UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
FORM 10-Q
(Mark One) ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2018 or |
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ||
|
For the transition period from to
Commission File Number1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210)821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | [X] | Accelerated filer | [ ] | |||||
Non-accelerated filer | [ ] |
| Smaller reporting company | [ ] | ||||
Emerging growth company | [ ] |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
Yes [ ] No [X]
At JulyOctober 31, 2018, there were 7,2627,278 million common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC. | |||||||||||
CONSOLIDATED STATEMENTS OF INCOME | |||||||||||
Dollars in millions except per share amounts | |||||||||||
(Unaudited) | |||||||||||
|
| Three months ended |
|
| Nine months ended | ||||||
|
| September 30, |
|
| September 30, | ||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
|
|
| As Adjusted |
|
|
|
| As Adjusted | ||
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
Service | $ | 41,297 |
| $ | 36,378 |
| $ | 109,849 |
| $ | 109,372 |
Equipment |
| 4,442 |
|
| 3,290 |
|
| 12,914 |
|
| 9,498 |
Total operating revenues |
| 45,739 |
|
| 39,668 |
|
| 122,763 |
|
| 118,870 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
Equipment |
| 4,828 |
|
| 4,191 |
|
| 14,053 |
|
| 12,177 |
Broadcast, programming and operations |
| 7,227 |
|
| 5,284 |
|
| 17,842 |
|
| 15,156 |
Other cost of revenues (exclusive of depreciation and amortization shown separately below) |
| 8,651 |
|
| 9,694 |
|
| 24,215 |
|
| 28,551 |
Selling, general and administrative |
| 9,598 |
|
| 8,650 |
|
| 26,179 |
|
| 25,981 |
Depreciation and amortization |
| 8,166 |
|
| 6,042 |
|
| 20,538 |
|
| 18,316 |
Total operating expenses |
| 38,470 |
|
| 33,861 |
|
| 102,827 |
|
| 100,181 |
Operating Income |
| 7,269 |
|
| 5,807 |
|
| 19,936 |
|
| 18,689 |
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| (2,051) |
|
| (1,686) |
|
| (5,845) |
|
| (4,374) |
Equity in net income (loss) of affiliates |
| (64) |
|
| 11 |
|
| (71) |
|
| (148) |
Other income (expense) – net |
| 1,053 |
|
| 842 |
|
| 5,108 |
|
| 2,255 |
Total other income (expense) |
| (1,062) |
|
| (833) |
|
| (808) |
|
| (2,267) |
Income Before Income Taxes |
| 6,207 |
|
| 4,974 |
|
| 19,128 |
|
| 16,422 |
Income tax expense |
| 1,391 |
|
| 1,851 |
|
| 4,305 |
|
| 5,711 |
Net Income |
| 4,816 |
|
| 3,123 |
|
| 14,823 |
|
| 10,711 |
Less: Net Income Attributable to Noncontrolling Interest |
| (98) |
|
| (94) |
|
| (311) |
|
| (298) |
Net Income Attributable to AT&T | $ | 4,718 |
| $ | 3,029 |
| $ | 14,512 |
| $ | 10,413 |
Basic Earnings Per Share Attributable to AT&T | $ | 0.65 |
| $ | 0.49 |
| $ | 2.19 |
| $ | 1.69 |
Diluted Earnings Per Share Attributable to AT&T | $ | 0.65 |
| $ | 0.49 |
| $ | 2.19 |
| $ | 1.69 |
Weighted Average Number of Common Shares Outstanding – Basic (in millions) |
| 7,284 |
|
| 6,162 |
|
| 6,603 |
|
| 6,164 |
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions) |
| 7,320 |
|
| 6,182 |
|
| 6,630 |
|
| 6,184 |
Dividends Declared Per Common Share | $ | 0.50 |
| $ | 0.49 |
| $ | 1.50 |
| $ | 1.47 |
See Notes to Consolidated Financial Statements. |
|
|
|
|
|
|
|
|
|
|
|
2
AT&T INC. |
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
| ||
Dollars in millions |
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Net income | $ | 4,816 |
| $ | 3,123 |
| $ | 14,823 |
| $ | 10,711 |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency: |
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment (includes $(7), $10, $(37) and $6 attributable to noncontrolling interest), net of taxes of $(2), $74, $(145) and $580 |
| (14) |
|
| 151 |
|
| (824) |
|
| 490 |
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses), net of taxes of $(4), $28, $(8) and $72 |
| (10) |
|
| 45 |
|
| (22) |
|
| 128 |
Reclassification adjustment included in net income, net of taxes of $0, $(50), $0 and $(54) |
| - |
|
| (79) |
|
| - |
|
| (86) |
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses), net of taxes of $0, $178, $68 and $(94) |
| 4 |
|
| 330 |
|
| 257 |
|
| (174) |
Reclassification adjustment included in net income, net of taxes of $3, $5, $9 and $15 |
| 12 |
|
| 10 |
|
| 35 |
|
| 29 |
Defined benefit postretirement plans: |
|
|
|
|
|
|
|
|
|
|
|
Net prior service (cost) credit arising during period, net of taxes of $0, $0, $173 and $594 |
| - |
|
| - |
|
| 530 |
|
| 969 |
Amortization of net prior service credit included in net income, net of taxes of $(108), $(157), $(322) and $(447) |
| (332) |
|
| (256) |
|
| (989) |
|
| (731) |
Other comprehensive income (loss) |
| (340) |
|
| 201 |
|
| (1,013) |
|
| 625 |
Total comprehensive income |
| 4,476 |
|
| 3,324 |
|
| 13,810 |
|
| 11,336 |
Less: Total comprehensive income attributable to noncontrolling interest |
| (91) |
|
| (104) |
|
| (274) |
|
| (304) |
Total Comprehensive Income Attributable to AT&T | $ | 4,385 |
| $ | 3,220 |
| $ | 13,536 |
| $ | 11,032 |
See Notes to Consolidated Financial Statements. |
|
|
|
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|
|
|
|
|
|
|
3
AT&T INC. | |||||
CONSOLIDATED BALANCE SHEETS | |||||
Dollars in millions except per share amounts | |||||
| September 30, |
| December 31, | ||
| 2018 |
| 2017 | ||
Assets | (Unaudited) |
|
| ||
Current Assets |
|
|
|
|
|
Cash and cash equivalents | $ | 8,657 |
| $ | 50,498 |
Accounts receivable - net of allowances for doubtful accounts of $845 and $663 |
| 26,312 |
|
| 16,522 |
Prepaid expenses |
| 1,860 |
|
| 1,369 |
Other current assets |
| 16,278 |
|
| 10,757 |
Total current assets |
| 53,107 |
|
| 79,146 |
Noncurrent Inventories and Theatrical Film and Television Production Costs |
| 7,221 |
|
| - |
Property, plant and equipment |
| 327,680 |
|
| 313,499 |
Less: accumulated depreciation and amortization |
| (197,332) |
|
| (188,277) |
Property, Plant and Equipment – Net |
| 130,348 |
|
| 125,222 |
Goodwill |
| 146,475 |
|
| 105,449 |
Licenses |
| 96,077 |
|
| 96,136 |
Trademarks and Trade Names – Net |
| 24,389 |
|
| 7,021 |
Distribution Networks – Net |
| 16,962 |
|
| - |
Other Intangible Assets – Net |
| 28,673 |
|
| 11,119 |
Investments in and Advances to Equity Affiliates |
| 6,128 |
|
| 1,560 |
Other Assets |
| 25,490 |
|
| 18,444 |
Total Assets | $ | 534,870 |
| $ | 444,097 |
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
Debt maturing within one year | $ | 14,905 |
| $ | 38,374 |
Accounts payable and accrued liabilities |
| 39,375 |
|
| 34,470 |
Advanced billing and customer deposits |
| 6,045 |
|
| 4,213 |
Accrued taxes |
| 1,460 |
|
| 1,262 |
Dividends payable |
| 3,635 |
|
| 3,070 |
Total current liabilities |
| 65,420 |
|
| 81,389 |
Long-Term Debt |
| 168,513 |
|
| 125,972 |
Deferred Credits and Other Noncurrent Liabilities |
|
|
|
|
|
Deferred income taxes |
| 60,495 |
|
| 43,207 |
Postemployment benefit obligation |
| 28,981 |
|
| 31,775 |
Other noncurrent liabilities |
| 26,490 |
|
| 19,747 |
Total deferred credits and other noncurrent liabilities |
| 115,966 |
|
| 94,729 |
|
|
|
|
|
|
Stockholders’ Equity |
|
|
|
|
|
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2018 and December 31, 2017: issued 7,620,748,598 at September 30, 2018 and 6,495,231,088 at December 31, 2017) |
| 7,621 |
|
| 6,495 |
Additional paid-in capital |
| 125,706 |
|
| 89,563 |
Retained earnings |
| 57,624 |
|
| 50,500 |
Treasury stock (350,465,537 at September 30, 2018 and 355,806,544 |
|
|
|
|
|
at December 31, 2017, at cost) |
| (12,486) |
|
| (12,714) |
Accumulated other comprehensive income |
| 5,383 |
|
| 7,017 |
Noncontrolling interest |
| 1,123 |
|
| 1,146 |
Total stockholders’ equity |
| 184,971 |
|
| 142,007 |
Total Liabilities and Stockholders’ Equity | $ | 534,870 |
| $ | 444,097 |
See Notes to Consolidated Financial Statements. |
|
|
|
|
|
4
AT&T INC. | |||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
Dollars in millions | |||||
(Unaudited) |
|
|
| ||
| Nine months ended | ||||
| September 30, | ||||
| 2018 |
| 2017 | ||
|
|
|
| As Adjusted | |
Operating Activities |
|
|
|
|
|
Net income | $ | 14,823 |
| $ | 10,711 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 20,538 |
|
| 18,316 |
Amortization of television and film costs |
| 1,608 |
|
| - |
Undistributed earnings from investments in equity affiliates |
| 312 |
|
| 171 |
Provision for uncollectible accounts |
| 1,240 |
|
| 1,216 |
Deferred income tax expense |
| 2,934 |
|
| 3,254 |
Net (gain) loss from investments, net of impairments |
| (501) |
|
| (114) |
Actuarial (gain) loss on pension and postretirement benefits |
| (2,726) |
|
| (259) |
Changes in operating assets and liabilities: |
|
|
|
|
|
Accounts receivable |
| (1,018) |
|
| (652) |
Other current assets, inventories and theatrical film and television production costs |
| (2,729) |
|
| (106) |
Accounts payable and other accrued liabilities |
| (1,385) |
|
| (1,437) |
Equipment installment receivables and related sales |
| 220 |
|
| 451 |
Deferred customer contract acquisition and fulfillment costs |
| (2,657) |
|
| (1,102) |
Retirement benefit funding |
| (420) |
|
| (420) |
Other - net |
| 1,283 |
|
| (1,556) |
Total adjustments |
| 16,699 |
|
| 17,762 |
Net Cash Provided by Operating Activities |
| 31,522 |
|
| 28,473 |
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
Purchase of property and equipment |
| (16,695) |
|
| (15,756) |
Interest during construction |
| (404) |
|
| (718) |
Acquisitions, net of cash acquired |
| (43,116) |
|
| 1,154 |
Dispositions |
| 983 |
|
| 56 |
(Purchases) sales of securities, net |
| (234) |
|
| 235 |
Advances to and investments in equity affiliates, net |
| (1,021) |
|
| - |
Cash collections of deferred purchase price |
| 500 |
|
| 665 |
Net Cash Used in Investing Activities |
| (59,987) |
|
| (14,364) |
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
Net change in short-term borrowings with original maturities of three months or less |
| (1,071) |
|
| (2) |
Issuance of other short-term borrowings |
| 4,852 |
|
| - |
Repayment of other short-term borrowings |
| (1,075) |
|
| - |
Issuance of long-term debt |
| 38,325 |
|
| 46,761 |
Repayment of long-term debt |
| (43,579) |
|
| (10,309) |
Purchase of treasury stock |
| (577) |
|
| (460) |
Issuance of treasury stock |
| 359 |
|
| 26 |
Dividends paid |
| (9,775) |
|
| (9,030) |
Other |
| (1,138) |
|
| 1,716 |
Net Cash (Used in) Provided by Financing Activities |
| (13,679) |
|
| 28,702 |
Net (decrease) increase in cash and cash equivalents and restricted cash |
| (42,144) |
|
| 42,811 |
Cash and cash equivalents and restricted cash beginning of year |
| 50,932 |
|
| 5,935 |
Cash and Cash Equivalents and Restricted Cash End of Period | $ | 8,788 |
| $ | 48,746 |
See Notes to Consolidated Financial Statements. | |||||
5
AT&T INC. | ||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY | ||||
Dollars and shares in millions except per share amounts | ||||
(Unaudited) | ||||
| September 30, 2018 | |||
| Shares |
| Amount | |
Common Stock |
|
|
|
|
Balance at beginning of year | 6,495 |
| $ | 6,495 |
Issuance of stock | 1,126 |
|
| 1,126 |
Balance at end of period | 7,621 |
| $ | 7,621 |
|
|
|
|
|
Additional Paid-In Capital |
|
|
|
|
