
| First Quarter |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Operating revenues | | | | | | | |
Service | $ | 13,792 | | $ | 13,403 | 2.9 | % |
Equipment | | 3,775 | | | 3,952 | (4.5) | |
Total Operating Revenues | | 17,567 | | | 17,355 | 1.2 | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 10,181 | | | 10,102 | 0.8 | |
Depreciation and amortization | | 2,035 | | | 2,095 | (2.9) | |
Total Operating Expenses | | 12,216 | | | 12,197 | 0.2 | |
Operating Income | | 5,351 | | | 5,158 | 3.7 | |
Equity in Net Income (Loss) of Affiliates | | - | | | - | - | |
Operating Contribution | $ | 5,351 | | $ | 5,158 | 3.7 | % |
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management'sManagement’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 following tables highlight other key measures of performance for the Business Solutions segment:Mobility:
| | September 30, | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | | Change | |
Business Wireless Subscribers | | | | | | | | | |
Postpaid/Branded | | | 51,412 | | | | 50,014 | | | | 2.8 | % |
Reseller | | | 77 | | | | 58 | | | | 32.8 | |
Connected devices 1 | | | 35,909 | | | | 29,355 | | | | 22.3 | |
Total Business Wireless Subscribers | | | 87,398 | | | | 79,427 | | | | 10.0 | |
| | | | | | | | | | | | |
Business IP Broadband Connections | | | 1,017 | | | | 963 | | | | 5.6 | % |
1 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes postpaid tablets. |
| | Third Quarter | | | Nine-Month Period | |
| | | | | | | Percent | | | | | | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | Change | | | 2017 | | | 2016 | | Change | |
| | | | | | | | | | | | | | | | |
Business Wireless Net Additions 1, 4 | | | | | | | | | | | | | | | | |
Postpaid/Branded | | | 15 | | | | 191 | | | | (92.1 | )% | | | (74 | ) | | | 509 | | | | - | % |
Reseller | | | 2 | | | | 1 | | | | - | | | | 3 | | | | (34 | ) | | | - | |
Connected devices 2 | | | 2,292 | | | | 1,290 | | | | 77.7 | | | | 7,015 | | | | 4,067 | | | | 72.5 | |
Business Wireless Net Subscriber Additions | | | 2,309 | | | | 1,482 | | | | 55.8 | | | | 6,944 | | | | 4,542 | | | | 52.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Business Wireless Postpaid Churn 1, 3, 4 | | | 1.01 | % | | | 0.97 | % | 4 BP | | | | 1.02 | % | | | 0.97 | % | 5 BP | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Business IP Broadband Net Additions | | | 25 | | | | 15 | | | | 66.7 | % | | | 41 | | | | 52 | | | | (21.2 | )% |
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period. | |
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. | |
Excludes postpaid tablets. | |
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number | |
of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for | |
each month of that period. | |
4 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers. | |
| First Quarter | | Percent |
(in 000s) | 2019 | | | 2018 | | Change |
Wireless Subscribers | | | | | | | |
Postpaid smartphones | 60,597 | | | 60,002 | | 1.0 | % |
Postpaid feature phones and data-centric devices | 15,953 | | | 17,429 | | (8.5) | |
Postpaid | 76,550 | | | 77,431 | | (1.1) | |
Prepaid | 17,180 | | | 15,671 | | 9.6 | |
Reseller | 7,574 | | | 9,002 | | (15.9) | |
Connected devices1 | 54,428 | | | 41,728 | | 30.4 | |
Total Wireless Subscribers | 155,732 | | | 143,832 | | 8.3 | |
| | | | | | | | |
Wireless Net Additions2 | | | | | | | |
Postpaid | (204) | | | 49 | | - | |
Prepaid | 96 | | | 241 | | (60.2) | |
Reseller | (253) | | | (388) | | 34.8 | |
Connected devices1 | 3,088 | | | 2,728 | | 13.2 | |
Wireless Net Subscriber Additions | 2,727 | | | 2,630 | | 3.7 | |
| | | | | | | | |
Postpaid Phone Subscribers | 63,438 | | | 63,657 | | (0.3) | |
Postpaid Phone Net Additions | 80 | | | (60) | | - | % |
| | | | | | | | |
Postpaid Churn3 | 1.17 | | | 1.06 | | 11 | BP |
Postpaid Phone-Only Churn 3 | 0.93 | | | 0.84 | | 9 | BP |
1 | Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes |
| postpaid 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. |
Operating RevenuesService decreased $706, or 4.0%, in the third quarter and $1,939, or 3.7%, for the first nine months of 2017. Revenue declines reflect technological shifts away from legacy products, as well as decreasing wireless equipment revenues resulting from changes in customer buying habits. These decreases were partially offset by fixed strategic services, which represent 41% of non-wireless revenues. Our revenues continue to be pressured by slower fixed business investment.
Wireless service revenues decreased $16, or 0.2%, in the third quarter andrevenue increased $101, or 0.4%, for the first nine months of 2017. The decrease in the third quarter was primarily due to customers shifting to our unlimited plans as well as fewer migrations from our Consumer Mobility segment during the quarter. The increase in the first nine months was primarilyquarter largely due to the migration of customers from our Consumer Mobility segment.
At September 30, 2017, we served 87.4 million subscribers, an increase of 10.0% from the prior year. Postpaid subscribers increased 2.8% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lowerhigher average revenue per average subscriber (ARPU) and churn, increased 22.3% from the prior year reflecting growth in our connected car business and other data centric devices that utilize the network to connect and control physical devices using embedded computing systems and/or software, commonly called the Internet of Things (IoT).
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the third quarter, business wireless postpaid churn increased to 1.01% in 2017 from 0.97% in 2016, and for the first nine months increased to 1.02% in 2017 from 0.97% in 2016.
Fixed strategic services revenues increased $174, or 6.0%, in the third quarter and $620, or 7.3%, for the first nine months of 2017. Our revenues increased in the third quarter and first nine months of 2017 primarily due to: Ethernet of $77 and $243; Dedicated Internet services of $46 and $150; and VoIP of $41 and $159, respectively.
Legacy wired voice and data service revenues decreased $608, or 15.0%, in the third quarter and $2,005, or 15.9%, for the first nine months of 2017. In the third quarter and first nine months of 2017, legacy voice billings decreased $324 and $1,068 and traditional data billings decreased $284 and $937, respectively. These decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or to competitors.
Wireless equipment revenues decreased $222, or 11.8%, in the third quarter and $549, or 10.1%, for the first nine months of 2017. The decreases were primarily due to decreases in device upgrades reflecting a change in customer buying habits.
Operations and support expenses decreased $692, or 6.3%, in the third quarter and $1,862, or 5.7%, for the first nine months of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.
Decreased operations and support expenses in the third quarter and first nine months were primarily due to lower equipment sales and wireless upgrade transactions, which decreased equipment costs by $336 and $732, and efforts to automate and digitize our support activities improved results $146 and $543, respectively. As of September 30, 2017, approximately 45% of our network functions have been moved to software-based systems. Expense reductions also reflect lower administrative costs, contributing to a reduction in expenses of $49 and $213, and fewer traffic compensation and wireless interconnect costs, resulting in declines of $44 and $155, respectively, in access and interconnect costs. Lower selling and wireless commission costs also contributed to decreased expenses for the first nine months.
Depreciation expense decreased $214, or 8.4%, in the third quarter and $596, or 7.9%, for the first nine months of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income increased $200, or 4.6%, in the third quarter and $519, or 4.1%, for the first nine months of 2017. Our Business Solutions segment operating income margin in the third quarter increased from 24.2% in 2016 to 26.4% in 2017, and for the first nine months increased from 24.2% in 2016 to 26.1% in 2017. Our Business Solutions EBITDA margin in the third quarter increased from 38.5% in 2016 to 40.0% in 2017, and for the first nine months increased from 38.5% in 2016 to 39.8% in 2017.
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Entertainment Group | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2017 | | | 2016 | | | Percent Change | | | 2017 | | | 2016 | | | Percent Change | |
|
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Video entertainment | | $ | 9,200 | | | $ | 9,026 | | | | 1.9 | % | | $ | 27,373 | | | $ | 26,893 | | | | 1.8 | % |
High-speed internet | | | 1,916 | | | | 1,892 | | | | 1.3 | | | | 5,784 | | | | 5,562 | | | | 4.0 | |
Legacy voice and data services | | | 949 | | | | 1,168 | | | | (18.8 | ) | | | 3,010 | | | | 3,725 | | | | (19.2 | ) |
Other service and equipment | | | 583 | | | | 634 | | | | (8.0 | ) | | | 1,786 | | | | 1,909 | | | | (6.4 | ) |
Total Segment Operating Revenues | | | 12,648 | | | | 12,720 | | | | (0.6 | ) | | | 37,953 | | | | 38,089 | | | | (0.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 9,953 | | | | 9,728 | | | | 2.3 | | | | 29,112 | | | | 28,875 | | | | 0.8 | |
Depreciation and amortization | | | 1,379 | | | | 1,504 | | | | (8.3 | ) | | | 4,256 | | | | 4,481 | | | | (5.0 | ) |
Total Segment Operating Expenses | | | 11,332 | | | | 11,232 | | | | 0.9 | | | | 33,368 | | | | 33,356 | | | | - | |
Segment Operating Income | | | 1,316 | | | | 1,488 | | | | (11.6 | ) | | | 4,585 | | | | 4,733 | | | | (3.1 | ) |
Equity in Net Income (Loss) of Affiliates | | | (6 | ) | | | - | | | | - | | | | (23 | ) | | | 1 | | | | - | |
Segment Contribution | | $ | 1,310 | | | $ | 1,488 | | | | (12.0 | )% | | $ | 4,562 | | | $ | 4,734 | | | | (3.6 | )% |
The following tables highlight other key measures of performance for the Entertainment Group segment:
| | September 30, | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | | Change | |
Video Connections | | | | | | | | | |
Satellite | | | 20,605 | | | | 20,777 | | | | (0.8 | )% |
U-verse | | | 3,691 | | | | 4,515 | | | | (18.3 | ) |
DIRECTV NOW 1 | | | 787 | | | | - | | | | - | |
Total Video Connections | | | 25,083 | | | | 25,292 | | | | (0.8 | ) |
| | | | | | | | | | | | |
Broadband Connections | | | | | | | | | | | | |
IP | | | 13,367 | | | | 12,752 | | | | 4.8 | |
DSL | | | 964 | | | | 1,424 | | | | (32.3 | ) |
Total Broadband Connections | | | 14,331 | | | | 14,176 | | | | 1.1 | |
| | | | | | | | | | | | |
Retail Consumer Switched Access Lines | | | 4,996 | | | | 6,155 | | | | (18.8 | ) |
U-verse Consumer VoIP Connections | | | 5,337 | | | | 5,378 | | | | (0.8 | ) |
Total Retail Consumer Voice Connections | | | 10,333 | | | | 11,533 | | | | (10.4 | )% |
1 Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial. |
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
| | Third Quarter | | | Nine-Month Period | |
| | | | | | | | Percent | | | | | | | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Video Net Additions | | | | | | | | | | | | | | | | | | |
Satellite 1 | | | (251 | ) | | | 323 | | | | - | % | | | (407 | ) | | | 993 | | | | - | % |
U-verse 1 | | | (134 | ) | | | (326 | ) | | | 58.9 | | | | (562 | ) | | | (1,099 | ) | | | 48.9 | |
DIRECTV NOW 2 | | | 296 | | | | - | | | | - | | | | 520 | | | | - | | | | - | |
Net Video Additions | | | (89 | ) | | | (3 | ) | | | - | | | | (449 | ) | | | (106 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Broadband Net Additions | | | | | | | | | | | | | | | | | | | | | | | | |
IP | | | 125 | | | | 156 | | | | (19.9 | ) | | | 479 | | | | 396 | | | | 21.0 | |
DSL | | | (96 | ) | | | (161 | ) | | | 40.4 | | | | (327 | ) | | | (506 | ) | | | 35.4 | |
Net Broadband Additions | | | 29 | | | | (5 | ) | | | - | % | | | 152 | | | | (110 | ) | | | - | % |
1 Includes disconnections for customers that migrated to DIRECTV NOW. |
2 Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial. |
Operating revenues decreased $72, or 0.6%, in the third quarter and $136, or 0.4%, for the first nine months of 2017, largely due to lower revenues from legacy voice and data products, partially offset by growth in revenues from consumer IP broadband services.