Balance at beginning of year |
|
| $ | 89,563 |
Issuance of common stock |
|
|
| 35,473 |
Issuance of treasury stock |
|
|
| (49) |
Share-based payments |
|
|
| 719 |
Balance at end of period |
|
| $ | 125,706 |
|
|
|
|
|
Retained Earnings |
|
|
|
|
Balance at beginning of year |
|
| $ | 50,500 |
Net income attributable to AT&T ($2.19 per diluted share) |
|
|
| 14,512 |
Dividends to stockholders ($1.50 per share) |
|
|
| (10,388) |
Cumulative effect of accounting changes |
|
|
| 3,000 |
Balance at end of period |
|
| $ | 57,624 |
|
|
|
|
|
Treasury Stock |
|
|
|
|
Balance at beginning of year | (356) |
| $ | (12,714) |
Repurchase and acquisition of common stock | (19) |
|
| (641) |
Issuance of treasury stock | 24 |
|
| 869 |
Balance at end of period | (351) |
| $ | (12,486) |
|
|
|
|
|
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax |
|
|
|
|
Balance at beginning of year |
|
| $ | 7,017 |
Other comprehensive income attributable to AT&T |
|
|
| (976) |
Amounts reclassified to retained earnings |
|
|
| (658) |
Balance at end of period |
|
| $ | 5,383 |
|
|
|
|
|
Noncontrolling Interest |
|
|
|
|
Balance at beginning of year |
|
| $ | 1,146 |
Net income attributable to noncontrolling interest |
|
|
| 311 |
Contributions |
|
|
| 8 |
Distributions |
|
|
| (332) |
Acquisition of noncontrolling interest |
|
|
| 1 |
Acquisition of interest held by noncontrolling owners |
|
|
| (9) |
Translation adjustments attributable to noncontrolling interest, net of taxes |
|
|
| (37) |
Cumulative effect of accounting changes |
|
|
| 35 |
Balance at end of period |
|
| $ | 1,123 |
|
|
|
|
|
Total Stockholders’ Equity at beginning of year |
|
| $ | 142,007 |
Total Stockholders’ Equity at end of period |
|
| $ | 184,971 |
See Notes to Consolidated Financial Statements. |
| |||
6
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| As Adjusted | As Adjusted | |||||||||||||||
Operating Revenues | ||||||||||||||||
Service | $ | 33,773 | $ | 36,538 | $ | 67,419 | $ | 72,994 | ||||||||
Equipment | 4,080 | 3,299 | 8,472 | 6,208 | ||||||||||||
Media | 1,133 | - | 1,133 | - | ||||||||||||
Total operating revenues | 38,986 | 39,837 | 77,024 | 79,202 | ||||||||||||
Operating Expenses | ||||||||||||||||
Cost of revenues | ||||||||||||||||
Equipment | 4,377 | 4,138 | 9,225 | 7,986 | ||||||||||||
Broadcast, programming and operations | 5,449 | 4,898 | 10,615 | 9,872 | ||||||||||||
Other cost of revenues (exclusive of depreciation and amortization shown separately below) | 7,632 | 9,569 | 15,564 | 18,857 | ||||||||||||
Selling, general and administrative | 8,684 | 8,559 | 16,581 | 17,331 | ||||||||||||
Depreciation and amortization | 6,378 | 6,147 | 12,372 | 12,274 | ||||||||||||
Total operating expenses | 32,520 | 33,311 | 64,357 | 66,320 | ||||||||||||
Operating Income | 6,466 | 6,526 | 12,667 | 12,882 | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Interest expense | (2,023 | ) | (1,395 | ) | (3,794 | ) | (2,688 | ) | ||||||||
Equity in net income (loss) of affiliates | (16 | ) | 14 | (7 | ) | (159 | ) | |||||||||
Other income (expense) – net | 2,353 | 925 | 4,055 | 1,413 | ||||||||||||
Total other income (expense) | 314 | (456 | ) | 254 | (1,434 | ) | ||||||||||
Income Before Income Taxes | 6,780 | 6,070 | 12,921 | 11,448 | ||||||||||||
Income tax expense | 1,532 | 2,056 | 2,914 | 3,860 | ||||||||||||
Net Income | 5,248 | 4,014 | 10,007 | 7,588 | ||||||||||||
Less: Net Income Attributable to Noncontrolling Interest | (116 | ) | (99 | ) | (213 | ) | (204 | ) | ||||||||
Net Income Attributable to AT&T | $ | 5,132 | $ | 3,915 | $ | 9,794 | $ | 7,384 | ||||||||
Basic Earnings Per Share Attributable to AT&T | $ | 0.81 | $ | 0.63 | $ | 1.56 | $ | 1.19 | ||||||||
Diluted Earnings Per Share Attributable to AT&T | $ | 0.81 | $ | 0.63 | $ | 1.56 | $ | 1.19 | ||||||||
Weighted Average Number of Common Shares Outstanding – Basic (in millions) | 6,351 | 6,165 | 6,257 | 6,166 | ||||||||||||
Weighted Average Number of Common Shares | 6,374 | 6,184 | 6,277 | 6,185 | ||||||||||||
Dividends Declared Per Common Share | $ | 0.50 | $ | 0.49 | $ | 1.00 | $ | 0.98 | ||||||||
See Notes to Consolidated Financial Statements.
2
AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 5,248 | $ | 4,014 | $ | 10,007 | $ | 7,588 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency: | ||||||||||||||||
Translation adjustment (includes $(32), $(10), $(30) and $(4) | (918 | ) | (33 | ) | (810 | ) | 339 | |||||||||
Available-for-sale securities: | ||||||||||||||||
Net unrealized gains (losses), net of taxes of $0, $29, $(4) and $44 | - | 50 | (12 | ) | 83 | |||||||||||
Reclassification adjustment included in net income, net of taxes of $0, $(7), $0 and $(4) | - | (12 | ) | - | (7 | ) | ||||||||||
Cash flow hedges: | ||||||||||||||||
Net unrealized gains (losses), net of taxes of $(112), $(279), $68 and $(272) | (421 | ) | (517 | ) | 253 | (504 | ) | |||||||||
Reclassification adjustment included in net income, net of taxes of $3, $5, $6 and $10 | 11 | 9 | 23 | 19 | ||||||||||||
Defined benefit postretirement plans: | ||||||||||||||||
Net prior service (cost) credit arising during period, net of taxes of $(12), $594, $173 and $594 | (37 | ) | 969 | 530 | 969 | |||||||||||
Amortization of net prior service credit included in net income, net of taxes of $(109), $(151), $(214) and $(290) | (334 | ) | (247 | ) | (657 | ) | (475 | ) | ||||||||
Other comprehensive income (loss) | (1,699 | ) | 219 | (673 | ) | 424 | ||||||||||
Total comprehensive income | 3,549 | 4,233 | 9,334 | 8,012 | ||||||||||||
Less: Total comprehensive income attributable to noncontrolling interest | (84 | ) | (89 | ) | (183 | ) | (200 | ) | ||||||||
Total Comprehensive Income Attributable to AT&T | $ | 3,465 | $ | 4,144 | $ | 9,151 | $ | 7,812 | ||||||||
See Notes to Consolidated Financial Statements.
3
AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
| June 30, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Assets | (Unaudited) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 13,523 | $ | 50,498 | ||||
Accounts receivable - net of allowances for doubtful accounts of $804 and $663 | 25,492 | 16,522 | ||||||
Prepaid expenses | 1,966 | 1,369 | ||||||
Other current assets | 14,305 | 10,757 | ||||||
Total current assets | 55,286 | 79,146 | ||||||
Noncurrent Inventories and Theatrical Film and Television Production Costs | 5,849 | - | ||||||
Property, plant and equipment | 324,889 | 313,499 | ||||||
Less: accumulated depreciation and amortization | (195,333 | ) | (188,277 | ) | ||||
Property, Plant and Equipment – Net | 129,556 | 125,222 | ||||||
Goodwill | 142,607 | 105,449 | ||||||
Licenses | 96,802 | 96,136 | ||||||
Trademarks and Trade Names – Net | 24,440 | 7,021 | ||||||
Distribution Networks – Net | 17,403 | - | ||||||
Other Intangible Assets – Net | 30,800 | 11,119 | ||||||
Investments in and Advances to Equity Affiliates | 8,007 | 1,560 | ||||||
Other Assets | 23,941 | 18,444 | ||||||
Total Assets | $ | 534,691 | $ | 444,097 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Debt maturing within one year | $ | 21,672 | $ | 38,374 | ||||
Accounts payable and accrued liabilities | 35,488 | 34,470 | ||||||
Advanced billing and customer deposits | 5,914 | 4,213 | ||||||
Accrued taxes | 1,889 | 1,262 | ||||||
Dividends payable | 3,630 | 3,070 | ||||||
Total current liabilities | 68,593 | 81,389 | ||||||
Long-Term Debt | 168,495 | 125,972 | ||||||
Deferred Credits and Other Noncurrent Liabilities | ||||||||
Deferred income taxes | 59,665 | 43,207 | ||||||
Postemployment benefit obligation | 28,791 | 31,775 | ||||||
Other noncurrent liabilities | 25,017 | 19,747 | ||||||
Total deferred credits and other noncurrent liabilities | 113,473 | 94,729 | ||||||
Stockholders’ Equity | ||||||||
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2018 and December 31, 2017: issued 7,620,748,598 at June 30, 2018 and 6,495,231,088 at December 31, 2017) | 7,621 | 6,495 | ||||||
Additionalpaid-in capital | 125,960 | 89,563 | ||||||
Retained earnings | 56,555 | 50,500 | ||||||
Treasury stock (360,993,619 at June 30, 2018 and 355,806,544 at December 31, 2017, at cost) | (12,872 | ) | (12,714 | ) | ||||
Accumulated other comprehensive income | 5,716 | 7,017 | ||||||
Noncontrolling interest | 1,150 | 1,146 | ||||||
Total stockholders’ equity | 184,130 | 142,007 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 534,691 | $ | 444,097 | ||||
See Notes to Consolidated Financial Statements.
4
AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
Six months ended June 30, | ||||||||
| 2018 | 2017 | |||||||
| As Adjusted | ||||||||
Operating Activities | ||||||||
Net income | $ | 10,007 | $ | 7,588 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 12,372 | 12,274 | ||||||
Amortization of television and film costs | 168 | - | ||||||
Undistributed earnings from investments in equity affiliates | 235 | 167 | ||||||
Provision for uncollectible accounts | 808 | 795 | ||||||
Deferred income tax expense | 2,032 | 964 | ||||||
Net (gain) loss from investments, net of impairments | (29 | ) | 12 | |||||
Actuarial (gain) loss on pension and postretirement benefits | (2,726 | ) | (259 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 233 | 119 | ||||||
Other current assets, inventories and theatrical film and television production costs | 1,039 | 470 | ||||||
Accounts payable and other accrued liabilities | (3,890 | ) | (2,761 | ) | ||||
Equipment installment receivables and related sales | 490 | 525 | ||||||
Deferred customer contract acquisition and fulfillment costs | (1,725 | ) | (796 | ) | ||||
Retirement benefit funding | (280 | ) | (280 | ) | ||||
Other – net | 442 | (1,148 | ) | |||||
Total adjustments | 9,169 | 10,082 | ||||||
Net Cash Provided by Operating Activities | 19,176 | 17,670 | ||||||
Investing Activities | ||||||||
Capital expenditures: | ||||||||
Purchase of property and equipment | (10,959 | ) | (10,750 | ) | ||||
Interest during construction | (267 | ) | (473 | ) | ||||
Acquisitions, net of cash acquired | (40,715 | ) | 1,224 | |||||
Dispositions | 59 | 51 | ||||||
(Purchases) sales of securities, net | (218 | ) | 169 | |||||
Advances to and investments in equity affiliates, net | (1,035 | ) | - | |||||
Cash collections of deferred purchase price | 500 | 382 | ||||||
Net Cash Used in Investing Activities | (52,635 | ) | (9,397 | ) | ||||
Financing Activities | ||||||||
Net change in short-term borrowings with original maturities of three months or less | 2,227 | (2 | ) | |||||
Issuance of other short-term borrowings | 4,839 | - | ||||||
Issuance of long-term debt | 26,478 | 24,115 | ||||||
Repayment of long-term debt | (29,447 | ) | (6,118 | ) | ||||
Purchase of treasury stock | (564 | ) | (458 | ) | ||||
Issuance of treasury stock | 12 | 24 | ||||||
Dividends paid | (6,144 | ) | (6,021 | ) | ||||
Other | (1,121 | ) | 77 | |||||
Net Cash (Used in) Provided by Financing Activities | (3,720 | ) | 11,617 | |||||
Net (decrease) increase in cash and cash equivalents and restricted cash | (37,179 | ) | 19,890 | |||||
Cash and cash equivalents and restricted cash beginning of year | 50,932 | 5,935 | ||||||
Cash and Cash Equivalents and Restricted Cash End of Period | $ | 13,753 | $ | 25,825 | ||||
See Notes to Consolidated Financial Statements.
5
AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
| June 30, 2018 | ||||||||
| Shares | Amount | |||||||
Common Stock | ||||||||
Balance at beginning of year | 6,495 | $ | 6,495 | |||||
Issuance of stock | 1,126 | 1,126 | ||||||
Balance at end of period | 7,621 | $ | 7,621 | |||||
AdditionalPaid-In Capital | ||||||||
Balance at beginning of year | $ | 89,563 | ||||||
Issuance of common stock | 35,473 | |||||||
Issuance of treasury stock | (4 | ) | ||||||
Share-based payments | 928 | |||||||
Balance at end of period | $ | 125,960 | ||||||
Retained Earnings | ||||||||
Balance at beginning of year | $ | 50,500 | ||||||
Net income attributable to AT&T ($1.56 per diluted share) | 9,794 | |||||||
Dividends to stockholders ($1.00 per share) | (6,739 | ) | ||||||
Cumulative effect of accounting changes | 3,000 | |||||||
Balance at end of period | $ | 56,555 | ||||||
Treasury Stock | ||||||||
Balance at beginning of year | (356 | ) | $ | (12,714 | ) | |||
Repurchase and acquisition of common stock | (18 | ) | (607 | ) | ||||
Issuance of treasury stock | 13 | 449 | ||||||
Balance at end of period | (361 | ) | $ | (12,872 | ) | |||
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax | ||||||||
Balance at beginning of year | $ | 7,017 | ||||||
Other comprehensive income attributable to AT&T | (643 | ) | ||||||
Amounts reclassified to retained earnings | (658 | ) | ||||||
Balance at end of period | $ | 5,716 | ||||||
Noncontrolling Interest | ||||||||
Balance at beginning of year | $ | 1,146 | ||||||
Net income attributable to noncontrolling interest | 213 | |||||||
Contributions | 8 | |||||||
Distributions | (223 | ) | ||||||
Acquisition of noncontrolling interest | 1 | |||||||
Translation adjustments attributable to noncontrolling interest, net of taxes | (30 | ) | ||||||
Cumulative effect of accounting changes | 35 | |||||||
Balance at end of period | $ | 1,150 | ||||||
Total Stockholders’ Equity at beginning of year | $ | 142,007 | ||||||
Total Stockholders’ Equity at end of period | $ | 184,130 | ||||||
See Notes to Consolidated Financial Statements.
6
AT&T INC.
JUNE
For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form10-K for the year ended December 31, 2017. The results for the interim periods are not necessarily indicative of those for the full year.
In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.
Dollars in millions except per share amounts
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of PresentationThese consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates, including the operating results of recently acquired Time Warner Inc. (referred to as “Time Warner” or “WarnerMedia”) as of June 15, 2018 (see Note 8).
All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees’ other comprehensive income (OCI) items, including translation adjustments.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain prior period amounts have been conformed to the current period’s presentation, including impacts for the adoption of recent accounting standards and the realignment of certain business units withinchanges in our reportable segments (see Note 4).
Tax ReformThe Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax rate from 35% to 21% and required companies to pay aone-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. Recognizing the late enactment of the Act and complexity of accurately accounting for its impact, the Securities and Exchange Commission (SEC) in Staff Accounting Bulletin (SAB) 118 provided guidance that allows registrants to provide a reasonable estimate of the impact to their financial statements and adjust the reported impact in a measurement period not to exceed one year. We included the estimated impact of the Act in our financial results at or for the period ended December 31, 2017 and did not record any adjustments thereto during the first sixnine months of 2018. Our future results could include additional adjustments, and those adjustments could be material.
Customer Fulfillment Costs During the second quarter of 2018, we updated our analysis of economic lives of customer relationships. As of April 1, 2018, we extended the amortization period to 58 months to better reflect the estimated economic lives of our entertainment groupEntertainment Group customers. This change in accounting estimate decreased other cost of revenues, and impactedwhich had an impact on net income $126,of $107, or $0.02 per diluted share, in the secondthird quarter and $233, or $0.04 per diluted share, for the first nine months of 2018.
Film and Television Production Cost Recognition, Participations and Residuals and Impairments Film and television production costs include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value. The amount of capitalized film and television production costs recognized as broadcast, programming and operations expenses for a given period is determined using the film forecast computation method. Under this method, the amortization of capitalized costs and the accrual of participations and residuals is based on the proportion of the film’s revenues recognized for such period to the film’s estimated remaining ultimate revenues (i.e., the total revenue to be received throughout a film’s life cycle).
7
Dollars in millions except per share amounts
The process of estimating a film’s ultimate revenues requires us to make a series of significant judgments related to future revenue generating activities associated with a particular film. We estimate the ultimate revenues, less additional costs to be incurred (including exploitation and participation costs), in order to determine whether the value of a film or television series is impaired and requires an immediate write-off of unrecoverable film and television production costs. We also determine, using the film forecast computation method, the amount of capitalized film and television production costs and the amount of participations and residuals to be recognized as broadcast, programming and operations expenses for a given film or television series in a particular period. To the extent that the ultimate revenues are adjusted, the resulting gross margin reported on the exploitation of that film or television series in a period is also adjusted.
Prior to the theatrical release of a film, our estimates are based on factors such as the historical performance of similar films, the star power of the lead actors, the rating and genre of the film, pre-release market research (including test market screenings), international distribution plans and the expected number of theaters in which the film will be released. In the absence of revenues directly related to the exhibition of owned film or television programs on our television networks, premium pay television or over-the-top (OTT) services, management estimates a portion of the unamortized costs that are representative of the utilization of that film or television program in that exhibition and expenses such costs as the film or television program is exhibited. The period over which ultimate revenues are estimated is generally not to exceed ten years from the initial release of a motion picture or from the date of delivery of the first episode of an episodic television series. Estimates are updated based on information available during the film’s production and, upon release, the actual results of each film. Changes in estimates of ultimate revenues from period to period affect the amount of production costs amortized in a given period and, therefore, could have an impact on the financial results for that period.
Licensed Programming Inventory Cost Recognition and Impairment We enter into agreements to license programming exhibition rights from licensors. A programming inventory asset related to these rights and a corresponding liability payable to the licensor are recorded (on a discounted basis if the license agreements are long-term) when (i) the cost of the programming is reasonably determined, (ii) the programming material has been accepted in accordance with the terms of the agreement, (iii) the programming is available for its first showing or telecast, and (iv) the license period has commenced. There are variations in the amortization methods of these rights, depending on whether the network is advertising-supported (e.g., TNT and TBS) or not advertising-supported (e.g., HBO and Turner Classic Movies).
For the advertising-supported networks, our general policy is to amortize each program’s costs on a straight-line basis (or per-play basis, if greater) over its license period. In circumstances where the initial airing of the program has more value than subsequent airings, an accelerated method of amortization is used. The accelerated amortization upon the first airing versus subsequent airings is determined based on a study of historical and estimated future advertising sales for similar programming. For rights fees paid for sports programming arrangements, such rights fees are amortized using a revenue-forecast model, in which the rights fees are amortized using the ratio of current period advertising revenue to total estimated remaining advertising revenue over the term of the arrangement.
For premium pay television and OTT services that are not advertising-supported, each licensed program’s costs are amortized on a straight-line basis over its license period or estimated period of use, beginning with the month of initial exhibition. When we have the right to exhibit feature theatrical programming in multiple windows over a number of years, historical audience viewership is used as the basis for determining the amount of programming amortization attributable to each window.
Licensed programming inventory is carried at the lower of unamortized cost or estimated net realizable value. For networks that generate both advertising and subscription revenues, the net realizable value of unamortized programming costs is generally evaluated based on the network’s programming taken as a whole. In assessing whether the programming inventory for a particular advertising-supported network is impaired, the net realizable value for all of the network’s programming inventory is determined based on a projection of the network’s profitability. Similarly, for premium pay television and OTT services that are not advertising-supported, an evaluation of the net realizable value of unamortized programming costs is performed based on the premium pay television and OTT services’ licensed programming taken as a whole. Specifically, the net realizable value for all premium pay television and OTT service licensed programming is determined based on projections of estimated subscription revenues less certain costs of delivering and distributing the licensed programming. Changes in management’s intended usage of a specific program, such as a decision to no longer exhibit that program and forego the use of the rights associated with the program license, results in a reassessment of that program’s net realizable value, which could result in an impairment.
8
Dollars in millions except per share amounts
Recently Adopted Accounting Standards
Revenue Recognition As of January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606), using the modified retrospective method, which does not allow us to adjust prior periods. We applied the rules to all open contracts existing as of January 1, 2018, recording an increase of $2,342 to retained earnings for the cumulative effect of the change, with an offsetting contract asset of $1,737, deferred contract acquisition costs of $1,454, other asset reductions of $239, other liability reductions of $212, deferred income taxes of $787 and noncontrolling interest of $35. (See(See Note 5)
7
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Pension and Other Postretirement Benefits As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU2017-07). We are no longer allowed to present the interest, estimated return on assets and amortization of prior service credits components of our net periodic benefit cost in our consolidated operating expenses, but rather are required to include those amounts in “other income (expense) – net” in our consolidated statements of income. We continue to present service costs with the associated compensation costs within our operating expenses. As a practical expedient, we used the amounts disclosed as the estimated basis for applying the retrospective presentation requirement.
The following table presents our results under our historical method and as adjusted to reflect ASU2017-07 (presentation ofbenefit cost):
|
| Pension and Postretirement Benefits | ||||||||||||||||||||||||||||||||
| Pension and Postretirement Benefits |
|
| Historical |
| Effect of |
|
| |||||||||||||||||||||||||||
| Historical Accounting Method | Effect of Adoption of ASU 2017-07 | As Adjusted |
|
| Accounting |
| Adoption of |
| As | |||||||||||||||||||||||||
For the three months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||
|
|
| Method |
| ASU 2017-07 |
| Adjusted | |||||||||||||||||||||||||||
For the three months ended September 30, 2018 | For the three months ended September 30, 2018 |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Consolidated Statements of Income | Consolidated Statements of Income |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Other cost of revenues | Other cost of revenues | $ | 8,527 |
| $ | 124 |
| $ | 8,651 | |||||||||||||||||||||||||
Selling, general and administrative expenses | Selling, general and administrative expenses |
| 9,207 |
|
| 391 |
|
| 9,598 | |||||||||||||||||||||||||
Operating Income | Operating Income |
| 7,784 |
|
| (515) |
|
| 7,269 | |||||||||||||||||||||||||
Other Income (Expense) – net | Other Income (Expense) – net |
| 538 |
|
| 515 |
|
| 1,053 | |||||||||||||||||||||||||
Net Income | Net Income |
| 4,816 |
|
| - |
|
| 4,816 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
For the three months ended September 30, 2017 | For the three months ended September 30, 2017 |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Consolidated Statements of Income | Consolidated Statements of Income |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Other cost of revenues | $ | 7,068 | $ | 564 | $ | 7,632 | Other cost of revenues | $ | 9,431 |
| $ | 263 |
| $ | 9,694 | |||||||||||||||||||
Selling, general and administrative expenses | 6,896 | 1,788 | 8,684 | Selling, general and administrative expenses |
| 8,317 |
|
| 333 |
|
| 8,650 | ||||||||||||||||||||||
Operating Income | 8,818 | (2,352 | ) | 6,466 | Operating Income |
| 6,403 |
|
| (596) |
|
| 5,807 | |||||||||||||||||||||
Other Income (Expense) – net | 1 | 2,352 | 2,353 | Other Income (Expense) – net |
| 246 |
|
| 596 |
|
| 842 | ||||||||||||||||||||||
Net Income | 5,248 | - | 5,248 | Net Income |
| 3,123 |
|
| - |
|
| 3,123 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
For the three months ended June 30, 2017 | ||||||||||||||||||||||||||||||||||
For the nine months ended September 30, 2018 | For the nine months ended September 30, 2018 |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Consolidated Statements of Income | Consolidated Statements of Income |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Other cost of revenues | $ | 9,218 | $ | 351 | $ | 9,569 | Other cost of revenues | $ | 23,166 |
| $ | 1,049 |
| $ | 24,215 | |||||||||||||||||||
Selling, general and administrative expenses | 8,113 | 446 | 8,559 | Selling, general and administrative expenses |
| 22,859 |
|
| 3,320 |
|
| 26,179 | ||||||||||||||||||||||
Operating Income | 7,323 | (797 | ) | 6,526 | Operating Income |
| 24,305 |
|
| (4,369) |
|
| 19,936 | |||||||||||||||||||||
Other Income (Expense) – net | 128 | 797 | 925 | Other Income (Expense) – net |
| 739 |
|
| 4,369 |
|
| 5,108 | ||||||||||||||||||||||
Net Income | 4,014 | - | 4,014 | Net Income |
| 14,823 |
|
| - |
|
| 14,823 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
For the six months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||
For the nine months ended September 30, 2017 | For the nine months ended September 30, 2017 |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Consolidated Statements of Income | Consolidated Statements of Income |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Other cost of revenues | $ | 14,639 | $ | 925 | $ | 15,564 | Other cost of revenues | $ | 27,714 |
| $ | 837 |
| $ | 28,551 | |||||||||||||||||||
Selling, general and administrative expenses | 13,652 | 2,929 | 16,581 | Selling, general and administrative expenses |
| 24,917 |
|
| 1,064 |
|
| 25,981 | ||||||||||||||||||||||
Operating Income | 16,521 | (3,854 | ) | 12,667 | Operating Income |
| 20,590 |
|
| (1,901) |
|
| 18,689 | |||||||||||||||||||||
Other Income (Expense) – net | 201 | 3,854 | 4,055 | Other Income (Expense) – net |
| 354 |
|
| 1,901 |
|
| 2,255 | ||||||||||||||||||||||
Net Income | 10,007 | - | 10,007 | Net Income |
| 10,711 |
|
| - |
|
| 10,711 | ||||||||||||||||||||||
For the six months ended June 30, 2017 | ||||||||||||||||||||||||||||||||||
Consolidated Statements of Income | ||||||||||||||||||||||||||||||||||
Other cost of revenues | $ | 18,283 | $ | 574 | $ | 18,857 | ||||||||||||||||||||||||||||
Selling, general and administrative expenses | 16,600 | 731 | 17,331 | |||||||||||||||||||||||||||||||
Operating Income | 14,187 | (1,305 | ) | 12,882 | ||||||||||||||||||||||||||||||
Other Income (Expense) – net | 108 | 1,305 | 1,413 | |||||||||||||||||||||||||||||||
Net Income | 7,588 | - | 7,588 | |||||||||||||||||||||||||||||||
89
JUNE
Dollars in millions except per share amounts
Cash Flows As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU2016-15). Under ASU2016-15, we continue to recognize cash receipts on owned equipment installment receivables as cash flows from operations. However, cash receipts on the deferred purchase price described in Note 9 are now required to be classified as cash flows from investing activities instead of cash flows from operating activities.