As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite and U-verse subscribers. In November 2016, we launched DIRECTV NOW, our newest video streaming option that does not require either satellite or U-verse service (commonly called over-the-top video service).
Video entertainment revenues increased $174, or 1.9%, in the third quarter and $480, or 1.8%, for the first nine months of 2017. These increases include a third-quarter 2017 pay-per-view event and reflect a 4.5% and 3.3% increase in average revenue per linear (combined satellite and U-verse) video connection. Advertising revenues also increased $41 and $113, respectively.
Linear video subscriber losses, and associated margin pressure, continued their recent trend, with some of the losses due to the impact from hurricanes as well as tightening of our credit policies. We are also seeing the impact of customers wanting mobile and over-the-top offerings, which is contributing to growth in DIRECTV NOW connections and partially offsetting linear video subscriber losses. DIRECTV NOW connections continue to grow as we add eligible devices and increase content choices. Our strategy to bundle services has positively impacted subscriber trends and churn, with customers who bundle our wireless and video having nearly half the rate of churn as customers with a single service. Customers with linear video but no wireless service through AT&T increased churn during the quarter, partially due to pricing increases associated with annual content cost increases and involuntary churn.
High-speed internet revenues increased $24, or 1.3%, in the third quarter and $222, or 4.0%, for the first nine months of 2017, reflecting a 4.8% increase in IP broadband subscribers when compared to the prior year. Average revenue per IP broadband connection (ARPU) decreased 3.7% in the third quarter and 0.8% for the first nine months of 2017. Our bundling strategy is also helping to lower churn for broadband subscribers, with subscribers who bundle broadband with another AT&T service having about 30% lower churn than broadband-only subscribers. To compete more effectively against other broadband providers in the midst of ongoing declines in DSL subscribers, we continued to deploy our all-fiber, high-speed wireline network, which has improved customer retention rates. We also expect our planned 5G national deployment to aid our ability to provide more locations with competitive broadband speeds.
Legacy voice and data service revenues decreased $219, or 18.8%, in the third quarter and $715, or 19.2%, for the first nine months of 2017. For the nine months ended September 30, 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 10% for the September 30, 2016 period, and reflect third quarter and year to date decreases of $148 and $483 in local voice and long-distance, and $70 and $232 in traditional data billings, respectively. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
competitors. At September 30, 2017, approximately 7% of our broadband connections were DSL compared to 10% at September 30, 2016.
Operations and support expenses increased $225, or 2.3%, in the third quarter and increased $237, or 0.8%, for the first nine months of 2017. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, which include costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.
Increased operations and support expenses in the third quarter and for the first nine months of 2017 were primarily due to annual content cost increases, a pay-per-view event, deferred customer fulfillment cost amortization, and video platform development costs. Partially offsetting these increases were the impact of our ongoing focus on cost efficiencies and merger synergies, as well as workforce reductions and lower marketing costs.
Depreciation expense decreased $125, or 8.3%, in the third quarter, and $225, or 5.0%, for the first nine months of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated. These decreases were offset by ongoing capital spending for network upgrades and expansion.
Operating income decreased $172, or 11.6%, in the third quarter and $148, or 3.1%, for the first nine months of 2017. Our Entertainment Group segment operating income margin in third quarter decreased from 11.7% in 2016 to 10.4% in 2017, and for the first nine months decreased from 12.4% in 2016 to 12.1% in 2017. Our Entertainment Group segment EBITDA margin in the third quarter decreased from 23.5% in 2016 to 21.3% in 2017, and for the first nine months decreased from 24.2% in 2016 to 23.3% in 2017.
Consumer Mobility | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2017 | | | 2016 | | | Percent Change | | | 2017 | | | 2016 | | | Percent Change | |
|
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Service | | $ | 6,507 | | | $ | 6,914 | | | | (5.9 | )% | | $ | 19,644 | | | $ | 20,805 | | | | (5.6 | )% |
Equipment | | | 1,241 | | | | 1,353 | | | | (8.3 | ) | | | 3,635 | | | | 3,976 | | | | (8.6 | ) |
Total Segment Operating Revenues | | | 7,748 | | | | 8,267 | | | | (6.3 | ) | | | 23,279 | | | | 24,781 | | | | (6.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 4,551 | | | | 4,751 | | | | (4.2 | ) | | | 13,599 | | | | 14,343 | | | | (5.2 | ) |
Depreciation and amortization | | | 877 | | | | 944 | | | | (7.1 | ) | | | 2,621 | | | | 2,798 | | | | (6.3 | ) |
Total Segment Operating Expenses | | | 5,428 | | | | 5,695 | | | | (4.7 | ) | | | 16,220 | | | | 17,141 | | | | (5.4 | ) |
Segment Operating Income | | | 2,320 | | | | 2,572 | | | | (9.8 | ) | | | 7,059 | | | | 7,640 | | | | (7.6 | ) |
Equity in Net Income of Affiliates | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Segment Contribution | | $ | 2,320 | | | $ | 2,572 | | | | (9.8 | )% | | $ | 7,059 | | | $ | 7,640 | | | | (7.6 | )% |
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The following tables highlight other key measures of performance for the Consumer Mobility segment: | |
| | | | | | | | | |
| | September 30, | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | | Change | |
Consumer Mobility Subscribers | | | | | | | | | |
Postpaid | | | 26,003 | | | | 27,374 | | | | (5.0 | )% |
Prepaid 2 | | | 15,136 | | | | 13,035 | | | | 16.1 | |
Branded | | | 41,139 | | | | 40,409 | | | | 1.8 | |
Reseller | | | 9,800 | | | | 12,566 | | | | (22.0 | ) |
Connected devices 1, 2 | | | 489 | | | | 936 | | | | (47.8 | ) |
Total Consumer Mobility Subscribers | | | 51,428 | | | | 53,911 | | | | (4.6 | )% |
1 Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes | |
postpaid tablets. See (2) below. | |
2 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component of | |
prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543 subscribers that | |
were formerly included in connected devices. | |
| | Third Quarter | | | Nine-Month Period | |
| | | | | | | Percent | | | | | | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | Change | | | 2017 | | | 2016 | | Change | |
Consumer Mobility Net Additions 1, 4 | | | | | | | | | | | | | | | | |
Postpaid | | | 102 | | | | 21 | | | | - | % | | | 127 | | | | 89 | | | | 42.7 | % |
Prepaid 5 | | | 324 | | | | 304 | | | | 6.6 | | | | 873 | | | | 1,169 | | | | (25.3 | ) |
Branded Net Additions | | | 426 | | | | 325 | | | | 31.1 | | | | 1,000 | | | | 1,258 | | | | (20.5 | ) |
Reseller | | | (394 | ) | | | (316 | ) | | | (24.7 | ) | | | (1,345 | ) | | | (1,140 | ) | | | (18.0 | ) |
Connected devices 2, 5 | | | (18 | ) | | | 41 | | | | - | | | | 87 | | | | 14 | | | | - | |
Consumer Mobility Net Subscriber Additions | | | 14 | | | | 50 | | | | (72.0 | )% | | | (258 | ) | | | 132 | | | | - | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Churn 1, 3, 4 | | | 2.37 | % | | | 2.11 | % | 26 BP | | | | 2.32 | % | | | 2.06 | % | 26 BP | |
Postpaid Churn 1, 3, 4 | | | 1.17 | % | | | 1.19 | % | (2) BP | | | | 1.16 | % | | | 1.17 | % | (1) BP | |
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period. | |
2 Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes | |
postpaid tablets. See (5) below. | |
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number | |
of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for | |
each month of that period. | |
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of | |
period subscribers. | |
5 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component | |
of prepaid subscribers, resulting in 97 additional prepaid net adds in the quarter. Had we restated our prior periods, prepaid | |
net adds for the comparable periods would have been 381 in the third quarter of 2016, and 1,060 and 1,324 for the first nine months of , | |
2017 and 2016, respectively. | |
Operating Revenues decreased $519, or 6.3%, in the third quarter and $1,502, or 6.1%, for the first nine months of 2017. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited plans, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Service revenue decreased $407, or 5.9%, in the third quarter and $1,161, or 5.6%, for the first nine months of 2017. The decreases were largely due to postpaid customers continuing to shift to discounted monthly service charges under our unlimited plans and the migration of subscribers to Business Solutions. Revenues from postpaid customers declined $419, or 8.6%, in the third quarter and $1,422, or 9.5%, for the first nine months of 2017. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 4.6% and 5.2%, respectively. The decreases were partially offset by higher prepaid service revenues of $155, or 10.7%, in the third quarter and $595, or 14.5%, for the first nine months primarily from growth in Cricket and AT&T PREPAIDSM subscribers.
Equipment revenue decreased $112, or 8.3%, in the third quarter and $341, or 8.6%, for the first nine months of 2017. The decreases in equipment revenues resulted from lower handset sales and upgrades. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.
Operations and support expenses decreased $200, or 4.2%, in the third quarter and $744, or 5.2%, for the first nine months of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.
Decreased operations and support expenses for the third quarter were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment and selling and commission costs, and operational efficiencies. The nine-month period also reflects lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising.
Depreciation expense decreased $67, or 7.1%, in the third quarter and $177, or 6.3%, for the first nine months of 2017. The decreases were primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income decreased $252, or 9.8%, in the third quarter and $581, or 7.6%, for the first nine months of 2017. Our Consumer Mobility segment operating income margin in the third quarter decreased from 31.1% in 2016 to 29.9% in 2017, and for the first nine months decreased from 30.8% in 2016 to 30.3% in 2017. Our Consumer Mobility EBITDA margin in the third quarter decreased from 42.5% in 2016 to 41.3% in 2017, and for the first nine months decreased from 42.1% in 2016 to 41.6% in 2017.
International | | | | | | | | | | | | | | | | | | |
Segment Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2017 | | | 2016 | | | Percent Change | | | 2017 | | | 2016 | | | Percent Change | |
Segment operating revenues | | | | | | | | | | | | | | | | | | |
Video entertainment | | $ | 1,363 | | | $ | 1,297 | | | | 5.1 | % | | $ | 4,065 | | | $ | 3,649 | | | | 11.4 | % |
Wireless service | | | 536 | | | | 484 | | | | 10.7 | | | | 1,546 | | | | 1,428 | | | | 8.3 | |
Wireless equipment | | | 200 | | | | 98 | | | | - | | | | 443 | | | | 297 | | | | 49.2 | |
Total Segment Operating Revenues | | | 2,099 | | | | 1,879 | | | | 11.7 | | | | 6,054 | | | | 5,374 | | | | 12.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Segment operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 1,937 | | | | 1,640 | | | | 18.1 | | | | 5,468 | | | | 4,951 | | | | 10.4 | |
Depreciation and amortization | | | 304 | | | | 293 | | | | 3.8 | | | | 905 | | | | 868 | | | | 4.3 | |
Total Segment Operating Expenses | | | 2,241 | | | | 1,933 | | | | 15.9 | | | | 6,373 | | | | 5,819 | | | | 9.5 | |
Segment Operating Income (Loss) | | | (142 | ) | | | (54 | ) | | | - | | | | (319 | ) | | | (445 | ) | | | 28.3 | |
Equity in Net Income (Loss) of Affiliates | | | 17 | | | | 1 | | | | - | | | | 62 | | | | 24 | | | | - | |
Segment Contribution | | $ | (125 | ) | | $ | (53 | ) | | | - | % | | $ | (257 | ) | | $ | (421 | ) | | | 39.0 | % |
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The following tables highlight other key measures of performance for the International segment:
| | September 30, | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | | Change | |
Mexican Wireless Subscribers | | | | | | | | | |
Postpaid | | | 5,316 | | | | 4,733 | | | | 12.3 | % |
Prepaid | | | 8,231 | | | | 5,665 | | | | 45.3 | |
Branded | | | 13,547 | | | | 10,398 | | | | 30.3 | |
Reseller | | | 232 | | | | 300 | | | | (22.7 | ) |
Total Mexican Wireless Subscribers | | | 13,779 | | | | 10,698 | | | | 28.8 | |
| | | | | | | | | | | | |
Latin America Satellite Subscribers | | | | | | | | | | | | |
PanAmericana | | | 8,201 | | | | 7,139 | | | | 14.9 | |
SKY Brazil 1 | | | 5,289 | | | | 5,337 | | | | (0.9 | ) |
Total Latin America Satellite Subscribers | | | 13,490 | | | | 12,476 | | | | 8.1 | % |
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico |
had 8.0 million subscribers at June 30, 2017 and 7.9 million subscribers at September 30, 2016. |
| | Third Quarter | | | Nine-Month Period | |
(in 000s) | | 2017 | | | 2016 | | | Percent Change | | | 2017 | | | 2016 | | | Percent Change | |
Mexican Wireless Net Additions | | | | | | | | | | | | | | | | | | |
Postpaid | | | 129 | | | | 163 | | | | (20.9 | )% | | | 351 | | | | 444 | | | | (20.9 | )% |
Prepaid | | | 585 | | | | 606 | | | | (3.5 | ) | | | 1,504 | | | | 1,670 | | | | (9.9 | ) |
Branded Net Additions | | | 714 | | | | 769 | | | | (7.2 | ) | | | 1,855 | | | | 2,114 | | | | (12.3 | ) |
Reseller | | | (17 | ) | | | (26 | ) | | | 34.6 | | | | (49 | ) | | | (100 | ) | | | 51.0 | |
Mexican Wireless Net Subscriber Additions | | | 697 | | | | 743 | | | | (6.2 | ) | | | 1,806 | | | | 2,014 | | | | (10.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Latin America Satellite Net Additions 1 | | | | | | | | | | | | | | | | | | | | | | | | |
PanAmericana | | | 98 | | | | (36 | ) | | | - | | | | 163 | | | | 73 | | | | - | |
SKY Brazil | | | (230 | ) | | | (12 | ) | | | - | | | | (260 | ) | | | (107 | ) | | | - | |
Latin America Satellite Net Subscriber Additions 2 | | | (132 | ) | | | (48 | ) | | | - | % | | | (97 | ) | | | (34 | ) | | | - | % |
1 In 2017, we updated the methodology used to account for prepaid video connections, which were reflected in beginning of period | |
subscribers. | |
2 Excludes SKY Mexico net subscriber losses of 13 for the six months ended June 30, 2017 and additions of 519 for the six | |
months of June 30, 2016. | |
Operating Results
Our International segment consists of the Latin American operations acquired with DIRECTV as well as our Mexican wireless operations. Video entertainment services are provided to primarily residential customers using satellite technology. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Operating revenuesARPU increased $220, or 11.7%, in the third quarter and $680, or 12.7%, for the first nine months of 2017. The increases include $66 and $416 from video services in Latin America due to price increases driven primarily by macroeconomic conditions with mixed local currencies. Mexico wireless revenues increased $154, or 26.5%, in the third quarter and $264, or 15.3%, for the first nine months of 2017, primarily due to growth in equipment revenues as we have increased our subscriber base, partially offset by competitive pricing for services.