As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash,” (ASU2016-18). The primary impact of ASU2016-18 was to require us to include restricted cash in our reconciliation of beginning and ending cash and cash equivalents (restricted and unrestricted) on the face of the statements of cash flows. (See Note 11)
The following table presents our results under our historical method and as adjusted to reflect ASU2016-15 ( (cash receipts on deferred purchase price) and ASU2016-18 ( (restricted cash):
|
| Cash Flows | |||||||||||||||||||||||||||||||||||
| Cash Flows |
|
| Historical |
| Effect of |
| Effect of |
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| ||||||||||||||||||||||||||||
| Historical Accounting Method | Effect of Adoption of ASU 2016-15 | Effect of Adoption of ASU 2016-18 | As Adjusted |
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| Accounting |
| Adoption of |
| Adoption of |
| As | |||||||||||||||||||||||||
For the six months ended June 30, 2018 | |||||||||||||||||||||||||||||||||||||
Consolidated Statements of Cash Flows | |||||||||||||||||||||||||||||||||||||
Equipment installment receivables and related sales | $ | 990 | $ | (500 | ) | $ | - | $ | 490 | ||||||||||||||||||||||||||||
Other – net | 431 | - | 11 | 442 | |||||||||||||||||||||||||||||||||
Cash Provided by (Used in) Operating Activities | 19,665 | (500 | ) | 11 | 19,176 | ||||||||||||||||||||||||||||||||
(Purchases) sales of securities – net | 4 | - | (222 | ) | (218 | ) | |||||||||||||||||||||||||||||||
Cash collections of deferred purchase price | - | 500 | - | 500 | |||||||||||||||||||||||||||||||||
Cash (Used in) Provided by Investing Activities | (52,913 | ) | 500 | (222 | ) | (52,635 | ) | ||||||||||||||||||||||||||||||
Change in cash and cash equivalents and restricted cash | $ | (36,968 | ) | $ | - | $ | (211 | ) | $ | (37,179 | ) | ||||||||||||||||||||||||||
|
| Method |
| ASU 2016-15 |
| ASU 2016-18 |
| Adjusted | |||||||||||||||||||||||||||||
For the six months ended June 30, 2017 | |||||||||||||||||||||||||||||||||||||
For the nine months ended September 30, 2018 | For the nine months ended September 30, 2018 |
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| |||||||||||||||||||||||||
Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows |
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|
|
|
| ||||||||||||||||||||||||||
Changes in other current assets | $ | 471 | $ | - | $ | (1 | ) | $ | 470 | Changes in other current assets | $ | (2,731) |
| $ | - |
| $ | 2 |
| $ | (2,729) | ||||||||||||||||
Equipment installment receivables and related sales | 907 | (382 | ) | - | 525 | Equipment installment receivables and related sales |
| 720 |
|
| (500) |
|
| - |
|
| 220 | ||||||||||||||||||||
Other – net | (1,041 | ) | - | (107 | ) | (1,148 | ) | Other – net |
| 1,399 |
|
| - |
|
| (116) |
|
| 1,283 | ||||||||||||||||||
Cash Provided by (Used in) Operating Activities | 18,160 | (382 | ) | (108 | ) | 17,670 | Cash Provided by (Used in) Operating Activities |
| 32,136 |
|
| (500) |
|
| (114) |
|
| 31,522 | |||||||||||||||||||
(Purchases) sales of securities – net | - | - | 169 | 169 | (Purchases) sales of securities – net |
| 7 |
|
| - |
|
| (241) |
|
| (234) | |||||||||||||||||||||
Cash collections of deferred purchase price | - | 382 | - | 382 | Cash collections of deferred purchase price |
| - |
|
| 500 |
|
| - |
|
| 500 | |||||||||||||||||||||
Cash (Used in) Provided by Investing Activities | (9,948 | ) | 382 | 169 | (9,397 | ) | Cash (Used in) Provided by Investing Activities |
| (60,246) |
|
| 500 |
|
| (241) |
|
| (59,987) | |||||||||||||||||||
Change in cash and cash equivalents and restricted cash | $ | 19,829 | $ | - | $ | 61 | $ | 19,890 | Change in cash and cash equivalents and restricted cash | $ | (41,789) |
| $ | - |
| $ | (355) |
| $ | (42,144) | |||||||||||||||||
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For the nine months ended September 30, 2017 | For the nine months ended September 30, 2017 |
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Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows |
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| |||||||||||||||||||||||||
Changes in other current assets | Changes in other current assets | $ | (106) |
| $ | - |
| $ | - |
| $ | (106) | |||||||||||||||||||||||||
Equipment installment receivables and related sales | Equipment installment receivables and related sales |
| 1,116 |
|
| (665) |
|
| - |
|
| 451 | |||||||||||||||||||||||||
Other – net | Other – net |
| (1,420) |
|
| - |
|
| (136) |
|
| (1,556) | |||||||||||||||||||||||||
Cash Provided by (Used in) Operating Activities | Cash Provided by (Used in) Operating Activities |
| 29,274 |
|
| (665) |
|
| (136) |
|
| 28,473 | |||||||||||||||||||||||||
(Purchases) sales of securities – net | (Purchases) sales of securities – net |
| (2) |
|
| - |
|
| 237 |
|
| 235 | |||||||||||||||||||||||||
Cash collections of deferred purchase price | Cash collections of deferred purchase price |
| - |
|
| 665 |
|
| - |
|
| 665 | |||||||||||||||||||||||||
Cash (Used in) Provided by Investing Activities | Cash (Used in) Provided by Investing Activities |
| (15,266) |
|
| 665 |
|
| 237 |
|
| (14,364) | |||||||||||||||||||||||||
Change in cash and cash equivalents and restricted cash | Change in cash and cash equivalents and restricted cash | $ | 42,711 |
| $ | - |
| $ | 100 |
| $ | 42,811 | |||||||||||||||||||||||||
Financial Instruments As of January 1, 2018, we adopted ASUNo. 2016-01, “Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU2016-01), which requires us to prospectively record changes in the fair value of our equity investments, except for those accounted for under the equity method, in net income instead of in accumulated other comprehensive income. As of January 1, 2018, we recorded an increase of $658 in retained earnings for the cumulative effect of the adoption of ASU2016-01, with an offset to accumulated other comprehensive income (accumulated OCI).
10
JUNE
Dollars in millions except per share amounts
New Accounting Standards and Accounting Standards Not Yet Adopted
Leases In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842),” as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASC 842 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding“right-of-use” “right-of-use” assets. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP. In July 2018, the FASB amended ASC 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. Through the same amendment, the FASB will allow lessors the option to make a policy election to treat lease and nonlease components as a single lease component under certain conditions. ASC 842 is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption.
Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition of lease expense appears similar to our current methodology. We are continuing to evaluate the magnitude and other potential impacts to our financial statements.
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and sixnine months ended JuneSeptember 30, 2018 and 2017, is shown in the table below:
Three months ended |
| Nine months ended | |||||||||||||||||||||||||||||||||||||||||
| Three months ended June 30, | Six months ended June 30, | September 30, |
| September 30, | |||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 |
| 2017 |
| 2018 |
| 2017 | |||||||||||||||||||||||||||||||||
Numerators |
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Numerator for basic earnings per share: |
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Net Income | $ | 5,248 | $ | 4,014 | $ | 10,007 | $ | 7,588 | $ | 4,816 |
| $ | 3,123 |
| $ | 14,823 |
| $ | 10,711 | ||||||||||||||||||||||||
Less: Net income attributable to noncontrolling interest | (116 | ) | (99 | ) | (213 | ) | (204 | ) |
| (98) |
|
| (94) |
|
| (311) |
|
| (298) | ||||||||||||||||||||||||
Net Income attributable to AT&T | 5,132 | 3,915 | 9,794 | 7,384 |
| 4,718 |
|
| 3,029 |
|
| 14,512 |
|
| 10,413 | ||||||||||||||||||||||||||||
Dilutive potential common shares: |
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Share-based payment | 4 | 2 | 9 | 6 |
| 4 |
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| 3 |
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| 13 |
|
| 9 | ||||||||||||||||||||||||||||
Numerator for diluted earnings per share | $ | 5,136 | $ | 3,917 | $ | 9,803 | $ | 7,390 | $ | 4,722 |
| $ | 3,032 |
| $ | 14,525 |
| $ | 10,422 | ||||||||||||||||||||||||
Denominators (000,000) |
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Denominator for basic earnings per share: |
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| ||||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding | 6,351 | 6,165 | 6,257 | 6,166 |
| 7,284 |
|
| 6,162 |
|
| 6,603 |
|
| 6,164 | ||||||||||||||||||||||||||||
Dilutive potential common shares: |
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| ||||||||||||||||||||||||||||||||
Share-based payment (in shares) | 23 | 19 | 20 | 19 |
| 36 |
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| 20 |
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| 27 |
|
| 20 | ||||||||||||||||||||||||||||
Denominator for diluted earnings per share | 6,374 | 6,184 | 6,277 | 6,185 |
| 7,320 |
|
| 6,182 |
|
| 6,630 |
|
| 6,184 | ||||||||||||||||||||||||||||
Basic earnings per share attributable to AT&T | $ | 0.81 | $ | 0.63 | $ | 1.56 | $ | 1.19 | $ | 0.65 |
| $ | 0.49 |
| $ | 2.19 |
| $ | 1.69 | ||||||||||||||||||||||||
Diluted earnings per share attributable to AT&T | $ | 0.81 | $ | 0.63 | $ | 1.56 | $ | 1.19 | $ | 0.65 |
| $ | 0.49 |
| $ | 2.19 |
| $ | 1.69 | ||||||||||||||||||||||||
10
11
JUNE
Dollars in millions except per share amounts
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated OCI are presented below. All amounts are net of tax and exclude noncontrolling interest.
| Foreign Currency Translation Adjustment | Net Unrealized Gains (Losses) onAvailable- for-Sale Securities | Net Unrealized Gains (Losses) on Cash Flow Hedges | Defined Benefit Postretirement Plans | Accumulated Other Comprehensive Income | ||||||||||||||||
Balance as of December 31, 2017 | $ | (2,054) | $ | 660 | $ | 1,402 | $ | 7,009 | $ | 7,017 | ||||||||||
Other comprehensive income (loss) before reclassifications | (780) | (12 | ) | 253 | 530 | (9 | ) | |||||||||||||
Amounts reclassified from accumulated OCI | - 1 | - | 1 | 23 | 2 | (657 | )3 | (634 | ) | |||||||||||
Net other comprehensive income (loss) | (780) | (12 | ) | 276 | (127 | ) | (643 | ) | ||||||||||||
Amounts reclassified to retained earnings | - | (658 | )4 | - | - | (658 | ) | |||||||||||||
Balance as of June 30, 2018 | $ | (2,834) | $ | (10 | ) | $ | 1,678 | $ | 6,882 | $ | 5,716 | |||||||||
| Foreign Currency Translation Adjustment | Net Unrealized Gains (Losses) onAvailable- for-Sale Securities | Net Unrealized Gains (Losses) on Cash Flow Hedges | Defined Benefit Postretirement Plans | Accumulated Other Comprehensive Income | ||||||||||||||||
Balance as of December 31, 2016 | $ | (1,995 | ) | $ | 541 | $ | 744 | $ | 5,671 | $ | 4,961 | |||||||||
Other comprehensive income (loss) before reclassifications | 343 | 83 | (504 | ) | 969 | 891 | ||||||||||||||
Amounts reclassified from accumulated OCI | - | 1 | (7 | )1 | 19 | 2 | (475 | )3 | (463 | ) | ||||||||||
Net other comprehensive income (loss) | 343 | 76 | (485 | ) | 494 | 428 | ||||||||||||||
Balance as of June 30, 2017 | $ | (1,652 | ) | $ | 617 | $ | 259 | $ | 6,165 | $ | 5,389 | |||||||||
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11
| Foreign Currency Translation Adjustment |
| Net Unrealized Gains (Losses) on Available-for-Sale Securities |
| Net Unrealized Gains (Losses) on Cash Flow Hedges |
| Defined Benefit Postretirement Plans |
| Accumulated Other Comprehensive Income | ||||||
Balance as of December 31, 2017 | $ | (2,054) |
| $ | 660 |
| $ | 1,402 |
| $ | 7,009 |
| $ | 7,017 | |
Other comprehensive income (loss) before reclassifications |
| (787) |
|
| (22) |
|
| 257 |
|
| 530 |
|
| (22) | |
Amounts reclassified from accumulated OCI |
| - | 1 |
| - | 1 |
| 35 | 2 |
| (989) | 3 |
| (954) | |
Net other comprehensive income (loss) |
| (787) |
|
| (22) |
|
| 292 |
|
| (459) |
|
| (976) | |
Amounts reclassified to retained earnings |
| - |
|
| (658) | 4 |
| - |
|
| - |
|
| (658) | |
Balance as of September 30, 2018 | $ | (2,841) |
| $ | (20) |
| $ | 1,694 |
| $ | 6,550 |
| $ | 5,383 | |
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|
| Foreign Currency Translation Adjustment |
| Net Unrealized Gains (Losses) on Available-for-Sale Securities |
| Net Unrealized Gains (Losses) on Cash Flow Hedges |
| Defined Benefit Postretirement Plans |
| Accumulated Other Comprehensive Income | ||||||
Balance as of December 31, 2016 | $ | (1,995) |
| $ | 541 |
| $ | 744 |
| $ | 5,671 |
| $ | 4,961 | |
Other comprehensive income (loss) before reclassifications |
| 484 |
|
| 128 |
|
| (174) |
|
| 969 |
|
| 1,407 | |
Amounts reclassified from accumulated OCI |
| - | 1 |
| (86) | 1 |
| 29 | 2 |
| (731) | 3 |
| (788) | |
Net other comprehensive income (loss) |
| 484 |
|
| 42 |
|
| (145) |
|
| 238 |
|
| 619 | |
Balance as of September 30, 2017 | $ | (1,511) |
| $ | 583 |
| $ | 599 |
| $ | 5,909 |
| $ | 5,580 | |
1 | (Gains) losses are included in Other income (expense) - net in the consolidated statements of income. | ||||||||||||||
2 | (Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7). | ||||||||||||||
3 | The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the | ||||||||||||||
| consolidated statements of income (see Note 6). | ||||||||||||||
4 | With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings | ||||||||||||||
| (see Note 1). | ||||||||||||||
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. We have fivefour reportable segments: (1) Consumer Mobility,Communications, (2) Business Solutions,WarnerMedia, (3) Entertainment Group,Latin America, and (4) International, and (5) WarnerMedia.Xandr.
12
Dollars in millions except per share amounts
We also evaluate segment and business unit performance based on EBITDA and/or EBITDA margin, which is defined as 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 to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
To most effectively implement
Due to organizational changes and our strategiesJune 14, 2018 acquisition of Time Warner, effective for 2018, effective January 1,the quarter ended September 30, 2018, we retrospectively realigned certainrevised our operating segments to align with the new management structure and organizational responsibilities, and operations withinhave accordingly recast our reportable segments. The most significant of these changes is to report individual wireless accounts with employer discounts in our Consumer Mobility segment instead of our Business Solutions segment. disclosures for all periods presented. As a result of these realignments, $19,686the realignment to combine all domestic wireless products and services into the Mobility business unit, which is now one of our reporting units, $27,568 of goodwill from theour former Business Solutions segment and $16,540 from our former Consumer Mobility segment was reallocated to the Consumer Mobility segment. Our reported segment results include the impact for the adoption of recent accounting standards, which affects the comparability between 2018 and 2017 (see Note 5).business unit.
With our acquisition of WarnerMedia,Time Warner, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset (see Note 8). For consolidated reporting, all amortization ofpre-acquisition released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we will continue to report the historichistorical content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historichistorical content production cost amortization reported in the segment results was $189$1,491 for the16-day period quarter ended JuneSeptember 30, 2018, $98$772 of which was forpre-acquisition released programming. For the 108-day period included in our nine months ended September 30, 2018, historical content production cost amortization reported in the segment results was $1,677, $870 of which was for pre-acquisition released programming.
TheConsumer MobilityCommunications segment provides wireless and wireline telecom, video and broadband services to consumers located in the U.S. or in U.S. territories and businesses globally. This segment contains the following business units:
·Mobilityprovides nationwide wireless service and equipment.
·Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to consumers, wholesaleresidential customers. This segment also sells advertising on DIRECTV and resale wireless subscribers located in the United States or in U.S. territories. We provideU-verse distribution platforms.
·Business Wireline provides advanced IP-based services, as well as traditional voice and data services including high-speed internet over wireless devices.
TheBusiness Solutionssegment provides services to business customers, including multinational companiescustomers.
The WarnerMedia segment develops, produces and governmentaldistributes feature films, television, gaming and wholesale customers. We provide advancedother content in various physical and digital formats globally. Historical financial results from AT&T’s Regional Sports Networks (RSN) and equity investments (predominantly Game Show Network and Otter Media Holdings), previously included in Entertainment Group, have been reclassified into the WarnerMedia segment and are combined with the Time Warner operations for the period subsequent to our acquisition on June 14, 2018. This segment contains the following business units:
IP-based· Turner is comprised of the historic Turner division as well the financial results of our RSN. This business unit creates and programs branded news, entertainment, sports and kids multi-platform content that is sold to various distribution affiliates. Turner also sells advertising on its networks and digital properties.
·Home Box Office consists of premium pay television and OTT services including Virtual Private Networks (VPN); Ethernet-related products; FlexWare, a service that relies on Software Defined Networkingdomestically and Network Function Virtualization to provide application-based routing,premium pay, basic tier television and broadband, collectively referred to as strategic services;OTT services internationally, as well as traditional datacontent licensing and voice products. We provide a complete communications solution to ourhome entertainment.
·Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.
The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business customers.units:
TheEntertainment Group segment·Vrio provides video internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories.
TheInternational segment provides entertainment servicesusing satellite technology in Latin America and the Caribbean.
·Mexico provides wireless servicesservice and equipment to customers 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 (operations in countries with highly inflationary economies consider the U.S. dollar as the functional currency).
TheWarnerMediasegment provides global media and entertainment services through television networks and film, using its brands to create, package and deliver high-quality content worldwide. The segment consists of Turner, HBO and Warner Bros. businesses.
1213
JUNE
Dollars in millions except per share amounts
The Xandr segmentprovides advertising services. These services utilize data insights to develop higher value targeted advertising. Certain revenues in this segment are also reported by the Communications segment and are eliminated upon consolidation.
Corporate and Other items reconcile our segment results to consolidated operating income and income before income taxes, and include:
·Corporate, which consists of: (1) businesses no longer integral to our operations or which we no longer actively market, (2) corporate support functions, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense) – net and (5) the recharacterization of programming intangible asset amortization, for programming acquired in the acquisition, which we continue to report with WarnerMedia segment operating expense, to consolidated amortization expense.
·Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, including amortization of intangible assets.
·Certain significant items includes (1) employee separation charges associated with voluntary and/or strategic offers, (2) losses resulting from abandonment or impairment of assets and (3) other items for which the segments are not being evaluated.
·Eliminations and consolidations, which (1) removes transactions involving dealings between our segments, including content licensing between WarnerMedia and Communications, and (2) includes adjustments for our reporting of the advertising business.
Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.
Our domestic business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our shared asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.
1314
AT&T INC.
JUNESEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
| For the three months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | Operations | EBITDA | Depreciation | Operating | Equity in Net Affiliates | Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | $ | 14,869 | $ | 8,085 | $ | 6,784 | $ | 1,806 | $ | 4,978 | $ | - | $ | 4,978 | ||||||||||||||||||||||||||||||||||||||||||
Business Solutions | 9,063 | 5,616 | 3,447 | 1,487 | 1,960 | 1 | 1,961 | |||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment Group | 11,650 | 8,852 | 2,798 | 1,346 | 1,452 | (20 | ) | 1,432 | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 1,951 | 1,803 | 148 | 313 | (165 | ) | 15 | (150 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
WarnerMedia | 1,275 | 794 | 481 | 30 | 451 | (6 | ) | 445 | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment Total | 38,808 | 25,150 | 13,658 | 4,982 | 8,676 | $ | (10 | ) | $ | 8,666 | ||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 319 | 660 | (341 | ) | 118 | (459 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition-related items | - | 321 | (321 | ) | 1,278 | (1,599 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Certain significant items | - | 152 | (152 | ) | - | (152 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Eliminations | (141 | ) | (141 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
AT&T Inc. | $ | 38,986 | $ | 26,142 | $ | 12,844 | $ | 6,378 | $ | 6,466 | ||||||||||||||||||||||||||||||||||||||||||||||
| For the six months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | Operations | EBITDA | Depreciation | Operating | Equity in Net Affiliates | Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | $ | 29,855 | $ | 16,609 | $ | 13,246 | $ | 3,613 | $ | 9,633 | $ | - | $ | 9,633 | ||||||||||||||||||||||||||||||||||||||||||
Business Solutions | 18,179 | 11,210 | 6,969 | 2,945 | 4,024 | - | 4,024 | |||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment Group | 23,227 | 17,791 | 5,436 | 2,658 | 2,778 | (11 | ) | 2,767 | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 3,976 | 3,607 | 369 | 645 | (276 | ) | 15 | (261 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
WarnerMedia | 1,275 | 794 | 481 | 30 | 451 | (6 | ) | 445 | ||||||||||||||||||||||||||||||||||||||||||||||||
Segment Total | 76,512 | 50,011 | 26,501 | 9,891 | 16,610 | $ | (2 | ) | $ | 16,608 | ||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 653 | 1,395 | (742 | ) | 141 | (883 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition-related items | - | 388 | (388 | ) | 2,340 | (2,728 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Certain significant items | - | 332 | (332 | ) | - | (332 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Eliminations | (141 | ) | (141 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
AT&T Inc. | $ | 77,024 | $ | 51,985 | $ | 25,039 | $ | 12,372 | $ | 12,667 | ||||||||||||||||||||||||||||||||||||||||||||||
For the three months ended September 30, 2018 | ||||||||||||||||||||
|
| Revenues |
|
| Operations and Support Expenses |
|
| EBITDA |
|
| Depreciation and Amortization |
|
| Operating Income (Loss) |
|
| Equity in Net Income (Loss) of Affiliates |
|
| Segment Contribution |
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility | $ | 17,938 |
| $ | 10,255 |
| $ | 7,683 |
| $ | 2,079 |
| $ | 5,604 |
| $ | (1) |
| $ | 5,603 |
Entertainment Group |
| 11,589 |
|
| 9,155 |
|
| 2,434 |
|
| 1,331 |
|
| 1,103 |
|
| 1 |
|
| 1,104 |
Business Wireline |
| 6,703 |
|
| 4,030 |
|
| 2,673 |
|
| 1,197 |
|
| 1,476 |
|
| (1) |
|
| 1,475 |
Total Communications |
| 36,230 |
|
| 23,440 |
|
| 12,790 |
|
| 4,607 |
|
| 8,183 |
|
| (1) |
|
| 8,182 |
WarnerMedia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turner |
| 2,988 |
|
| 1,487 |
|
| 1,501 |
|
| 59 |
|
| 1,442 |
|
| 7 |
|
| 1,449 |
Home Box Office |
| 1,644 |
|
| 991 |
|
| 653 |
|
| 25 |
|
| 628 |
|
| 2 |
|
| 630 |
Warner Bros. |
| 3,720 |
|
| 3,104 |
|
| 616 |
|
| 40 |
|
| 576 |
|
| (23) |
|
| 553 |
Other |
| (148) |
|
| (79) |
|
| (69) |
|
| 10 |
|
| (79) |
|
| (25) |
|
| (104) |
Total WarnerMedia |
| 8,204 |
|
| 5,503 |
|
| 2,701 |
|
| 134 |
|
| 2,567 |
|
| (39) |
|
| 2,528 |
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio |
| 1,102 |
|
| 877 |
|
| 225 |
|
| 168 |
|
| 57 |
|
| 9 |
|
| 66 |
Mexico |
| 731 |
|
| 869 |
|
| (138) |
|
| 129 |
|
| (267) |
|
| - |
|
| (267) |
Total Latin America |
| 1,833 |
|
| 1,746 |
|
| 87 |
|
| 297 |
|
| (210) |
|
| 9 |
|
| (201) |
Xandr |
| 445 |
|
| 109 |
|
| 336 |
|
| 3 |
|
| 333 |
|
| - |
|
| 333 |
Segment Total | $ | 46,712 |
| $ | 30,798 |
| $ | 15,914 |
| $ | 5,041 |
| $ | 10,873 |
| $ | (31) |
| $ | 10,842 |
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
| 308 |
|
| (18) |
|
| 326 |
|
| 797 |
|
| (471) |
|
|
|
|
|
|
Acquisition-related items |
| - |
|
| 362 |
|
| (362) |
|
| 2,329 |
|
| (2,691) |
|
|
|
|
|
|
Certain significant items |
| - |
|
| 75 |
|
| (75) |
|
| - |
|
| (75) |
|
|
|
|
|
|
Eliminations and consolidations |
| (1,281) |
|
| (913) |
|
| (368) |
|
| (1) |
|
| (367) |
|
|
|
|
|
|
AT&T Inc. | $ | 45,739 |
| $ | 30,304 |
| $ | 15,435 |
| $ | 8,166 |
| $ | 7,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2018 | ||||||||||||||||||||
|
| Revenues |
|
| Operations and Support Expenses |
|
| EBITDA |
|
| Depreciation and Amortization |
|
| Operating Income (Loss) |
|
| Equity in Net Income (Loss) of Affiliates |
|
| Segment Contribution |
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility | $ | 52,575 |
| $ | 30,020 |
| $ | 22,555 |
| $ | 6,287 |
| $ | 16,268 |
| $ | (1) |
| $ | 16,267 |
Entertainment Group |
| 34,498 |
|
| 26,623 |
|
| 7,875 |
|
| 3,986 |
|
| 3,889 |
|
| (1) |
|
| 3,888 |
Business Wireline |
| 20,100 |
|
| 12,084 |
|
| 8,016 |
|
| 3,547 |
|
| 4,469 |
|
| (1) |
|
| 4,468 |
Total Communications |
| 107,173 |
|
| 68,727 |
|
| 38,446 |
|
| 13,820 |
|
| 24,626 |
|
| (3) |
|
| 24,623 |
WarnerMedia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turner |
| 3,767 |
|
| 1,933 |
|
| 1,834 |
|
| 71 |
|
| 1,763 |
|
| 39 |
|
| 1,802 |
Home Box Office |
| 1,925 |
|
| 1,162 |
|
| 763 |
|
| 30 |
|
| 733 |
|
| 1 |
|
| 734 |
Warner Bros. |
| 4,227 |
|
| 3,507 |
|
| 720 |
|
| 54 |
|
| 666 |
|
| (24) |
|
| 642 |
Other |
| (210) |
|
| (106) |
|
| (104) |
|
| 11 |
|
| (115) |
|
| (71) |
|
| (186) |
Total WarnerMedia |
| 9,709 |
|
| 6,496 |
|
| 3,213 |
|
| 166 |
|
| 3,047 |
|
| (55) |
|
| 2,992 |
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio |
| 3,710 |
|
| 2,894 |
|
| 816 |
|
| 559 |
|
| 257 |
|
| 24 |
|
| 281 |
Mexico |
| 2,099 |
|
| 2,459 |
|
| (360) |
|
| 383 |
|
| (743) |
|
| - |
|
| (743) |
Total Latin America |
| 5,809 |
|
| 5,353 |
|
| 456 |
|
| 942 |
|
| (486) |
|
| 24 |
|
| (462) |
Xandr |
| 1,174 |
|
| 218 |
|
| 956 |
|
| 4 |
|
| 952 |
|
| - |
|
| 952 |
Segment Total | $ | 123,865 |
| $ | 80,794 |
| $ | 43,071 |
| $ | 14,932 |
| $ | 28,139 |
| $ | (34) |
| $ | 28,105 |
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
| 961 |
|
| 1,378 |
|
| (417) |
|
| 938 |
|
| (1,355) |
|
|
|
|
|
|
Acquisition-related items |
| - |
|
| 750 |
|
| (750) |
|
| 4,669 |
|
| (5,419) |
|
|
|
|
|
|
Certain significant items |
| - |
|
| 407 |
|
| (407) |
|
| - |
|
| (407) |
|
|
|
|
|
|
Eliminations and consolidations |
| (2,063) |
|
| (1,040) |
|
| (1,023) |
|
| (1) |
|
| (1,022) |
|
|
|
|
|
|
AT&T Inc. | $ | 122,763 |
| $ | 82,289 |
| $ | 40,474 |
| $ | 20,538 |
| $ | 19,936 |
|
|
|
|
|
|
1415
AT&T INC.
JUNESEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
| For the three months ended June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) Affiliates | Segment Contribution | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | $ | 15,091 | $ | 8,636 | $ | 6,455 | $ | 1,716 | $ | 4,739 | $ | - | $ | 4,739 | ||||||||||||||||||||||||||||||||||||||||||
Business Solutions | 9,667 | 6,053 | 3,614 | 1,483 | 2,131 | - | 2,131 | |||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment Group | 12,661 | 9,561 | 3,100 | 1,458 | 1,642 | (12 | ) | 1,630 | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 2,026 | 1,772 | 254 | 311 | (57 | ) | 25 | (32 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Segment Total | 39,445 | 26,022 | 13,423 | 4,968 | 8,455 | $ | 13 | $ | 8,468 | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 392 | 766 | (374 | ) | 9 | (383 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition-related items | - | 281 | (281 | ) | 1,170 | (1,451 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Certain significant items | - | 95 | (95 | ) | - | (95 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
AT&T Inc. | $ | 39,837 | $ | 27,164 | $ | 12,673 | $ | 6,147 | $ | 6,526 | ||||||||||||||||||||||||||||||||||||||||||||||
| For the six months ended June 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) of Affiliates | Segment Contribution | ||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | $ | 29,897 | $ | 17,196 | $ | 12,701 | $ | 3,432 | $ | 9,269 | $ | - | $ | 9,269 | ||||||||||||||||||||||||||||||||||||||||||
Business Solutions | 19,288 | 12,051 | 7,237 | 2,943 | 4,294 | - | 4,294 | |||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment Group | 25,262 | 19,166 | 6,096 | 2,878 | 3,218 | (18 | ) | 3,200 | ||||||||||||||||||||||||||||||||||||||||||||||||
International | 3,955 | 3,531 | 424 | 601 | (177 | ) | 45 | (132 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Segment Total | 78,402 | 51,944 | 26,458 | 9,854 | 16,604 | $ | 27 | $ | 16,631 | |||||||||||||||||||||||||||||||||||||||||||||||
Corporate and Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 800 | 1,637 | (837 | ) | 48 | (885 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition-related items | - | 488 | (488 | ) | 2,372 | (2,860 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Certain significant items | - | (23 | ) | 23 | - | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||
AT&T Inc. | $ | 79,202 | $ | 54,046 | $ | 25,156 | $ | 12,274 | $ | 12,882 | ||||||||||||||||||||||||||||||||||||||||||||||
For the three months ended September 30, 2017 | ||||||||||||||||||||
|
| Revenues |
|
| Operations and Support Expenses |
|
| EBITDA |
|
| Depreciation and Amortization |
|
| Operating Income (Loss) |
|
| Equity in Net Income (Loss) of Affiliates |
|
| Segment Contribution |
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility | $ | 17,370 |
| $ | 10,029 |
| $ | 7,341 |
| $ | 2,008 |
| $ | 5,333 |
| $ | - |
| $ | 5,333 |
Entertainment Group |
| 12,467 |
|
| 9,804 |
|
| 2,663 |
|
| 1,379 |
|
| 1,284 |
|
| (1) |
|
| 1,283 |
Business Wireline |
| 7,278 |
|
| 4,635 |
|
| 2,643 |
|
| 1,189 |
|
| 1,454 |
|
| 1 |
|
| 1,455 |
Total Communications |
| 37,115 |
|
| 24,468 |
|
| 12,647 |
|
| 4,576 |
|
| 8,071 |
|
| - |
|
| 8,071 |
WarnerMedia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turner |
| 107 |
|
| 97 |
|
| 10 |
|
| 1 |
|
| 9 |
|
| 13 |
|
| 22 |
Home Box Office |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Warner Bros. |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Other |
| - |
|
| 1 |
|
| (1) |
|
| - |
|
| (1) |
|
| (19) |
|
| (20) |
Total WarnerMedia |
| 107 |
|
| 98 |
|
| 9 |
|
| 1 |
|
| 8 |
|
| (6) |
|
| 2 |
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio |
| 1,363 |
|
| 1,075 |
|
| 288 |
|
| 206 |
|
| 82 |
|
| 17 |
|
| 99 |
Mexico |
| 736 |
|
| 862 |
|
| (126) |
|
| 98 |
|
| (224) |
|
| - |
|
| (224) |
Total Latin America |
| 2,099 |
|
| 1,937 |
|
| 162 |
|
| 304 |
|
| (142) |
|
| 17 |
|
| (125) |
Xandr |
| 333 |
|
| 39 |
|
| 294 |
|
| - |
|
| 294 |
|
| - |
|
| 294 |
Segment Total | $ | 39,654 |
| $ | 26,542 |
| $ | 13,112 |
| $ | 4,881 |
| $ | 8,231 |
| $ | 11 |
| $ | 8,242 |
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
| 382 |
|
| 801 |
|
| (419) |
|
| 24 |
|
| (443) |
|
|
|
|
|
|
Acquisition-related items |
| - |
|
| 134 |
|
| (134) |
|
| 1,136 |
|
| (1,270) |
|
|
|
|
|
|
Certain significant items |
| (89) |
|
| 325 |
|
| (414) |
|
| 1 |
|
| (415) |
|
|
|
|
|
|
Eliminations and consolidations |
| (279) |
|
| 17 |
|
| (296) |
|
| - |
|
| (296) |
|
|
|
|
|
|
AT&T Inc. | $ | 39,668 |
| $ | 27,819 |
| $ | 11,849 |
| $ | 6,042 |
| $ | 5,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2017 | ||||||||||||||||||||
|
| Revenues |
|
| Operations and Support Expenses |
|
| EBITDA |
|
| Depreciation and Amortization |
|
| Operating Income (Loss) |
|
| Equity in Net Income (Loss) of Affiliates |
|
| Segment Contribution |
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility | $ | 51,922 |
| $ | 30,005 |
| $ | 21,917 |
| $ | 5,988 |
| $ | 15,929 |
| $ | - |
| $ | 15,929 |
Entertainment Group |
| 37,435 |
|
| 28,711 |
|
| 8,724 |
|
| 4,254 |
|
| 4,470 |
|
| - |
|
| 4,470 |
Business Wireline |
| 21,911 |
|
| 13,906 |
|
| 8,005 |
|
| 3,583 |
|
| 4,422 |
|
| - |
|
| 4,422 |
Total Communications |
| 111,268 |
|
| 72,622 |
|
| 38,646 |
|
| 13,825 |
|
| 24,821 |
|
| - |
|
| 24,821 |
WarnerMedia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turner |
| 323 |
|
| 273 |
|
| 50 |
|
| 3 |
|
| 47 |
|
| 32 |
|
| 79 |
Home Box Office |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Warner Bros. |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Other |
| - |
|
| 3 |
|
| (3) |
|
| - |
|
| (3) |
|
| (55) |
|
| (58) |
Total WarnerMedia |
| 323 |
|
| 276 |
|
| 47 |
|
| 3 |
|
| 44 |
|
| (23) |
|
| 21 |
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio |
| 4,065 |
|
| 3,123 |
|
| 942 |
|
| 642 |
|
| 300 |
|
| 62 |
|
| 362 |
Mexico |
| 1,989 |
|
| 2,345 |
|
| (356) |
|
| 263 |
|
| (619) |
|
| - |
|
| (619) |
Total Latin America |
| 6,054 |
|
| 5,468 |
|
| 586 |
|
| 905 |
|
| (319) |
|
| 62 |
|
| (257) |
Xandr |
| 992 |
|
| 118 |
|
| 874 |
|
| 1 |
|
| 873 |
|
| - |
|
| 873 |
Segment Total | $ | 118,637 |
| $ | 78,484 |
| $ | 40,153 |
| $ | 14,734 |
| $ | 25,419 |
| $ | 39 |
| $ | 25,458 |
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
| 1,182 |
|
| 2,440 |
|
| (1,258) |
|
| 73 |
|
| (1,331) |
|
|
|
|
|
|
Acquisition-related items |
| - |
|
| 622 |
|
| (622) |
|
| 3,508 |
|
| (4,130) |
|
|
|
|
|
|
Certain significant items |
| (89) |
|
| 302 |
|
| (391) |
|
| 1 |
|
| (392) |
|
|
|
|
|
|
Eliminations and consolidations |
| (860) |
|
| 17 |
|
| (877) |
|
| - |
|
| (877) |
|
|
|
|
|
|
AT&T Inc. | $ | 118,870 |
| $ | 81,865 |
| $ | 37,005 |
| $ | 18,316 |
| $ | 18,689 |
|
|
|
|
|
|
1516
JUNE
Dollars in millions except per share amounts
The following table is a reconciliation of Segment ContributionContributions to “Income Before Income Taxes” reported on our consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Third Quarter |
|
| Nine-month period | ||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
Communications | $ | 8,182 |
| $ | 8,071 |
| $ | 24,623 |
| $ | 24,821 |
WarnerMedia |
| 2,528 |
|
| 2 |
|
| 2,992 |
|
| 21 |
Latin America |
| (201) |
|
| (125) |
|
| (462) |
|
| (257) |
Xandr |
| 333 |
|
| 294 |
|
| 952 |
|
| 873 |
Segment Contribution |
| 10,842 |
|
| 8,242 |
|
| 28,105 |
|
| 25,458 |
Reconciling Items: |
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other |
| (471) |
|
| (443) |
|
| (1,355) |
|
| (1,331) |
Merger and integration items |
| (362) |
|
| (134) |
|
| (750) |
|
| (622) |
Amortization of intangibles acquired |
| (2,329) |
|
| (1,136) |
|
| (4,669) |
|
| (3,508) |
Employee separation charges |
| (75) |
|
| (208) |
|
| (259) |
|
| (268) |
Gain on wireless spectrum transactions |
| - |
|
| - |
|
| - |
|
| 181 |
Natural disaster items |
| - |
|
| (207) |
|
| (104) |
|
| (207) |
Foreign currency devaluation |
| - |
|
| - |
|
| (44) |
|
| (98) |
Segment equity in net income of affiliates |
| 31 |
|
| (11) |
|
| 34 |
|
| (39) |
Eliminations and consolidations |
| (367) |
|
| (296) |
|
| (1,022) |
|
| (877) |
AT&T Operating Income |
| 7,269 |
|
| 5,807 |
|
| 19,936 |
|
| 18,689 |
Interest Expense |
| (2,051) |
|
| (1,686) |
|
| (5,845) |
|
| (4,374) |
Equity in net income (loss) of affiliates |
| (64) |
|
| 11 |
|
| (71) |
|
| (148) |
Other income (expense) - Net |
| 1,053 |
|
| 842 |
|
| 5,108 |
|
| 2,255 |
Income Before Income Taxes | $ | 6,207 |
| $ | 4,974 |
| $ | 19,128 |
| $ | 16,422 |
The following tables present intersegment revenues, assets, investments in equity affiliates and capital expenditures by segment.