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Operations and support expenses increased $297, or 18.1%, in the third quarter and $517, or 10.4%, for the first nine months of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits.
The increases in Latin America in the third quarter and for the first nine months were primarily due to higher programming and other operating costs. The nine-month period was partially offset by foreign currency exchange rates and our reassessment of operating tax contingencies in Brazil. The increases in Mexico for the first nine months were primarily driven by higher operational costs, including expenses associated with our network expansion and foreign currency pressures.
Depreciation expense increased $11, or 3.8%, in the third quarter and $37, or 4.3%, for the first nine months of 2017. The increases were primarily due to updating the estimated asset lives for video equipment in Latin America and higher capital spending in Mexico.
Operating income decreased $88 in the third quarter and increased $126, or 28.3%, for the first nine months of 2017, and were negatively impacted by foreign exchange pressure. Our International segment operating income margin in the third quarter decreased from (2.9)% in 2016 to (6.8)% in 2017, and for the first nine months increased from (8.3)% in 2016 to (5.3)% in 2017. Our International EBITDA margin in the third quarter decreased from 12.7% in 2016 to 7.7% in 2017, and for the first nine months increased from 7.9% in 2016 to 9.7% in 2017.
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility). See "Discussion and Reconciliation of Non-GAAP Measure" for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.
AT&T Mobility Results | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | 2017 | | | 2016 | | | Percent Change | | | 2017 | | | 2016 | | | Percent Change | |
|
Operating revenues | | | | | | | | | | | | | | | | | | |
Service | | $ | 14,541 | | | $ | 14,964 | | | | (2.8 | )% | | $ | 43,613 | | | $ | 44,673 | | | | (2.4 | )% |
Equipment | | | 2,895 | | | | 3,229 | | | | (10.3 | ) | | | 8,508 | | | | 9,398 | | | | (9.5 | ) |
Total Operating Revenues | | | 17,436 | | | | 18,193 | | | | (4.2 | ) | | | 52,121 | | | | 54,071 | | | | (3.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 10,113 | | | | 10,697 | | | | (5.5 | ) | | | 30,308 | | | | 31,822 | | | | (4.8 | ) |
EBITDA | | | 7,323 | | | | 7,496 | | | | (2.3 | ) | | | 21,813 | | | | 22,249 | | | | (2.0 | ) |
Depreciation and amortization | | | 2,010 | | | | 2,107 | | | | (4.6 | ) | | | 5,999 | | | | 6,244 | | | | (3.9 | ) |
Total Operating Expenses | | | 12,123 | | | | 12,804 | | | | (5.3 | ) | | | 36,307 | | | | 38,066 | | | | (4.6 | ) |
Operating Income | | $ | 5,313 | | | $ | 5,389 | | | | (1.4 | )% | | $ | 15,814 | | | $ | 16,005 | | | | (1.2 | )% |
The following tables highlight other key measures of performance for AT&T Mobility: | |
| | | |
| | September 30, | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | | Change | |
Wireless Subscribers 1 | | | | | | | | | |
Postpaid smartphones | | | 59,277 | | | | 58,688 | | | | 1.0 | % |
Postpaid feature phones and data-centric devices | | | 18,138 | | | | 18,700 | | | | (3.0 | ) |
Postpaid | | | 77,415 | | | | 77,388 | | | | - | |
Prepaid 3 | | | 15,136 | | | | 13,035 | | | | 16.1 | |
Branded | | | 92,551 | | | | 90,423 | | | | 2.4 | |
Reseller | | | 9,877 | | | | 12,624 | | | | (21.8 | ) |
Connected devices 2, 3 | | | 36,398 | | | | 30,291 | | | | 20.2 | |
Total Wireless Subscribers | | | 138,826 | | | | 133,338 | | | | 4.1 | |
| | | | | | | | | | | | |
Branded Smartphones | | | 72,242 | | | | 69,752 | | | | 3.6 | |
Smartphones under our installment programs at end of period | | | 31,207 | | | | 29,382 | | | | 6.2 | % |
1 Represents 100% of AT&T Mobility wireless subscribers. | |
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes | |
postpaid tablets. See (3) below. | |
3 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component of | |
prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543 subscribers | |
that were formerly included in connected devices. | |
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
| | | | | | | | | | | |
| | Third Quarter | | | Nine-Month Period | |
| | | | | | | Percent | | | | | | | | Percent | |
(in 000s) | | 2017 | | | 2016 | | Change | | | 2017 | | | 2016 | | Change | |
Wireless Net Additions 1, 4 | | | | | | | | | | | | | | | | |
Postpaid | | | 117 | | | | 212 | | | | (44.8 | )% | | | 53 | | | | 598 | | | | (91.1 | )% |
Prepaid 5 | | | 324 | | | | 304 | | | | 6.6 | | | | 873 | | | | 1,169 | | | | (25.3 | ) |
Branded Net Additions | | | 441 | | | | 516 | | | | (14.5 | ) | | | 926 | | | | 1,767 | | | | (47.6 | ) |
Reseller | | | (392 | ) | | | (315 | ) | | | (24.4 | ) | | | (1,342 | ) | | | (1,174 | ) | | | (14.3 | ) |
Connected devices 2, 5 | | | 2,274 | | | | 1,331 | | | | 70.8 | | | | 7,102 | | | | 4,081 | | | | 74.0 | |
Wireless Net Subscriber Additions | | | 2,323 | | | | 1,532 | | | | 51.6 | | | | 6,686 | | | | 4,674 | | | | 43.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Smartphones sold under our installment programs during period | | | 3,491 | | | | 4,283 | | | | (18.5 | )% | | | 10,575 | | | | 12,378 | | | | (14.6 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Churn 3, 4 | | | 1.32 | % | | | 1.45 | % | (13) BP | | | | 1.35 | % | | | 1.41 | % | (6) BP | |
Branded Churn 3, 4 | | | 1.70 | % | | | 1.63 | % | 7 BP | | | | 1.66 | % | | | 1.57 | % | 9 BP | |
Postpaid Churn 3, 4 | | | 1.07 | % | | | 1.05 | % | 2 BP | | | | 1.07 | % | | | 1.04 | % | 3 BP | |
Postpaid Phone Only Churn 3, 4 | | | 0.84 | % | | | 0.90 | % | (6) BP | | | | 0.84 | % | | | 0.90 | % | (6) BP | |
1 Excludes acquisition-related additions during the period. | |
2 Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes | |
postpaid tablets. See (5) below. | |
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number | |
of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period. | |
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers. | |
5 Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component | |
of prepaid subscribers, resulting in 97 additional prepaid net adds in the quarter. Had we restated our prior periods, prepaid | |
net adds for the comparable periods would have been 381 in the third quarter of 2016, and 1,060 and 1,324 for the first nine months of, | |
2017 and 2016, respectively. | |
Operating income decreased $76, or 1.4%, in the third quarter and $191, or 1.2%, for the first nine months of 2017. The third-quarter operating income margin of AT&T Mobility increased from 29.6% in 2016 to 30.5% in 2017 and for the first nine months increased from 29.6% in 2016 to 30.3% in 2017. AT&T Mobility's third-quarter EBITDA margin increased from 41.2% in 2016 to 42.0% in 2017 and for the first nine months increased from 41.1% in 2016 to 41.9% in 2017. AT&T Mobility's third-quarter EBITDA service margin increased from 50.1% in 2016 to 50.4% in 2017 and for the first nine months increased from 49.8% in 2016 to 50.0% in 2017 (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues).
Subscriber Relationships
As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative services, plans and devices and 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 maturing market, we have launched a wide variety of plans, including unlimited, as well as equipment installment programs. Beginning in the first quarter of 2017, we expanded our unlimited wireless data plansprimarily due to make them available to customersprice actions that dowere not subscribe to our video services.
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
ARPU
Postpaid phone-only ARPU was $58.29 foreffect in the third quarter and $58.23 for the first nine months of 2017, compared to $59.64 and $59.66 in 2016. Postpaid phone-only ARPU plus equipment installment billings was $68.95 for the third quarter and $68.94 for the first nine months of 2017, compared to $69.99 and $69.83 in 2016. ARPU has been affected by customers shifting to unlimited plans, which decreases overage revenues; however, customers are adding additional devices helping to offset that decline.comparative prior year.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. TotalPostpaid churn was lower for the third quarter and first nine months of 2017. Postpaidpostpaid phone-only churn was higher for the third quarter and first nine months of 2017, driven by higher tablet churn. Postpaid phone-only churn was lower in the thirdfirst quarter and first nine months of 2017, despitedue to continued competitive pressurepricing in the industry.
Branded Subscribers
Branded subscribers increased 1.1%Equipment revenue decreased in the thirdfirst quarter driven by lower postpaid smartphone sales, resulting from the continuing trend of 2017 when comparedcustomers choosing to June 30, 2017 and increased 2.4% when compared to September 30, 2016. Both the sequential and year-over-year increases reflect postpaid subscribers remaining essentially flat while prepaid subscribers grew 6.7% and 16.1%, respectively. Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars where customers actively subscribe for vehicle connectivity, as a component of prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543,000 subscribers that were formerly included in connected devices.upgrade devices less frequently or bring their own.
At September 30, 2017, 92%34
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
Operations and support expenses increased in the first quarter primarily due to higher commission deferral amortization, partially offset by lower postpaid smartphone volumes and increased operational efficiencies.
Depreciation expense decreased in the first quarter primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income increased in the first quarter. Our Mobility operating income margin in the first quarter increased from 29.7% in 2018 to 30.5% in 2019. Our Mobility EBITDA margin in the first quarter increased from 41.8% in 2018 to 42.0% 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 postpaid phone subscriber base used smartphones, comparedability to 90% at September 30, 2016,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 95%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 phone sales during both years attributable to smartphones. 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. Device connections on our Mobile Share and unlimited wireless data plans now represent 86% of our postpaid customer base, compared to 83% at September 30, 2016. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.
Our equipment installment purchase programs, including AT&T Next, allow for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, AT&T Next subscribers also have the right to trade in the original device for a new device with a new installment plan and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. At September 30, 2017, about 53% of the postpaid smartphone base is on an equipment installment program compared to 50% at September 30, 2016. Over 90% of postpaid smartphone gross adds and upgrades for all periods presented were either equipment installment plans or Bring Your Own Device (BYOD). While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.
Connected Devices
Connected Devices includesdevices include data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. ConnectedThe number of connected device subscriberssubscriber relationships increased 5.0% during the thirdfirst quarter when compared to June 30, 2017 and 20.2% when compared to September 30, 2016. Duringof 2019, driven by the third quarter and first nine monthsaddition of 2017, we added approximately 1.5 million and 4.72.0 million wholesale connected cars respectively, through agreements with various carmakers and experienced strong growth in other IoT connections as well. 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.
Entertainment Group Results | | | | | | | |
| First Quarter | |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Operating revenues | | | | | | | |
Video entertainment | $ | 8,074 | | $ | 8,225 | (1.8) | % |
High-speed internet | | 2,070 | | | 1,878 | 10.2 | |
Legacy voice and data services | | 683 | | | 806 | (15.3) | |
Other service and equipment | | 501 | | | 522 | (4.0) | |
Total Operating Revenues | | 11,328 | | | 11,431 | (0.9) | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 8,527 | | | 8,811 | (3.2) | |
Depreciation and amortization | | 1,323 | | | 1,310 | 1.0 | |
Total Operating Expenses | | 9,850 | | | 10,121 | (2.7) | |
Operating Income | | 1,478 | | | 1,310 | 12.8 | |
Equity in Net Income (Loss) of Affiliates | | - | | | (1) | - | |
Operating Contribution | $ | 1,478 | | $ | 1,309 | 12.9 | % |
OTHER BUSINESS MATTERS
Time Warner Inc. Acquisition35 In October 2016, we announced an agreement (Merger Agreement) to acquire Time Warner in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. The cash portion of the purchase price will be financed with new debt and cash. The transaction remains subject to review by the U.S. Department of Justice, but is
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management'sManagement’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 following tables highlight other key measures of performance for the Entertainment Group business unit:expected
| | First Quarter | Percent Change |
(in 000s) | 2019 | | | 2018 |
Video Connections | | | | | | |
Premium TV1 | 22,359 | | | 23,902 | (6.5) | % |
DIRECTV NOW2 | 1,508 | | | 1,467 | 2.8 | |
Total Video Connections | 23,867 | | | 25,369 | (5.9) | |
| | | | | | | |
Broadband Connections | | | | | | |
IP1 | 13,822 | | | 13,616 | 1.5 | |
DSL | 632 | | | 816 | (22.5) | |
Total Broadband Connections | 14,454 | | | 14,432 | 0.2 | |
| | | | | | | |
Retail Consumer Switched Access Lines | 3,787 | | | 4,535 | (16.5) | |
U-verse Consumer VoIP Connections | 4,393 | | | 5,105 | (13.9) | |
Total Retail Consumer Voice Connections | 8,180 | | | 9,640 | (15.1) | |
| | | | | | | |
Video Net Additions | | | | | | |
Premium TV1, 3 | (544) | | | (187) | - | |
DIRECTV NOW2 | (83) | | | 312 | - | |
Net Video Additions | (627) | | | 125 | - | |
| | | | | | | |
Broadband Net Additions | | | | | | |
IP1 | 93 | | | 154 | (39.6) | |
DSL | (48) | | | (72) | 33.3 | |
Net Broadband Additions | 45 | | | 82 | (45.1) | |
| | | | | | |
Fiber Broadband Connections (included in IP) | 3,060 | | | 1,955 | 56.5 | |
Fiber Broadband Net Additions (included in IP) | 297 | | | 226 | 31.4 | % |
1 | 2019 includes the impact of aligning our subscriber billing practice with the industry and AT&T Mobility to extend customer business |
| disconnection period to the end of the billing cycle, resulting in an increase of 117 net video and 38 net broadband subscribers at March |
| 31, 2019. |
2 | Consistent with industry practice, DIRECTV NOW includes connections that are on a free-trial. |
3 | Includes disconnections for customers that migrated to DIRECTV NOW. |
Video entertainment revenues are comprised of subscription and advertising revenues. Revenues decreased in the first quarter of 2019, largely driven by a 6.5% decline in premium TV subscribers. Our customers continue to close before year-end 2017. See Note 7 for additional detailsshift, consistent with the rest of the transaction and "Liquidity" forindustry, from a discussion ofpremium linear service to our financing arrangements.
FirstNet On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and managemore economically priced OTT video service which has pressured our video revenues. OTT net additions declined in the first nationwide broadband network dedicatedquarter due to America's first responders. FirstNet will provide 20 MHz of valuable telecommunications spectrumprice changes and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000, in part recoverable from FirstNet, over the life of the 25-year contract to build, operate and maintain the network. AT&T will construct and operate the network and provide sustainability payments to FirstNet. Sustainability payments are required to be usedpromotions. Churn rose for the operating expenses of FirstNet and to fund network improvements included in our $40,000 estimate. FirstNet's operating expenses are anticipated to be in the $75-$100 range annually, and when adjusted for inflation, we expect to be in the $3,000 range over the life of the 25-year contract. After FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will be reinvested into the network. As of November 2, 2017, 30 states and territories have opted-in to the program, representing 38%, or approximately $6,900, of this total sustainability payment commitment. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states and territories electing to participate in FirstNet.
States have until December 28, 2017 to elect to opt-out of the federally funded program, after which any state that did not formally make an election will automatically be opted-in. We do not expect FirstNet to materially impact our 2017 results.
Litigation Challenging DIRECTV's NFL SUNDAY TICKET More than two dozen putative class actions were filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have "pooled" their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge "supra-competitive" prices for the NFL SUNDAY TICKET package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management of pre-trial proceedings. In June 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the allegations the complaints have asserted. In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. Ipremium TV only service, partially reflecting price increases.n June 2017, the court granted the NFL defendants' motion to dismiss the complaint without leave to amend, finding that: (1) the plaintiffs did not plead a viable market; (2) the plaintiffs did not plead facts supporting the contention that the exclusive agreement between the NFL and DIRECTV harms competition; (3) the claims failed to overcome the fact that the NFL and its teams must cooperate to sell broadcasts; and (4) the plaintiffs do not have standing to challenge the horizontal agreement among the NFL and the teams. In light of the order granting the motion to dismiss, the court denied DIRECTV's motion to compel arbitration as moot. In July 2017, plaintiffs filed an appeal in the U.S. Court of Appeals for the Ninth Circuit, which is pending.
Federal Trade Commission Litigation Involving DIRECTV High-speed internet In March 2015, the Federal Trade Commission (FTC) filed a civil suitrevenues increased in the U.S. District Court forfirst quarter of 2019. In addition to the Northern Districtshift of California against DIRECTV seeking injunctive relief and money damages under Section 5subscribers to our higher-speed fiber services, our bundling strategy is helping to lower churn with subscribers who bundle broadband with another AT&T service, having about half the churn of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We vigorously dispute these allegations. broadband-only subscribers.A bench trial began on August 14, 2017, and was suspended on August 25, 2017, after the FTC rested its case, so that the court could consider DIRECTV's motion for judgment. The hearing on the motion occurred on October 25, 2017, and the judge took it under advisement.
Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management'sManagement’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
Legacy voice and data service revenues decreased in the first quarter of 2019, reflecting the continued migration of customers to our more advanced IP-based offerings or to competitors.
posts, internet browsingOperations and many other applications are typically unaffected. Contrarysupport expenses decreased in the first quarter of 2019. Contributing to the FTC's allegations,decreases were lower marketing costs and volumes, our MBR programongoing focus on cost efficiencies, a one-time settlement of a carriage dispute and the impact of a prior update to the estimated economic life for our entertainment group customers.
Depreciation expense increased in the first quarter of 2019, primarily due to our ongoing capital spending for network upgrades and expansion.
Operating income increased in the first quarter of 2019. Our Entertainment Group operating income margin in the first quarter increased from 11.5% in 2018 to 13.0% in 2019. Our Entertainment Group EBITDA margin in the first quarter increased from 22.9% in 2018 to 24.7% in 2019.
Business Wireline Results | | | | | | | |
| First Quarter | |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Operating revenues | | | | | | | |
Strategic and managed services | $ | 3,792 | | $ | 3,595 | 5.5 | % |
Legacy voice and data services | | 2,404 | | | 2,865 | (16.1) | |
Other service and equipment | | 302 | | | 287 | 5.2 | |
Total Operating Revenues | | 6,498 | | | 6,747 | (3.7) | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 4,040 | | | 4,016 | 0.6 | |
Depreciation and amortization | | 1,235 | | | 1,170 | 5.6 | |
Total Operating Expenses | | 5,275 | | | 5,186 | 1.7 | |
Operating Income | | 1,223 | | | 1,561 | (21.7) | |
Equity in Net Income (Loss) of Affiliates | | - | | | (1) | - | |
Operating Contribution | $ | 1,223 | | $ | 1,560 | (21.6) | % |
Strategic and managed services revenues increased in the first quarter of 2019. Our strategic services are made up of (1) data services, including our VPN, dedicated internet ethernet and broadband, (2) voice service, including VoIP and cloud-based voice solutions, (3) security and cloud solutions, and (4) managed, professional and outsourcing services. Revenue increases were primarily attributable to growth in our security and cloud solutions and managed services.
Legacy voice and dataservice revenues decreased in the first quarter of 2019, primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.
Other service and equipment revenues increased in the first quarter of 2019, driven by revenues from intellectual property. Other service revenues include project-based revenue, which is permitted bynonrecurring in nature, as well as revenues from customer premises equipment.
Operations and support expenses increased in the first quarter of 2019, primarily due to higher fulfillment deferral amortization. Partially offsetting the increase is our continued efforts to shift to a software-based network and automate and digitize our customer contracts, was fully disclosedsupport activities.
Depreciation expense increased in advancethe first quarter, primarily due to our Unlimited Data Plan customers,increases in capital spending for network upgrades and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and, on August 29, 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC asked the Court of Appeals to reconsider the decision "en banc," which the Court agreed to do. The en banc hearing was held on September 19, 2017. We do not expect a decision until early 2018. In addition to the FTC case, several class actions have been filed also challenging our MBR program. We vigorously dispute the allegations the complaints have asserted.expansion.
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management'sManagement’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
Operating income decreased in the first quarter of 2019. Our Business Wireline operating income margin in the first quarter decreased from 23.1% in 2018 to 18.8% in 2019. Our Business Wireline EBITDA margin in the first quarter decreased from 40.5% in 2018 to 37.8% in 2019.
WARNERMEDIA SEGMENT | First Quarter |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Segment Operating Revenues | | | | | | | |
Turner | $ | 3,443 | | $ | 112 | - | % |
Home Box Office | | 1,510 | | | - | - | |
Warner Bros. | | 3,518 | | | - | - | |
Eliminations & Other | | (92) | | | - | - | |
Total Segment Operating Revenues | | 8,379 | | | 112 | - | |
| | | | | | | |
Segment Operating Contribution | | | | | | | |
Turner | | 1,272 | | | 64 | - | |
Home Box Office | | 582 | | | - | - | |
Warner Bros. | | 553 | | | - | - | |
Eliminations & Other | | (97) | | | (25) | - | |
Total Segment Operating Contribution | $ | 2,310 | | $ | 39 | - | % |
Our WarnerMedia segment consists of our Turner, Home Box Office and Warner Bros. business units. The order of presentation reflects the consistency of revenue streams, rather than overall magnitude as that is subject to timing and frequency of studio releases. WarnerMedia also includes our financial results for RSNs, which comprise the prior period results reported in this segment.
The WarnerMedia segment does not include results from Time Warner operations for the periods prior to our June 14, 2018 acquisition. Otter Media is included as an equity method investment for periods prior to our August 7, 2018 acquisition of the remaining interest and is in the segment operating results following the acquisition. Consistent with our past practice, many of the fair value adjustments from the application of purchase accounting required under GAAP have not been allocated to the segment, instead they are reported as acquisition-related items in the reconciliation to consolidated results.
Operating revenues were $8,379 in the first quarter of 2019.
Operating contribution was $2,310 for the first quarter of 2019. Our WarnerMedia segment operating income margin was 26.8%.
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
WarnerMedia Business Unit Discussion |
Turner Results | | | | | | | |
| First Quarter |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Operating revenues | | | | | | | |
Subscription | $ | 1,965 | | $ | 98 | - | % |
Advertising | | 1,261 | | | 14 | - | |
Content and other | | 217 | | | - | - | |
Total Operating Revenues | | 3,443 | | | 112 | - | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 2,136 | | | 74 | - | |
Depreciation and amortization | | 60 | | | 1 | - | |
Total Operating Expenses | | 2,196 | | | 75 | - | |
Operating Income | | 1,247 | | | 37 | - | |
Equity in Net Income of Affiliates | | 25 | | | 27 | (7.4) | |
Operating Contribution | $ | 1,272 | | $ | 64 | - | % |
Turner includes the WarnerMedia businesses managed by Turner as well as our financial results for RSNs, which comprise the prior period results reported in this business unit.
Operating revenues for Turner are generated primarily from licensing programming to distribution affiliates and from selling advertising on its networks and digital properties. Revenues for the first quarter included $1,965 of subscription, $1,261 of advertising and $217 of content and other revenue.
Operations and support expenses totaled $2,136 for the first quarter of 2019.
Operating income was $1,247 in the first quarter of 2019. Our Turner operating income margin was 36.2% in the first quarter of 2019. Our Turner EBITDA margin was 38.0% in the first quarter of 2019.
Home Box Office Results | | | | | | | |
| First Quarter |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Operating revenues | | | | | | | |
Subscription | $ | 1,334 | | $ | - | - | % |
Content and other | | 176 | | | - | - | |
Total Operating Revenues | | 1,510 | | | - | - | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 921 | | | - | - | |
Depreciation and amortization | | 22 | | | - | - | |
Total Operating Expenses | | 943 | | | - | - | |
Operating Income | | 567 | | | - | - | |
Equity in Net Income of Affiliates | | 15 | | | - | - | |
Operating Contribution | $ | 582 | | $ | - | - | % |
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
Operatingrevenues for Home Box Office are generated from the exploitation of original and licensed programming through distribution outlets. Revenues for the first quarter included $1,334 of subscription and $176 of content and other revenue.
Operations and support expenses totaled $921 for the first quarter of 2019.
Operating income was $567 in the first quarter of 2019. Our Home Box Office operating income margin was 37.5% in the first quarter of 2019. Our Home Box Office EBITDA margin was 39.0% in the first quarter of 2019.
Warner Bros. Results | | | | | | | |
| First Quarter |
| | | | | | Percent | |
| 2019 | | 2018 | Change | |
Operating revenues | | | | | | | |
Theatrical product | $ | 1,506 | | $ | - | - | % |
Television product | | 1,613 | | | - | - | |
Games and other | | 399 | | | - | - | |
Total Operating Revenues | | 3,518 | | | - | - | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 2,919 | | | - | - | |
Depreciation and amortization | | 52 | | | - | - | |
Total Operating Expenses | | 2,971 | | | - | - | |
Operating Income | | 547 | | | - | - | |
Equity in Net Income of Affiliates | | 6 | | | - | - | |
Operating Contribution | $ | 553 | | $ | - | - | % |
Operating revenues for Warner Bros. primarily relate to theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on television or OTT services). For the first quarter, total operating revenues were $3,518 and included $1,506 from theatrical product, $1,613 from television product and $399 from games and other.
Operations and support expenses totaled $2,919 for the first quarter of 2019.
Operating income was $547 in the first quarter of 2019. Our Warner Bros. operating income margin was 15.5% in the first quarter of 2019. Our Warner Bros. EBITDA margin was 17.0% in the first quarter of 2019.
LATIN AMERICA SEGMENT | First Quarter |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Segment Operating Revenues | | | | | | | |
Vrio | $ | 1,067 | | $ | 1,354 | (21.2) | % |
Mexico | | 651 | | | 671 | (3.0) | |
Total Segment Operating Revenues | | 1,718 | | | 2,025 | (15.2) | |
| | | | | | | |
Segment Operating Contribution | | | | | | | |
Vrio | | 32 | | | 148 | (78.4) | |
Mexico | | (205) | | | (259) | 20.8 | |
Total Segment Operating Contribution | $ | (173) | | $ | (111) | (55.9) | % |
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
Operating ResultsOur Latin America operations conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates, subjecting results to foreign currency fluctuations.
Operating revenues decreased in the first quarter of 2019 driven by lower revenues for Vrio, primarily resulting from foreign exchange pressure.
Operating contribution decreased in the first quarter of 2019, reflecting foreign exchange pressure. Our Latin America segment operating income margin in the first quarter was (10.1)% in 2019 and (5.5)% in 2018.
Latin America Business Unit Discussion | | | | | |
Vrio Results | | | | | |
| First Quarter |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Operating revenues | $ | 1,067 | | $ | 1,354 | (21.2) | % |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 866 | | | 1,001 | (13.5) | |
Depreciation and amortization | | 169 | | | 205 | (17.6) | |
Total Operating Expenses | | 1,035 | | | 1,206 | (14.2) | |
Operating Income | | 32 | | | 148 | (78.4) | |
Operating Contribution | $ | 32 | | $ | 148 | (78.4) | % |
The following tables highlight other key measures of performance for Vrio:
| | First Quarter |
| | | | | | | Percent |
(in 000s) | | 2019 | | | 2018 | Change |
Vrio Video Subscribers1,2 | | 13,584 | | | 13,573 | 0.1 | % |
| | | | | | | | |
Vrio Video Net Subscriber Additions3 | | (32) | | | (15) | - | % |
1 | Excludes subscribers of our equity investment in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 7.6 million |
| subscribers at December 31, 2018 and 7.9 million subscribers at March 31, 2018. |
2 | 2019 excludes the impact of 222 subscriber disconnections resulting from conforming our video credit policy across the region, which is |
| reflected in beginning of period subscribers. |
3 | Excludes SKY Mexico net subscriber losses of 199 and 92 for the quarter ended December 31, 2018 and March 31, 2018, respectively. |
Operating revenues decreased in the first quarter of 2019, primarily due to foreign exchange pressures.
Operations and support expenses decreased in the first quarter of 2019, primarily due to changes in foreign currency exchange rates. Approximately 17% of Vrio expenses are U.S. dollar based, with the remainder in the local currency.
Depreciation expense decreased in the first quarter of 2019, primarily due to changes in foreign currency exchange rates.
Operating income decreased in the first quarter of 2019. Our Vrio operating income margin in the first quarter decreased from 10.9% in 2018 to 3.0% in 2019. Our Vrio EBITDA margin in the first quarter decreased from 26.1% in 2018 to 18.8% in 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
Mexico Results | | | | | | |
| First Quarter | |
| 2019 | | 2018 | Percent Change |
Operating revenues | | | | | | | |
Service | $ | 442 | | $ | 404 | 9.4 | % |
Equipment | | 209 | | | 267 | (21.7) | |
Total Operating Revenues | | 651 | | | 671 | (3.0) | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 725 | | | 803 | (9.7) | |
Depreciation and amortization | | 131 | | | 127 | 3.1 | |
Total Operating Expenses | | 856 | | | 930 | (8.0) | |
Operating Income (Loss) | | (205) | | | (259) | 20.8 | |
Operating Contribution | $ | (205) | | $ | (259) | 20.8 | % |
The following tables highlight other key measures of performance for Mexico:
| | First Quarter |
| | | | | | | Percent |
(in 000s) | | 2019 | | | 2018 | Change |
Mexico Wireless Subscribers1 | | | | | | | |
Postpaid | | 5,642 | | | 5,607 | 0.6 | % |
Prepaid | | 11,779 | | | 9,857 | 19.5 | |
Reseller | | 301 | | | 178 | 69.1 | |
Total Mexico Wireless Subscribers | | 17,722 | | | 15,642 | 13.3 | % |
| | | | | | |
Mexico Wireless Net Additions | | | | | | | |
Postpaid | | (69) | | | 109 | - | % |
Prepaid | | 114 | | | 459 | (75.2) | |
Reseller | | 48 | | | (25) | - | |
Mexico Wireless Net Subscriber Additions | | 93 | | | 543 | (82.9) | % |
1 | 2019 excludes the impact of 692 subscriber disconnections resulting from the churn of customers related to sales by certain third-party |
| distributors and the sunset of 2G services in Mexico, which are reflected in beginning of period subscribers. |
Service revenues increased in the first quarter of 2019, primarily due to growth in our subscriber base.
Equipment revenues decreased in the first quarter of 2019, primarily due to higher demand in the prior year for our initial offering of equipment installment programs partially offset by growth in our subscriber base.
Operations and support expenses decreased in the first quarter of 2019, primarily driven by equipment sales and inventory reserves. These decreases were partially offset by higher bad debt expenses. Approximately 7% of Mexico expenses are U.S. dollar based, with the remainder in the local currency.
Depreciation and amortization expense increased in the first quarter of 2019 primarily due to the amortization of spectrum licenses and higher in-service assets, partly offset by changes in the useful lives of certain assets.
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
Operating income increased in the first quarter of 2019. Our Mexico operating income margin in the first quarter increased from (38.6)% in 2018 to (31.5)% in 2019. Our Mexico EBITDA margin in the first quarter increased from (19.7)% in 2018 to (11.4)% in 2019.
XANDR SEGMENT | |
| First Quarter | |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Operating revenues | $ | 426 | | $ | 337 | 26.4 | % |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 160 | | | 50 | - | |
Depreciation and amortization | | 13 | | | 1 | - | |
Total Operating Expenses | | 173 | | | 51 | - | |
Operating Income | | 253 | | | 286 | (11.5) | |
Equity in Net Income of Affiliates | | - | | | - | - | |
Operating Contribution | $ | 253 | | $ | 286 | (11.5) | % |
Operating revenues increased in the first quarter of 2019, primarily due to our acquisition of AppNexus in August 2018.
Operations and support expenses increased in the first quarter of 2019, primarily due to our acquisition of AppNexus and our ongoing development of the platform supporting Xandr’s business.
Operating income decreased in the first quarter of 2019. Our Xandr segment operating income margin in the first quarter decreased from 84.9% in 2018 to 59.4% in 2019.
SUPPLEMENTAL TOTAL ADVERTISING REVENUE INFORMATION
As a supplemental presentation to our Xandr segment operating results, we are providing a view of total advertising revenues generated by AT&T. This combined view presents the entire portfolio of advertising revenues reported across all operating segments and represents a significant strategic initiative and growth opportunity for AT&T. See revenue categories tables in Note 5 for a reconciliation.
Total Advertising Revenues | | | | | | | |
| First Quarter | |
| | | | | | Percent |
| 2019 | | 2018 | Change |
Operating Revenues | | | | | | | |
WarnerMedia | $ | 1,279 | | $ | 14 | - | % |
Communications | | 417 | | | 375 | 11.2 | |
Xandr | | 426 | | | 337 | 26.4 | |
Eliminations | | (350) | | | (334) | (4.8) | |
Total Advertising Revenues | $ | 1,772 | | $ | 392 | - | % |
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
SUPPLEMENTAL COMMUNICATIONS OPERATING INFORMATION
As a supplemental presentation to our Communications segment operating results, we are providing a view of our AT&T Business Solutions results which includes both wireless and wireline operations. This combined view presents a complete profile of the entire business customer relationship, and underscores the importance of mobile solutions to serving our business customers. See “Discussion and Reconciliation of Non-GAAP Measures” for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
Business Solutions Results | | | | | | | |
| First Quarter | |
| 2019 | | 2018 | Percent Change |
| |
Operating revenues | | | | | | | |
Wireless service | $ | 1,913 | | $ | 1,791 | 6.8 | % |
Strategic and managed services | | 3,792 | | | 3,595 | 5.5 | |
Legacy voice and data services | | 2,404 | | | 2,865 | (16.1) | |
Other service and equipment | | 302 | | | 287 | 5.2 | |
Wireless equipment | | 596 | | | 578 | 3.1 | |
Total Operating Revenues | | 9,007 | | | 9,116 | (1.2) | |
| | | | | | | |
Operating expenses | | | | | | | |
Operations and support | | 5,640 | | | 5,594 | 0.8 | |
Depreciation and amortization | | 1,541 | | | 1,458 | 5.7 | |
Total Operating Expenses | | 7,181 | | | 7,052 | 1.8 | |
Operating Income | | 1,826 | | | 2,064 | (11.5) | |
Equity in Net Income of Affiliates | | - | | | (1) | - | |
Operating Contribution | $ | 1,826 | | $ | 2,063 | (11.5) | % |
Time Warner In June 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. In July 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. On February 26, 2019, the D.C. Circuit unanimously affirmed our win. AT&T’s representations to the DOJ regarding its operation of Turner expired on February 28, 2019. The DOJ did not ask the D.C. Circuit to rehear its appeal before the applicable April 12, 2019 deadline, and it stated publicly on February 26, 2018 that “[t]he department has no plans to seek further review” of the D.C. Circuit’s decision. The DOJ’s deadline to file a petition for writ of certiorari with the United States Supreme Court is May 28, 2019.
Labor ContractsAs of September 30, 2017,March 31, 2019, we employed approximately 257,000262,000 persons. Approximately 46%40% of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.
A summarycontract now covering approximately 8,000 traditional wireline employees in our Midwest region expired in April 2018 and employees are working under the terms of laborthe prior contract, including benefits, while negotiations by region or employee group, is as follows:
· | Approximately 20,000 mobility employees across the country are covered by a contract that expired in early 2017. We continue to negotiate with labor representatives. On October 30, 2017, we presented a contract that provides for, among other things, compounded annual wage increases totaling nearly 10% over the term of the contract and continued health care coverage. The contract is subject to acceptance and ratification. |
· | Approximately 15,000 traditional wireline employees in our West region are covered by a contract that expired in April 2016. In August, these employees, along with 2,300 legacy DIRECTV non-management employees, ratified a new four-year contract that will expire in April 2020. |
continue. In addition, a contract now covering approximately 3,000 traditional wireline employees in our legacy AT&T Corp. business also expired in April 2018. Those employees are working under the terms of their prior contract, including benefits, while negotiations continue.
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
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. However, based on their public statements and written opinions, we expect theThe new leadership at the FCC to chartis charting a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. Based on its public statements, we expect the FCC to continue to eliminate antiquated, unnecessary regulations and streamline processes. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.
Internet In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The Order, which represented a departure from longstanding bipartisan precedent, significantly expanded the FCC’s authority to regulate broadband internet access services, as well as internet interconnection arrangements. In December 2017, the FCC adopted an order that maintains light touch pricing regulation of packet-basedreversed its 2015 decision by reclassifying fixed and mobile consumer broadband services extends such light touch pricing regulation to high-speed TDM transportas information services and torepealing most of our TDM channel termination services, based on a competitive market test for such services. For those servicesthe rules that do not qualify for light touch regulation,were adopted in 2015. In lieu of broad conduct prohibitions, the order allows companiesrequires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer volume and term discounts, as well as contract tariffs.paid prioritization. Several parties appealed the FCC's decision. TheseFCC’s December 2017 decision and the D.C. Circuit heard oral argument on the appeals were consolidatedon February 1, 2019. Although the FCC order expressly preempted inconsistent state or local measures, a number of states are considering or have adopted legislation that would reimpose the very rules the FCC repealed, and in some cases, establish additional requirements that go beyond the U.S. CourtFCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively reimpose the repealed requirements. Suits have recently been filed concerning laws in California and Vermont, and other lawsuits are possible. The California and Vermont suits have been stayed pursuant to agreements by those states not to enforce their laws pending resolution of Appealsappeals of the FCC’s December 2017 order. We will continue to support congressional action to codify a set of standard consumer rules for the Eighth Circuit, where they remain pending.
internet.
In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge"“edge” providers such as Google and Facebook. OnIn April 3, 2017, the Presidentpresident signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuanceAct.
Privacy-related legislation has been considered in a number of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuancestates. Legislative and regulatory action could result in increased costs of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress. In June 2017, the FCC released an order clarifying that providers ofcompliance, claims against broadband internet access service continueproviders and others, and increased uncertainty in the value and availability of data. On June 28, 2018, the state of California enacted comprehensive privacy legislation that effective as of January 1, 2020, gives California consumers the right to be subjectknow what personal information is being collected about them, and whether and to privacy requirements under section 222whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right to opt-out of the sale of personal information. The Communications Act of 1934 (Communications Act), but notlaw applies the more restrictivesame rules to all companies that were adopted in October 2016.collect consumer information.
In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The FCC's decision significantly expanded its authority to regulate the provision of fixed and mobile broadband internet access services. AT&T and other providers of
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management'sManagement’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
broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. In June 2016, a panel of the Court of Appeals upheld the FCC's classification of broadband internet access and the attendant rules by a 2-1 vote. On May 1, 2017, the Court of Appeals denied requests for rehearing filed by AT&T and several other parties. In May 2017, the FCC initiated a proceeding to reverse its 2015 decision to classify broadband internet access services as telecommunications services. AT&T fully supports an open internet and believes that Congress should pass bipartisan legislation that codifies core principles of net neutrality while maintaining a stable regulatory environment conducive to investment, future innovation and economic growth. On September 28, 2017, AT&T and other parties filed with the United States Supreme Court petitions for certiorari to review the Court of Appeals decision.
We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide IP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for our services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
We provide wireless services in robustly competitive markets, but are subject to substantial governmental regulation.
Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers' prices and offerings are generally not subject to state or local regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the areas of consumer protection and the deployment of cell sites and equipment. The anticipated industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of "small cell"“small cell” equipment and therefore increase the need for a quicklocal permitting process.processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede broadband services, including small cell equipment. In March, August and September 2018, the FCC adopted orders to streamline the wireless infrastructure review process in order to facilitate deployment of next-generation wireless facilities. Those orders have been appealed and the various appeals remain pending in the DC Circuit and 9th Circuit Court of Appeals. In addition, to date, 21 states have adopted legislation to facilitate small cell deployment.
The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. government to make more spectrum available. The FCC finished its most recent auction in April 2017 of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").
In May 2014,December 2018, we introduced the FCC issued an order revising its policies governingnation’s first commercial mobile spectrum holdings. The FCC rejected5G service. We currently have mobile 5G in parts of 19 U.S. cities and will have launched mobile 5G service in at least 22 major cities by the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-thirdend of the available low band spectrum as presumptively harmfulyear. We expect to competition. The spectrum screen (including the low band screen) recently increasedhave mobile 5G service nationwide to more than 200 million people by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs.early 2020.
As the wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, we have:
· | Submitted winning bids for 251 Advanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality spectrum in the AWS-3 Auction. |
· | Redeployed spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks. |
· | Secured the FirstNet contract, which provides us with access to a nationwide low band 20 MHz of spectrum, assuming all states opt-in. |
· | Invested in 5G and millimeter-wave technologies with our in-process acquisition of Fiber-Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (28 GHz and 39 GHz) that the FCC recently reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services. |
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Tax Reform On November 2, 2017, the Tax Cuts and Jobs Act was introduced in the U.S. House of Representatives. If enacted, we expect it would stimulate investment, job creation and economic growth which would result in a positive impact on demand for our services. As written, we anticipate the legislation will have a positive impact on our consolidated operations and cash flows.
LIQUIDITY AND CAPITAL RESOURCES
In anticipation of the Time Warner transaction, weWe had $48,499$6,516 in cash and cash equivalents available at September 30, 2017.March 31, 2019. Cash and cash equivalents included cash of $3,707$2,786 and money market funds and other cash equivalents of $44,792.$3,730. Approximately $888$2,443 of our cash and cash equivalents residedwere held by our foreign entities in foreign jurisdictionsaccounts predominantly outside of the U.S. and were primarily in foreign currencies; these funds are primarily usedmay be subject to meet working capital requirements of foreign operations.restrictions on repatriation.
Cash and cash equivalents increased $42,711$1,312 since December 31, 2016.2018. In the first ninethree months of 2017,2019, cash inflows were primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment and other customer receivables to third parties. We alsoparties, issuance of commercial paper and long-term debt and collateral received a $1,438 deposit refund from the FCC.banks and other participants in our derivative arrangements. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, debt repayments, funding capital expenditures debt repayments,and vendor financing payments, and dividends to stockholders, and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.stockholders.
Cash Provided by or Used in Operating Activities
During the first ninethree months of 2017,2019, cash provided by operating activities was $29,274,$11,052, compared to $29,202$8,947 for the first ninethree months of 2016.2018. Higher operating cash flows in 20172019 were primarily due to contributions from WarnerMedia, including our new securitization program (see Note 9), and higher receiptscash flows from our sale of AT&T Next receivables and working capital improvements.initiatives, partly offset by lower net tax refunds.
We actively manage the timing of our supplier payments for non-capital items to optimize the use of our cash. Among other things, we seek to have payments made on 90-day or greater terms, while providing the suppliers with access to bank facilities that permit earlier payments at their cost. In addition, for payments to a key supplier, we have arrangements that allow us to extend payment terms up to 90 days at an additional cost to us (referred to as supplier financing). The net impact of supplier financing reduced cash from operating activities by $904 and $344 for the three months ended March 31, 2019 and 2018, respectively. All supplier financing payments are due within one year.
Cash Used in or Provided by Investing Activities
For the first ninethree months of 2017,2019, cash used in investing activities totaled $15,266$5,401, and consisted primarily of $15,756$5,182 for capital expenditures, excludingincluding interest during construction.construction ($936 lower than the prior-year comparable period).
Investing activities also include a refundFor capital improvements, we have negotiated favorable vendor payment terms of 120 days or more (referred to as vendor financing) with some of our vendors, which are excluded from capital expenditures and reported as financing activities. For the FCCfirst three months of 2019, these vendor financing payments were $820, and when combined with $5,182 of capital expenditures, total capital investment was $6,002 ($288 lower than the prior-year comparable period). In the first quarter of 2019, we placed $733 of equipment in service under vendor financing arrangements. Total vendor financing payables included in our March 31, 2019 consolidated balance sheets were $2,403, with $1,883 due within one year (in “Accounts payable and accrued liabilities”) and the amount of $1,438 in April 2017, resulting from the conclusion of the FCC's 600 MHz Auction. We submitted winning bidsremainder predominately due within two to purchase spectrum licenses in 18 markets for which we paid $910.three years (in “Other noncurrent liabilities”).
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 vast majority of our capital expenditures are spent on our networks, our video servicesincluding product development and related support systems. Capital expenditures, excluding interest during construction, increased $473 inDuring the first nine months. The increase was primarily due to our continued fiber buildout and timingquarter, approximately $300 of build schedules in 2017 compared with 2016. Additionally, in connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing). For the first nine months of 2017, vendor financingassets related to capital investments was $897. We do not report capital expenditures at the segment level.FirstNet build were placed into service.
We continue to expect our 2017 capital expenditures to be in the $22,000 range, and we expect our capital expenditures to be in the 15% range of service revenues or lower for each of the years 2017 through 2019. The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital spending takes into account existing tax law and does not reflect anticipated tax reform. We continue to focusare also focused on ensuring DIRECTV merger commitments are met. As of March 31, 2019, we market our fiber-to-the-premises network to more than 12 million customer locations and are on track to meet our FCC commitment of 12.5 million locations by mid-2019.
Cash Provided by or Used in Financing Activities
For the first ninethree months of 2017,2019, cash provided byused in financing activities totaled $28,703$4,421 and included net proceeds of $46,761$9,182, which consisted primarily fromof the following long-term debt issuances:
● | January draw of $2,850 on an 11-month syndicated term loan agreement. |
·● | January borrowings of $725 supported by government agencies to support network equipment purchases. |
● | January draw of $750 on a private financing agreement. |
● | February issuance of $1,250$3,000 of 3.200%4.350% global notes due 2022.2029. |
· | February issuance of $750 of 3.800% global notes due 2024. |
·● | February issuance of $2,000 of 4.250% global notes due 2027. |
· | February issuance of $3,000 of 5.250% global notes due 2037. |
· | February issuance of $2,000 of 5.450% global notes due 2047. |
· | February issuance of $1,000 of 5.700% global notes due 2057. |
· | March issuance of $1,430 of 5.500% global notes due 2047. |
· | March issuance of $800 floating rate global notes due 2020. The floating rate for the notes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 65 basis points. |
· | March draw of $300 on a private financing agreement with Banco Nacional de Mexico, S.A. due March 2019. The agreement contains terms similar to that provided under our syndicated credit arrangements; the interest rate is a market rate. |
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
· | May issuance of $1,500 floating rate global notes due 2021. The floating rate for the notes is based upon the three-month LIBOR, reset quarterly, plus 95 basis points. |
· | May issuance of CAD$600 of 2.850% global notes due 2024 and CAD$750 of 4.850% global notes due 2047 (together, equivalent to $994, when issued)2039. |
During the first three months of 2019, repayment of long-term debt totaled $9,840, consisting of the following:
● | The final $2,625 of amounts outstanding under our Acquisition Term Loan (defined below). |
·● | June issuance$750 of £1,000 of 3.550% global notes due 2037, subject to mandatory redemption (equivalent to $1,282 when issued).January borrowings under a private financing agreement. |
·● | June issuance$1,850 of €750 of 1.050% global2.300% notes due 2023, €1,750 of 1.800% global notes due 2026, €1,500 of 2.350% global notes due 2029, €1,750 of 3.150% global notes due 2036 and €1,250 of floating rate global notes due 2023. All except the 2036 global notes are subject to mandatory redemption (together, equivalent to $7,883, when issued).2019. |
·● | August issuance of $750$400 of floating rate notes due 2023, $1,750 of 2.85% global notes due 2023, $3,000 of 3.40% global notes due 2024, $5,000 of 3.90% global notes due 2027, $4,500 of 4.90% global notes due 2037, $5,000 of 5.15% global notes due 2050 and $2,500 of 5.30% global notes due 2058. All are subject to mandatory redemption.
|
For notes subject to mandatory redemption ($29,801), if we do not consummate the Time Warner acquisition pursuant to the merger agreement, on or prior to April 22, 2018, or, if prior to such date, the merger agreement is terminated, then in either case we must redeem certain of the notes at a redemption price equal to 101% of the principal amount of the notes, plus accrued but unpaid interest.
On October 27, 2017, we issued $1,150 of 5.35% global notes due 2066. The underwriters have an option to purchase up to an additional $173 aggregate principal amount within 30 days of the offering.
On October 30, 2017, we launched an exchange offer covering approximately $24,000 of notes issued by AT&T Inc., DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. due between 2020 and 2023. We may issue up to $8,000 of new AT&T Inc. notes, subject to increase, due 2028 and 2030. Also on October 30, 2017, we offered to exchange approximately $9,000 of high-coupon existing AT&T Inc. notes and existing subsidiary notes for new AT&T Inc. notes. The notes covered in the exchange have coupons ranging from 5.85% to 8.75% and maturities from 2022 to 2097. The existing AT&T Inc. notes may be exchanged for new AT&T Inc. notes due 2046 and the subsidiary bonds may be exchanged for new AT&T Inc. notes due 2046 or new AT&T Inc. notes with identical coupon and maturity as the existing subsidiary notes. We are also seeking consent of bondholders to modify the covenants of the subsidiary indentures to generally conform to AT&T Inc.'s indenture. The exchange offers will expire on November 28, 2017.
During the first nine months of 2017, we redeemed or repaid $10,309 of debt, primarily consisting of the following:
· | $1,142 of 2.400% global notes due 2017.2019. |
·● | $1,000890 of 1.600% global5.200% notes due 2017.2020. |
·● | $5001,120 of floating rate5.000% notes due 2017.2021. |
·● | £750$1,000 of 5.875% global4.700% Warner Media, LLC notes due 2017.2021. |
·● | $750 repayment1,000 of a private financing agreement with Export Development Canada4.750% Warner Media, LLC notes due 2017.2021. |
·● | $1,15038 of 1.700% global4.600% DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. notes due 2017.2021. |
·● | $4,155 repayment40 of amounts outstanding under our syndicated credit agreement.5.000% DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. notes due 2021. |
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.4% as of September 30, 2017, compared to 4.2% as ofMarch 31, 2019 and December 31, 2016.2018. We had $162,450$170,532 of total notes and debentures outstanding at September 30, 2017,March 31, 2019, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso, Canadian dollar and CanadianAustralian dollar denominated debt that totaled approximately $37,260.$41,061.
AsAt March 31, 2019, we had $11,538 of September 30,debt maturing within one year, including $2,957 of commercial paper borrowings and $8,441 of long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
● | $1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021. |
● | An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the remainder of the zero-coupon note (issued for principal of $500 in 2007 and partially exchanged in the 2017 debt exchange offers) is held to maturity, the redemption amount will be $592. |
At March 31, 2019, we had approximately 388376 million shares remaining from 2013 and 2014share repurchase authorizations from ourapproved by the Board of Directors to repurchase shares of our common stock. During the first nine months of 2017, we repurchased approximately 7 million shares totaling $279 under these authorizations. In 2017, we intend to use free cash flow (operating cash flows less constructionin 2013 and capital expenditures) after dividends primarily to pay down debt.2014.
We paid dividends of $9,030$3,714 during the first ninethree months of 2017,2019, compared with $8,850$3,070 for the first ninethree months of 2016,2018, primarily reflecting the increase in the number of shares outstanding related to our acquisition of Time Warner as well as an increase in our quarterly dividend approved by our Board of Directors in October 2016.December 2018. Dividends declared by our Board of Directors totaled $0.49 per share in the third quarter and $1.47$0.51 per share in the first ninethree months of 20172019 and $0.48$0.50 per share in the third quarter and $1.44 for the first ninethree months of 2016.2018. Our dividend policy considers the
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
At September 30, 2017, we had $8,55147
Item 2. Management’s Discussion and Analysis of debt maturing within one year, $8,379Financial Condition and Results of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:Operations - Continued
· | $1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021. |
· | An accreting zero-coupon note that may be redeemed each May until maturity in 2022. In May 2017, $1 was redeemed by the holder for $1. If the remainder of the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,029. |
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Credit FacilitiesThe following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.
We use credit facilities as a tool in managing our liquidity status. In December 2015,2018, we amended our five-year revolving credit agreement (the “Amended and Restated Credit Agreement”) and concurrently entered into a new five-year $12,000agreement (the “Five Year Credit Agreement”) such that we now have two $7,500 revolving credit agreement of which noagreements totaling $15,000. The Amended and Restated Credit Agreement terminates on December 11, 2021 and the Five Year Credit Agreement terminates on December 11, 2023. No amounts arewere outstanding under either agreement as of March 31, 2019.
In September 30, 2017. On September 5, 2017 we repaid all of the amounts outstanding under our $9,155 syndicated credit agreement and terminated the facility. On September 29, 2017, we entered into a five-year $2,250 syndicated term loan credit agreement containing (i) a three-year $750 term loan facility, (the "Tranche A Facility), (ii) a four-year $750 term loan facility (the "Tranche B Facility") and (iii) a five-year $750 term loan facility, (the "Tranche C Facility"), with certain investment and commercial banks and The Bank of Nova Scotia, as administrative agent. No amounts areWe drew on all three facilities during the first quarter of 2018, with $2,250 in advances outstanding as of March 31, 2019.
On November 20, 2018, we entered into and drew on a 4.5 year $3,550 term loan credit agreement (the “November 2018 Term Loan”) with Bank of America, N.A., as agent. We used the proceeds to finance the repayment, in part, of loans outstanding under the Acquisition Term Loan. As of March 31, 2019, $3,550 was outstanding under this agreement.
On January 31, 2019, we entered into and drew on an 11-month $2,850 syndicated term loan credit agreement (the “Citibank Term Loan”), with certain investment and commercial banks and Citibank, N.A., as administrative agent. As of March 31, 2019, $2,850 was outstanding under this agreement.
In anticipation of the Time Warner acquisition, we entered into a $16,175 term loan agreement (“Acquisition Term Loan”) containing (i) a 2.5 year $8,087.5 facility (the “Tranche A Facility”) and (ii) a 4.5 year $8,087.5 facility (the “Tranche B Facility”) with a commitment termination date of December 31, 2018. As of December 31, 2018, $2,625 was outstanding of Tranche A Facility,advances. We paid $2,625 of the Tranche B Facility orA advances on February 20, 2019, and terminated the Tranche C Facility as of September 30, 2017.facility.
We also enter intoutilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases.
In connection with our pending Merger with Time Warner, we entered intopurchases, as well as a $30,000 bridge loan credit agreement ("Bridge Loan") and a $10,000 term loan agreement ("Term Loan"). Following the August issuances of $22,500 of global notes, we reduced the commitments under the Bridge Loan to $0 and terminated the facility. No amounts will be borrowed under the Term Loan prior to the closing of the Merger. Borrowings under the Term Loan will be used solely to finance a portion of the cash to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related expenses.commercial paper program.
Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of September 30, 2017,March 31, 2019, we were in compliance with the covenants for our credit facilities.
Collateral Arrangements
During the quarter, we amended collateral arrangements with certain counterparties to require cash collateral posting by AT&T only when deposit amounts exceed certain thresholds. Under these arrangements, counterparties are still required to post collateral. During the first ninethree months of 2017,2019, we received $2,743$1,404 of additional cash collateral, on a net basis, from banks and other participants in our derivativeprimarily driven by the amended arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. At September 30, 2017, we had posted collateral assets of $837 and received collateral liabilities of $338, compared to December 31, 2016, posted collateral assets of $3,242 and no collateral liabilities. (See Note 6)7)
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders'stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At September 30, 2017,March 31, 2019, our debt ratio was 56.4%47.4%, compared to 50.1%52.6% at September 30, 2016,March 31, 2018 and 49.9%47.7% at December 31, 2016.2018. Our net debt ratio was 39.7%45.6% at September 30, 2017,March 31, 2019, compared to 47.8%36.8% at September 30, 2016March 31, 2018 and 47.5%46.2% at December 31, 2016.2018. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.
During the first nine months of 2017, we received $4,217 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management'sManagement’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
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the pension trust used to pay benefits under our qualified pension plans. The preferred equity interest had a value of $9,354 as of September 30, 2017, and $8,477 as of December 31, 2016, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts. Mobility II distributed $420 to the trust during the first nine months of 2017. So long as those distributions are made, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares.
During the third quarter, AT&T notifiedfirst three months of 2019, we received $4,460 from the trustmonetization of various assets, primarily from the sale of certain equipment installment and other customer receivables. We plan to continue to explore similar opportunities. To that end, in April 2019, we received $1,430 cash for the fiduciarysale of our minority stake in Hulu. We also entered into an agreement to sell WarnerMedia’s headquarters (Hudson Yards) for approximately $2,200 under a sale/leaseback agreement, which is expected to close late in the preferred interest that AT&T would not exercise its call option of the preferred interest until at least September 9, 2022, which raised the valuation of the preferred interest by approximately $1,245.45second quarter. Proceeds from both transactions will be used to reduce debt levels.
AT&T INC.
SEPTEMBER 30, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE
We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.
Supplemental Operational MeasureBusiness Solutions Reconciliation
We provide a supplemental discussion of our domestic wirelessBusiness Solutions operations that is calculated by combining our Consumer Mobility and Business Solutions segments,Wireline business units, and then adjusting to remove non-wirelessnon-business operations. The following table presents a reconciliation of our supplemental AT&T MobilityBusiness Solutions results.
| | Three Months Ended | | | First Quarter |
| | September 30, 2017 | | | September 30, 2016 | | | March 31, 2019 | | | March 31, 2018 |
| | Consumer Mobility | | | Business Solutions | | | Adjustments1 | | | AT&T Mobility | | | Consumer Mobility | | | Business Solutions | | | Adjustments1 | | | AT&T Mobility | | | Mobility | | Business Wireline | | Adjustments1 | | Business Solutions | | | Mobility | | Business Wireline | | Adjustments1 | | Business Solutions |
Operating Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Wireless service | | $ | 6,507 | | | $ | 8,034 | | | $ | - | | | $ | 14,541 | | | $ | 6,914 | | | $ | 8,050 | | | $ | - | | | $ | 14,964 | | $ | 13,792 | $ | - | $ | (11,879) | $ | 1,913 | | $ | 13,403 | $ | - | $ | (11,612) | $ | 1,791 |
Fixed strategic services | | | - | | | | 3,087 | | | | (3,087 | ) | | | - | | | | - | | | | 2,913 | | | | (2,913 | ) | | | - | | |
Strategic and managed services | | | - | | 3,792 | | - | | 3,792 | | | - | | 3,595 | | - | | 3,595 |
Legacy voice and data services | | | - | | | | 3,434 | | | | (3,434 | ) | | | - | | | | - | | | | 4,042 | | | | (4,042 | ) | | | - | | | - | | 2,404 | | - | | 2,404 | | | - | | 2,865 | | - | | 2,865 |
Other service and equipment | | | - | | | | 852 | | | | (852 | ) | | | - | | | | - | | | | 886 | | | | (886 | ) | | | - | | | - | | 302 | | - | | 302 | | | - | | 287 | | - | | 287 |
Wireless equipment | | | 1,241 | | | | 1,654 | | | | - | | | | 2,895 | | | | 1,353 | | | | 1,876 | | | | - | | | | 3,229 | | | 3,775 | | - | | (3,179) | | 596 | | | 3,952 | | - | | (3,374) | | 578 |
Total Operating Revenues | | | 7,748 | | | | 17,061 | | | | (7,373 | ) | | | 17,436 | | | | 8,267 | | | | 17,767 | | | | (7,841 | ) | | | 18,193 | | | 17,567 | | 6,498 | | (15,058) | | 9,007 | | | 17,355 | | 6,747 | | (14,986) | | 9,116 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 4,551 | | | | 10,233 | | | | (4,671 | ) | | | 10,113 | | | | 4,751 | | | | 10,925 | | | | (4,979 | ) | | | 10,697 | | | 10,181 | | 4,040 | | (8,581) | | 5,640 | | | 10,102 | | 4,016 | | (8,524) | | 5,594 |
EBITDA | | | 3,197 | | | | 6,828 | | | | (2,702 | ) | | | 7,323 | | | | 3,516 | | | | 6,842 | | | | (2,862 | ) | | | 7,496 | | | 7,386 | | 2,458 | | (6,477) | | 3,367 | | | 7,253 | | 2,731 | | (6,462) | | 3,522 |
Depreciation and amortization | | | 877 | | | | 2,325 | | | | (1,192 | ) | | | 2,010 | | | | 944 | | | | 2,539 | | | | (1,376 | ) | | | 2,107 | | | 2,035 | | 1,235 | | (1,729) | | 1,541 | | | 2,095 | | 1,170 | | (1,807) | | 1,458 |
Total Operating Expense | | | 5,428 | | | | 12,558 | | | | (5,863 | ) | | | 12,123 | | | | 5,695 | | | | 13,464 | | | | (6,355 | ) | | | 12,804 | | | 12,216 | | 5,275 | | (10,310) | | 7,181 | | | 12,197 | | 5,186 | | (10,331) | | 7,052 |
Operating Income | | $ | 2,320 | | | $ | 4,503 | | | $ | (1,510 | ) | | $ | 5,313 | | | $ | 2,572 | | | $ | 4,303 | | | $ | (1,486 | ) | | $ | 5,389 | | | 5,351 | | 1,223 | | (4,748) | | 1,826 | | | 5,158 | | 1,561 | | (4,655) | | 2,064 |
1 Non-wireless (fixed) operations reported in Business Solutions segment. | | |
Equity in net income (loss) of affiliates | | | - | | - | | - | | - | | | - | | (1) | | - | | (1) |
Operating Contribution | | $ | 5,351 | $ | 1,223 | $ | (4,748) | $ | 1,826 | | $ | 5,158 | $ | 1,560 | $ | (4,655) | $ | 2,063 |
1Non-business wireless reported in the Communications segment under the Mobility business unit. | | 1Non-business wireless reported in the Communications segment under the Mobility business unit. |
SEPTEMBER 30, 2017MARCH 31, 2019
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
| | Nine Months Ended | |
| | September 30, 2017 | | | September 30, 2016 | |
| | Consumer Mobility | | | Business Solutions | | | Adjustments1 | | | AT&T Mobility | | | Consumer Mobility | | | Business Solutions | | | Adjustments1 | | | AT&T Mobility | |
Operating Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Wireless service | | $ | 19,644 | | | $ | 23,969 | | | $ | - | | | $ | 43,613 | | | $ | 20,805 | | | $ | 23,868 | | | $ | - | | | $ | 44,673 | |
Fixed strategic services | | | - | | | | 9,089 | | | | (9,089 | ) | | | - | | | | - | | | | 8,469 | | | | (8,469 | ) | | | - | |
Legacy voice and data services | | | - | | | | 10,572 | | | | (10,572 | ) | | | - | | | | - | | | | 12,577 | | | | (12,577 | ) | | | - | |
Other service and equipment | | | - | | | | 2,513 | | | | (2,513 | ) | | | - | | | | - | | | | 2,619 | | | | (2,619 | ) | | | - | |
Wireless equipment | | | 3,635 | | | | 4,873 | | | | - | | | | 8,508 | | | | 3,976 | | | | 5,422 | | | | - | | | | 9,398 | |
Total Operating Revenues | | | 23,279 | | | | 51,016 | | | | (22,174 | ) | | | 52,121 | | | | 24,781 | | | | 52,955 | | | | (23,665 | ) | | | 54,071 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operations and support | | | 13,599 | | | | 30,722 | | | | (14,013 | ) | | | 30,308 | | | | 14,343 | | | | 32,584 | | | | (15,105 | ) | | | 31,822 | |
EBITDA | | | 9,680 | | | | 20,294 | | | | (8,161 | ) | | | 21,813 | | | | 10,438 | | | | 20,371 | | | | (8,560 | ) | | | 22,249 | |
Depreciation and amortization | | | 2,621 | | | | 6,972 | | | | (3,594 | ) | | | 5,999 | | | | 2,798 | | | | 7,568 | | | | (4,122 | ) | | | 6,244 | |
Total Operating Expense | | | 16,220 | | | | 37,694 | | | | (17,607 | ) | | | 36,307 | | | | 17,141 | | | | 40,152 | | | | (19,227 | ) | | | 38,066 | |
Operating Income | | $ | 7,059 | | | $ | 13,322 | | | $ | (4,567 | ) | | $ | 15,814 | | | $ | 7,640 | | | $ | 12,803 | | | $ | (4,438 | ) | | $ | 16,005 | |
1 Non-wireless (fixed) operations reported in Business Solutions segment. | |
AT&T INC.
SEPTEMBER 30, 2017
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At September 30, 2017,March 31, 2019, we had interest rate swaps with a notional value of $10,775$1,633 and a fair value of $11.$(11).
We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $38,694$42,192 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(842)$(2,270) at September 30, 2017.March 31, 2019.
We have foreign exchange contracts with a U.S. dollar notional value of $1,238 to provide currency at a fixed rate to hedge a portion of the exchange risk involved in foreign currency-denominated transactions. These foreign exchange contracts include fair value hedges, cash flow hedges and economic (nonqualifying) hedges with a total net fair value of $81 at March 31, 2019.
We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant'sregistrant’s disclosure controls and procedures as of September 30, 2017.March 31, 2019. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant'sregistrant’s disclosure controls and procedures were effective as of September 30, 2017.March 31, 2019.
SEPTEMBER 30, 2017MARCH 31, 2019
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors"“Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
·● | Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers'suppliers’ ability to access financial markets at favorable rates and terms. |
·● | Changes in available technology and the effects of such changes, including product substitutions and deployment costs. |
·● | Increases in our benefit plans'plans’ costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation or repeal of healthcare legislation, regulations or related court decisions. |
·● | The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) and legislative efforts involving issues that are important to our business, including, without limitation, special access and business data services; intercarrier compensation; interconnection obligations; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure, including the withdrawal of legacy TDM-based services; universal service; broadband deployment; wireless equipment siting regulations; E911 services; competition policy; privacy; net neutrality, including the FCC's order classifying broadband as Title II services subject to much more comprehensive regulation; unbundled network elements and other wholesale obligations; multi-channelneutrality; multichannel video programming distributor services and equipment; content licensing and copyright protection; availability of new spectrum, on fair and balanced terms; and wireless and satellite license awards and renewals. |
· | The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations and elimination of state commission review of the withdrawal of services. |
·● | Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs. |
·● | Potential changes to the electromagnetic spectrum currently used for broadcast television and satellite distribution being considered by the FCC could negatively impact WarnerMedia’s ability to deliver linear network feeds of its domestic cable networks to its affiliates, and in some cases, WarnerMedia’s ability to produce high-value news and entertainment programming on location. |
● | U.S. and foreign laws and regulations regarding intellectual property rights protection and privacy, personal data protection and user consent are complex and rapidly evolving and could result in impact to our business plans, increased costs, or claims against us that may harm our reputation. |
● | Our ability to absorbrespond to revenue losses caused byand margin pressures from increasing competition, including offeringsservices that use alternative technologies and/or delivery methods (e.g., cable, wireless, VoIP and over-the-top video service), subscriber reluctance to purchase new wireless handsets, and our ability to maintain capital expenditures.government-owned or subsidized networks. |
· | The extent of competition including from governmental networks and other providers and the resulting pressure on customer totals and segment operating margins. |
· | Our ability to develop attractive and profitable product/service offerings to offset increasing competition. |
·● | The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and non-regulation of comparable alternative technologies (e.g., VoIP)VoIP and data usage). |
·● | The continued development and delivery of attractive and profitable wireless, video and broadband offerings;offerings and devices; the extent to which regulatory and build-out requirements apply to our offerings; our ability to match speeds offered by our competitors and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings. |
·● | Our continued ability to maintain margins, attractgenerate advertising revenue from attractive video content, especially from WarnerMedia, in the face of unpredictable and offer a diverse portfolio of video, wireless service and devices and device financing plans.rapidly evolving public viewing habits. |
·● | The availability and cost ofand our ability to adequately fund additional wireless spectrum and network upgrades; and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules. |
·● | Our ability to manage growth in wireless video and data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms. |
·● | The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties. |
·● | The impact from major equipment or software failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions including flooding and hurricanes, natural disasters including earthquakes and forest fires, pandemics, energy shortages, wars or terrorist attacks. |
·● | The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards. |
·● | Our ability to successfully integrate our acquisition of DIRECTV. |
· | Our ability to close our pending acquisition of Time Warner Inc. and successfully reorganize ourWarnerMedia operations, including the ability to manage various businesses in widely dispersed business locations and with decentralized management. |
·● | Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.take advantage of the desire of advertisers to change traditional video advertising models. |
·● | Our increased exposure to video competition and foreign economies, including foreign exchange fluctuations as well as regulatory and political uncertainty. |
·● | Changes in our corporate strategies, such as changing network-related requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments. |
·● | The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general. |
· | The uncertainty and impact of anticipated regulatory and corporate tax reform, which may impact the overall economy and incentives for business investments. |
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
SEPTEMBER 30, 2017MARCH 31, 2019
PART II – OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the thirdfirst quarter 2017,2019, there were no such material developments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | | | | | | | | | | | | (c) A summary of our repurchases of common stock during the thirdfirst quarter of 20172019 is as follows: | | | | | | | | | | | | | (a) | | (b) | | (c) | | (d) | Period | Total Number of Shares (or Units) Purchased 1, 2, 3 | | Average Price Paid Per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs1 | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs | | | | | | | | | | | JulyJanuary 1, 20172019 -
JulyJanuary 31, 20172019
| 19,060710,607 | | $ | 37.4530.46 | | - | | 388,296,000 375,662,000 | AugustFebruary 1, 20172019 -
August 31, 2017February 28, 2019
| 16,3793,021,234 | | | 38.8830.29 | | - | | 388,296,000 375,662,000 | SeptemberMarch 1, 20172019 -
September 30, 2017March 31, 2019
| 618,9283,113,701 | | | 38.0830.52 | | - | | 388,296,000 375,662,000 | Total | 654,3676,845,542 | | $ | 38.1030.41 | | - | | | 1 | In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common | | stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. | | The authorizations have no expiration date. | 2 | Of the shares repurchased, 63,8616,237,118 shares were acquired through the withholding of taxes on the vesting of restricted stock | | and performance shares or on the exercise price of options. | 3 | Of the shares repurchased, 590,506608,424 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit | | Association (VEBA) trusts. |
AT&T INC.
Item 6. Exhibits | | | | | | | | | | | | | | | | | | | | | | | | The following exhibits are filed or incorporated by reference as a part of this report: | | | | | | | | | | | | | | | | | | | | | | Exhibit | | | | | | Filed | | Incorporated by Reference | Number | | Exhibit Description | Herewith | | Form | Period Ending | Exhibit | Filing Date | | | | x | | | | | | | | | | | | x | | | | | | | | | | | | x | | | | | | | | | | | | x | | | | | | | | | | | | | | 8-K | | | | 10.1 | | 10/4/2017 | | | | x | | | | | | | | | | | | x | | | | | | | | | 31 | | Rule 13a-14(a)/15d-14(a) Certifications | | | | | | | | | | | | | x | | | | | | | | | | | | x | | | | | | | | | | | | x | | | | | | | | | 101 | | XBRL Instance Document | x | | | | | | | | |
SIGNATURE SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 3, 2017May 6, 2019
| | | AT&T Inc. /s/ John J. Stephens John J. Stephens Senior Executive Vice President and Chief Financial Officer |
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