| Three months ended | Six months ended | |||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Consumer Mobility | $ | 4,978 | $ | 4,739 | $ | 9,633 | $ | 9,269 | ||||||||||||||||||||
Business Solutions | 1,961 | 2,131 | 4,024 | 4,294 | ||||||||||||||||||||||||
Entertainment Group | 1,432 | 1,630 | 2,767 | 3,200 | ||||||||||||||||||||||||
International | (150 | ) | (32 | ) | (261 | ) | (132 | ) | ||||||||||||||||||||
WarnerMedia | 445 | - | 445 | - | ||||||||||||||||||||||||
Segment Contribution | 8,666 | 8,468 | 16,608 | 16,631 | ||||||||||||||||||||||||
Reconciling Items: | ||||||||||||||||||||||||||||
Corporate and Other | (459 | ) | (383 | ) | (883 | ) | (885 | ) | ||||||||||||||||||||
Merger and integration items | (321 | ) | (281 | ) | (388 | ) | (488 | ) | ||||||||||||||||||||
Amortization of intangibles acquired | (1,278 | ) | (1,170 | ) | (2,340 | ) | (2,372 | ) | ||||||||||||||||||||
Employee separation charges | (133 | ) | (60 | ) | (184 | ) | (60 | ) | ||||||||||||||||||||
Gain on wireless spectrum transactions | - | 63 | - | 181 | ||||||||||||||||||||||||
Natural disaster items | - | - | (104 | ) | - | |||||||||||||||||||||||
Foreign currency devaluation | (19 | ) | (98 | ) | (44 | ) | (98 | ) | ||||||||||||||||||||
Segment equity in net income of affiliates | 10 | (13 | ) | 2 | (27 | ) | ||||||||||||||||||||||
AT&T Operating Income | 6,466 | 6,526 | 12,667 | 12,882 | ||||||||||||||||||||||||
Interest Expense | 2,023 | 1,395 | 3,794 | 2,688 | ||||||||||||||||||||||||
Equity in net income (loss) of affiliates | (16 | ) | 14 | (7 | ) | (159 | ) | |||||||||||||||||||||
Other income (expense) - Net | 2,353 | 925 | 4,055 | 1,413 | ||||||||||||||||||||||||
Income Before Income Taxes | $ | 6,780 | $ | 6,070 | $ | 12,921 | $ | 11,448 | ||||||||||||||||||||
Intersegment Reconciliation |
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
| Nine-Month Period | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
|
Communications | $ | 6 |
| $ | - |
| $ | 8 |
| $ | - |
WarnerMedia |
| 844 |
|
| 33 |
|
| 1,053 |
|
| 99 |
Latin America |
| - |
|
| - |
|
| - |
|
| - |
Xandr |
| - |
|
| - |
|
| - |
|
| - |
Total Intersegment Revenues |
| 850 |
|
| 33 |
|
| 1,061 |
|
| 99 |
Consolidations |
| 431 |
|
| 246 |
|
| 1,002 |
|
| 761 |
Eliminations and consolidations | $ | 1,281 |
| $ | 279 |
| $ | 2,063 |
| $ | 860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investment in Equity Method Investees | Capital Expenditures |
|
|
| |||
|
|
|
|
|
|
| |||||
At September 30, 2018 | Assets |
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
Communications | $ | 487,833 |
| $ | 1 |
| $ | 16,024 |
|
|
|
WarnerMedia |
| 132,689 |
|
| 5,395 |
|
| 298 |
|
|
|
Latin America |
| 18,420 |
|
| 713 |
|
| 524 |
|
|
|
Xandr |
| 2,647 |
|
| - |
|
| 66 |
|
|
|
Corporate and eliminations |
| (106,719) |
|
| 19 |
|
| 187 |
|
|
|
Total | $ | 534,870 |
| $ | 6,128 |
| $ | 17,099 |
|
|
|
17
Dollars in millions except per share amounts
As of January 1, 2018, we adopted FASB ASU2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606).ASC 606. With our adoption of ASC 606, we made a policy election to record certain regulatory fees, primarily Universal Service Fund (USF) fees, on a net basis. See the Notes to the Consolidated Financial Statements of our 2017 Annual Report on Form10-K for additional information regarding our policies prior to adoption of ASC 606.
When implementing ASC 606, we utilized the practical expedient allowing us to reflect the aggregate effect of all contract modifications occurring before the beginning of the earliest period presented when allocating the transaction price to performance obligations.
Service
Wireless, Advanced Data, Legacy Voice & Data Services and Equipment RevenuesRevenue
Our products and services are offered to customers inWe offer service-only contracts and in contracts that bundle equipment used to access the services and/or with other service offerings. Some contracts have fixed terms and others are cancellable on a short-term basis (i.e., month-to-month arrangements).
Examples of service revenues include wireless, video entertainment (e.g., AT&T U-verse and DIRECTV), strategic services (e.g., virtual private network service), and legacy voice and data (e.g., traditional local and long-distance). These services represent a series of distinct services that is considered a separate performance obligation. Service revenue is recognized when services are provided, based upon either usage (e.g., minutes of traffic/bytes of data processed) or period of time (e.g., monthly service fees). We
Some of our services require customer premises equipment that, when combined and integrated with AT&T’s specific network infrastructure, facilitate the delivery of service to the customer. In evaluating whether the equipment is a separate performance obligation, we consider the customer’s ability to benefit from the equipment on its own or together with other readily available resources and if so, whether the service and equipment are separately identifiable (i.e., is the service highly dependent on, or highly interrelated with the equipment). When the equipment does not meet the criteria to be a distinct performance obligation (e.g., equipment associated with certain video services), we allocate the total transaction price to the related service. When equipment is a distinct performance obligation, we record the sale of equipment when title has passed and the products are accepted by the customer. Some contracts have fixed terms and others are cancellable on a short-term basis (i.e.,month-to-month arrangements).
Revenues from transactions between us and our customers are recorded net of regulatory fees and taxes. Cash incentives given to customers are recorded as a reduction of revenue. Nonrefundable, upfront service activation and setup fees associated with service arrangements are deferred and recognized over the associated service contract period or customer life. We record the sale of equipment and services to customers as gross revenue when we are the principal in the arrangement and net of the associated costs incurred when we act as an agent in the arrangement.
16
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Our contracts allow for customers to frequently modify their arrangement, without incurring penalties in many cases. When a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be treated as a new contract or if it should be considered a change of the existing contract. We generally do not have significant impacts from contract modifications.
Service-Only Contracts and Standalone Equipment Sales
Revenue is recognized as service is provided or when control has transferred. For devices sold through indirect channels (e.g., national dealers), revenue is recognized when the dealer accepts the device, not upon activation.
Arrangements with Multiple Performance Obligations
Our equipment and service revenues are predominantly recognized on a gross basis, as most of our services do not involve a third party and we typically control the equipment that is sold to our customers.
Revenue recognized from fixed term contracts that bundle services and/or equipment are allocated based on the standalone selling price of all required performance obligations of the contract (i.e., each item included in the bundle). Promotional discounts are attributed to each required component of the arrangement, resulting in recognition over the contract term. Standalone selling prices are determined by assessing prices paid for service-only contracts (e.g., arrangements where customers bring their own devices) and standalone device pricing.
We offer the majority of our customers the option to purchase certain wireless devices in installments over a specified period of time, and, in many cases, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. For customers that elect these equipment installment payment programs, at the point of sale, we recognize revenue for the entire amount of revenue allocated to the customer receivable net of fair value of thetrade-in right guarantee. The difference between the revenue recognized and the consideration received is recorded as a note receivable when the devices are not discounted and our right to consideration is unconditional. When installment sales include promotional discounts (e.g., “buy one get one free”), the difference between revenue recognized and consideration received is recorded as a contract asset to be amortized over the contract term.
Less commonly, we offer certain customers highly discounted devices when they enter into a minimum service agreement term. For these contracts, we recognize equipment revenue at the point of sale based on a standalone selling price allocation. The difference between the revenue recognized and the cash received is recorded as a contract asset that will amortize over the contract term.
For
Our contracts that requireallow for customers to frequently modify their arrangement, without incurring penalties in many cases. When a contract is modified, we evaluate the usechange in scope or price of certain equipment in orderthe contract to receive service (e.g., AT&TU-verse® and DIRECTV linear video services), we allocate the total transaction price to servicedetermine if the equipment doesmodification should be treated as a new contract or if it should be considered a change of the existing contract. We generally do not meet the criteria to be a distinct performance obligation.
Media Revenues
Media revenues are primarily derivedhave significant impacts from content production and distribution (i.e., content revenue), providing programming to distributors that have contracted to receive and distribute this programming to their subscribers (i.e., subscription revenue) and the sale of advertising on our networks and digital properties and the digital properties we manage and/or operate for others (i.e., advertising revenue).contract modifications.
17Revenues from transactions between us and our customers are recorded net of revenue-based regulatory fees and taxes. Cash incentives given to customers are recorded as a reduction of revenue. Nonrefundable, upfront service activation and setup fees associated with service arrangements are deferred and recognized over the associated service contract period or customer life.
18
JUNE
Dollars in millions except per share amounts
Subscription Revenue
Subscription revenues from cable networks and premium pay and basic tier television services are recognized over the license period as programming is provided to affiliates or digital distributors based on negotiated contractual programming rates. When a distribution contract with an affiliate has expired and a new distribution contract has not been executed, revenues are based on estimated rates, giving consideration to factors including the previous contractual rates, inflation, current payments by the affiliate and the status of the negotiations on a new contract. When the new distribution contract terms are finalized, an adjustment to revenue is recorded, if necessary, to reflect the new terms.
Subscription revenues from end-user subscribers are recognized when services are provided, based upon either usage or period of time. Subscription revenues from OTT services are recognized as programming services are provided to customers.
Content Revenue
Feature films typically are produced or acquired for initial exhibition in theaters, followed by distribution, generally commencing within three years of such initial exhibition. Revenues from film rentals by theaters are recognized as the films are exhibited.
Television programs and series are initially produced for broadcast and may be subsequently licensed or sold in physical format and/or electronic delivery. Revenues from the distribution of television programming through broadcast networks, cable networks, first-run syndication and OTT services are recognized when the programs or series are available to the licensee. In certain circumstances, pursuant to the terms of the applicable contractual arrangements, the availability dates granted to customers may precede the date in which the customer can be billed for these sales.
Revenues from sales of feature films and television programming in physical format are recognized at the later of the delivery date or the date when made widely available for sale or rental by retailers based on gross sales less a provision for estimated returns, rebates and pricing allowances. Revenues from the licensing of television programs and series for electronic sell-through or video-on-demand are recognized when the product has been purchased by and made available to the consumer to either download or stream. Revenues from the distribution of television programming through OTT services are recognized when the television programs or series are available to the licensee.
Upfront or guaranteed payments for the licensing of intellectual property are recognized as revenue at either the inception of the license term if the intellectual property has significant standalone functionality or over the corresponding license term if the licensee’s ability to derive utility is dependent on our continued support of the intellectual property throughout the license term.
Revenues from the sales of console games are recognized at the later of the delivery date or the date that the product is made widely available for sale or rental by retailers based on gross sales less a provision for estimated returns, rebates and pricing allowances.
Advertising Revenue
Advertising revenues are recognized, net of agency commissions, in the period that the advertisements are aired. If there is a targeted audience guarantee, revenues are recognized for the actual audience delivery and revenues are deferred for any shortfall until the guaranteed audience delivery is met, typically by providing additional advertisements. Advertising revenues from digital properties are recognized as impressions are delivered or the services are performed.
19
AT&T INC.
SEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Disaggregation of Revenue
The following tables set forth disaggregated reported revenue by category:
Revenue Categories | ||||||||||||||||||||||||||
The following tables set forth reported revenue by category: | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2018 | ||||||||||||||||||||||||||
| Service Revenues |
|
|
|
|
|
| |||||||||||||||||||
|
| Wireless |
|
| Advanced Data |
|
| Legacy Voice & Data |
|
| Subscription |
|
| Content |
|
| Advertising |
|
| Other |
|
| Equipment |
|
| Total |
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility | $ | 13,912 |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | 77 |
| $ | - |
| $ | 3,949 |
| $ | 17,938 |
Entertainment Group |
| - |
|
| 2,045 |
|
| 740 |
|
| 7,882 |
|
| - |
|
| 401 |
|
| 518 |
|
| 3 |
|
| 11,589 |
Business Wireline |
| - |
|
| 3,059 |
|
| 2,615 |
|
| - |
|
| - |
|
| - |
|
| 830 |
|
| 199 |
|
| 6,703 |
WarnerMedia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turner |
| - |
|
| - |
|
| - |
|
| 1,855 |
|
| 125 |
|
| 944 |
|
| 64 |
|
| - |
|
| 2,988 |
Home Box Office |
| - |
|
| - |
|
| - |
|
| 1,517 |
|
| 125 |
|
| - |
|
| 2 |
|
| - |
|
| 1,644 |
Warner Bros. |
| - |
|
| - |
|
| - |
|
| 20 |
|
| 3,494 |
|
| 20 |
|
| 186 |
|
| - |
|
| 3,720 |
Eliminations and Other |
| - |
|
| - |
|
| - |
|
| 27 |
|
| (199) |
|
| 19 |
|
| 5 |
|
| - |
|
| (148) |
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio |
| - |
|
| - |
|
| - |
|
| 1,102 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 1,102 |
Mexico |
| 440 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 291 |
|
| 731 |
Xandr |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 445 |
|
| - |
|
| - |
|
| 445 |
Corporate and Other |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 308 |
|
| - |
|
| 308 |
Eliminations and consolidations |
| - |
|
| - |
|
| - |
|
| - |
|
| (829) |
|
| (401) |
|
| (51) |
|
| - |
|
| (1,281) |
Total Operating Revenues | $ | 14,352 |
| $ | 5,104 |
| $ | 3,355 |
| $ | 12,403 |
| $ | 2,716 |
| $ | 1,505 |
| $ | 1,862 |
| $ | 4,442 |
| $ | 45,739 |
| For the three months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | Business Solutions | Entertainment Group | International | WarnerMedia | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Wireless service | $ | 11,853 | $ | 1,829 | $ | - | $ | 417 | $ | - | $ | - | $ | 14,099 | ||||||||||||||||||||||||||||||||||||||||||
Video entertainment | - | - | 8,331 | 1,254 | - | - | 9,585 | |||||||||||||||||||||||||||||||||||||||||||||||||
Strategic services | - | 3,039 | - | - | - | - | 3,039 | |||||||||||||||||||||||||||||||||||||||||||||||||
High-speed internet | - | - | 1,981 | - | - | - | 1,981 | |||||||||||||||||||||||||||||||||||||||||||||||||
Legacy voice and data | - | 2,723 | 785 | - | - | - | 3,508 | |||||||||||||||||||||||||||||||||||||||||||||||||
Content | - | - | - | - | 487 | - | 487 | |||||||||||||||||||||||||||||||||||||||||||||||||
Subscription | - | - | - | - | 591 | - | 591 | |||||||||||||||||||||||||||||||||||||||||||||||||
Advertising | - | - | - | - | 208 | - | 208 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other media revenues | - | - | - | - | 51 | (1 | ) | 50 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other service | - | 691 | 550 | - | - | 320 | 1,561 | |||||||||||||||||||||||||||||||||||||||||||||||||
Wireless equipment | 3,016 | 584 | - | 280 | - | - | 3,880 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other equipment | - | 197 | 3 | - | - | - | 200 | |||||||||||||||||||||||||||||||||||||||||||||||||
Eliminations | - | - | - | - | (62 | ) | (141 | ) | (203 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Total Operating Revenues | $ | 14,869 | $ | 9,063 | $ | 11,650 | $ | 1,951 | $ | 1,275 | $ | 178 | $ | 38,986 | ||||||||||||||||||||||||||||||||||||||||||
For the nine months ended September 30, 2018 | ||||||||||||||||||||||||||
| Service Revenues |
|
|
|
|
|
| |||||||||||||||||||
|
| Wireless |
|
| Advanced Data |
|
| Legacy Voice & Data |
|
| Subscription |
|
| Content |
|
| Advertising |
|
| Other |
|
| Equipment |
|
| Total |
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility | $ | 40,912 |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | 162 |
| $ | - |
| $ | 11,501 |
| $ | 52,575 |
Entertainment Group |
| - |
|
| 5,904 |
|
| 2,317 |
|
| 23,559 |
|
| - |
|
| 1,122 |
|
| 1,588 |
|
| 8 |
|
| 34,498 |
Business Wireline |
| - |
|
| 9,168 |
|
| 8,176 |
|
| - |
|
| - |
|
| - |
|
| 2,189 |
|
| 567 |
|
| 20,100 |
WarnerMedia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turner |
| - |
|
| - |
|
| - |
|
| 2,363 |
|
| 146 |
|
| 1,181 |
|
| 77 |
|
| - |
|
| 3,767 |
Home Box Office |
| - |
|
| - |
|
| - |
|
| 1,787 |
|
| 136 |
|
| - |
|
| 2 |
|
| - |
|
| 1,925 |
Warner Bros. |
| - |
|
| - |
|
| - |
|
| 27 |
|
| 3,949 |
|
| 28 |
|
| 223 |
|
| - |
|
| 4,227 |
Eliminations and Other |
| - |
|
| - |
|
| - |
|
| 27 |
|
| (255) |
|
| 13 |
|
| 5 |
|
| - |
|
| (210) |
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio |
| - |
|
| - |
|
| - |
|
| 3,710 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 3,710 |
Mexico |
| 1,261 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 838 |
|
| 2,099 |
Xandr |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 1,174 |
|
| - |
|
| - |
|
| 1,174 |
Corporate and Other |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 961 |
|
| - |
|
| 961 |
Eliminations and consolidations |
| - |
|
| - |
|
| - |
|
| - |
|
| (1,039) |
|
| (1,122) |
|
| 98 |
|
| - |
|
| (2,063) |
Total Operating Revenues | $ | 42,173 |
| $ | 15,072 |
| $ | 10,493 |
| $ | 31,473 |
| $ | 2,937 |
| $ | 2,558 |
| $ | 5,143 |
| $ | 12,914 |
| $ | 122,763 |
1820
AT&T INC.
JUNESEPTEMBER 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
| For the six months ended June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer Mobility | Business Solutions | Entertainment Group | International | WarnerMedia | Corporate and Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Wireless service | $ | 23,465 | $ | 3,620 | $ | - | $ | 821 | $ | - | $ | - | $ | 27,906 | ||||||||||||||||||||||||||||||||||||||||||
Video entertainment | - | - | 16,690 | 2,608 | - | - | 19,298 | |||||||||||||||||||||||||||||||||||||||||||||||||
Strategic services | - | 6,109 | - | - | - | - | 6,109 | |||||||||||||||||||||||||||||||||||||||||||||||||
High-speed internet | - | - | 3,859 | - | - | - | 3,859 | |||||||||||||||||||||||||||||||||||||||||||||||||
Legacy voice and data | - | 5,561 | 1,604 | - | - | - | 7,165 | |||||||||||||||||||||||||||||||||||||||||||||||||
Content | - | - | - | - | 487 | - | 487 | |||||||||||||||||||||||||||||||||||||||||||||||||
Subscription | - | - | - | - | 591 | - | 591 | |||||||||||||||||||||||||||||||||||||||||||||||||
Advertising | - | - | - | - | 208 | - | 208 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other media revenues | - | - | - | - | 51 | (1 | ) | 50 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other service | - | 1,360 | 1,069 | - | - | 653 | 3,082 | |||||||||||||||||||||||||||||||||||||||||||||||||
Wireless equipment | 6,390 | 1,162 | - | 547 | - | - | 8,099 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other equipment | - | 367 | 5 | - | - | 1 | 373 | |||||||||||||||||||||||||||||||||||||||||||||||||
Eliminations | - | - | - | - | (62 | ) | (141 | ) | (203 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Total Operating Revenues | $ | 29,855 | $ | 18,179 | $ | 23,227 | $ | 3,976 | $ | 1,275 | $ | 512 | $ | 77,024 | ||||||||||||||||||||||||||||||||||||||||||
19
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from two to five years. Costs to fulfill customer contracts are deferred and amortized over periods ranging generally from four to five years, reflecting the estimated economic lives of the respective customer relationships, subject to an assessment of the recoverability of such costs. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.
Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $2,764$3,409 and $11,017$11,304 as of JuneSeptember 30, 2018, respectively, of which $1,250$1,572 and $3,715$3,905 were included in Other current assets on our consolidated balance sheets. For the sixnine months ended JuneSeptember 30, 2018, we amortized $595$959 and $1,889$2,983 of these costs, respectively.
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration (i.e., we must perform additional services or satisfy another performance obligation in order to bill and receive consideration). The contract asset will decrease as services are provided and billed. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Reductions in the contract liability will be recorded as we satisfy the performance obligations.
The following table presents contract assets and liabilities and revenue recorded at or for the period ended JuneSeptember 30, 2018:
| ||||
| ||||
| ||||
|
|
| September 30, |
|
|
| 2018 |
|
|
|
|
Contract asset |
| $ | 1,923 |
Contract liability |
|
| 6,920 |
|
|
|
|
Beginning of period contract liability recorded as customer contract revenue during the period |
|
| 4,716 |
Our consolidated balance sheet at JuneSeptember 30, 2018 included approximately $1,257$1,244 for the current portion of our contract asset in “Other current assets” and $5,723$5,846 for the current portion of our contract liability in “Advanced billings and customer deposits.”
20
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Remaining Performance Obligations
Remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. In determining the transaction price allocated, we do not includenon-recurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year, which are primarily prepaid wireless, video and residential internet agreements.
Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of JuneSeptember 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $41,838,$40,474 of which we expect to recognize approximately 80% over70% by the end of next two years,year, with the balance recognized thereafter.
The aggregate amount of transaction price allocated to remaining performance obligations included $13,623 related to$12,661 from WarnerMedia operations which relatesrelated to the licensing of theatrical and television content that will be made available to customers at some point in the future. It excludes advertising and subscription arrangements that have an expected contract duration of one year or less.
21
Dollars in millions except per share amounts
Prior to 2018, revenue recognized from contracts that bundle services and equipment was limited to the lesser of the amount allocated based on the relative selling price of the equipment and service already delivered or the consideration received from the customer for the equipment and service already delivered. Our prior accounting also separately recognized regulatory fees as operating revenue when received and as an expense when incurred. Sales commissions were previously expensed as incurred.
21
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
| For the three months ended June 30, 2018 | As Reported | Historical Accounting Method | ||||||
Consolidated Statements of Income: | ||||||||
Service Revenues | $ | 33,773 | $ | 35,163 | ||||
Equipment Revenues | 4,080 | 3,611 | ||||||
Media Revenues | 1,133 | 1,135 | ||||||
Total Operating Revenues | 38,986 | 39,909 | ||||||
Other cost of revenue | 7,632 | 8,535 | ||||||
Selling, general and administrative expenses | 8,684 | 9,267 | ||||||
Total Operating Expenses | 32,520 | 34,006 | ||||||
Operating income | 6,466 | 5,903 | ||||||
Income before income taxes | 6,780 | 6,217 | ||||||
Income tax expense | 1,532 | 1,394 | ||||||
Net income | 5,248 | 4,823 | ||||||
Net income attributable to AT&T | 5,132 | 4,713 | ||||||
Basic Earnings per Share Attributable to AT&T | $ | 0.81 | $ | 0.74 | ||||
Diluted Earnings per Share Attributable to AT&T | $ | 0.81 | $ | 0.74 | ||||
For the six months ended June 30, 2018 | ||||||||
Consolidated Statements of Income: | ||||||||
Service Revenues | $ | 67,419 | $ | 70,232 | ||||
Equipment Revenues | 8,472 | 7,472 | ||||||
Media Revenues | 1,133 | 1,135 | ||||||
Total Operating Revenues | 77,024 | 78,839 | ||||||
Other cost of revenue | 15,564 | 17,396 | ||||||
Selling, general and administrative expenses | 16,581 | 17,764 | ||||||
Total Operating Expenses | 64,357 | 67,372 | ||||||
Operating income | 12,667 | 11,467 | ||||||
Income before income taxes | 12,921 | 11,721 | ||||||
Income tax expense | 2,914 | 2,620 | ||||||
Net income | 10,007 | 9,101 | ||||||
Net income attributable to AT&T | 9,794 | 8,900 | ||||||
Basic Earnings per Share Attributable to AT&T | $ | 1.56 | $ | 1.42 | ||||
Diluted Earnings per Share Attributable to AT&T | $ | 1.56 | $ | 1.42 | ||||
At June 30, 2018 | ||||||||
Consolidated Balance Sheets: | ||||||||
Other current assets | 14,305 | 11,961 | ||||||
Other Assets | 23,941 | 21,983 | ||||||
Accounts payable and accrued liabilities | 35,488 | 35,667 | ||||||
Advanced billings and customer deposits | 5,914 | 5,978 | ||||||
Deferred income taxes | 59,665 | 58,585 | ||||||
Other noncurrent liabilities | 25,017 | 24,832 | ||||||
Retained earnings | 56,555 | 53,313 | ||||||
Accumulated other comprehensive income | 5,716 | 5,723 | ||||||
Noncontrolling interest | 1,150 | 1,103 | ||||||
For the three months ended September 30, 2018 |
| As Reported |
|
| Historical Accounting Method |
Consolidated Statements of Income: |
|
|
|
|
|
Service Revenues | $ | 41,297 |
| $ | 42,681 |
Equipment Revenues |
| 4,442 |
|
| 3,926 |
Total Operating Revenues |
| 45,739 |
|
| 46,607 |
Other cost of revenues |
| 8,651 |
|
| 9,568 |
Selling, general and administrative expenses |
| 9,598 |
|
| 10,145 |
Total Operating Expenses |
| 38,470 |
|
| 39,934 |
Operating income |
| 7,269 |
|
| 6,673 |
Income before income taxes |
| 6,207 |
|
| 5,611 |
Income tax expense |
| 1,391 |
|
| 1,245 |
Net income |
| 4,816 |
|
| 4,366 |
Net income attributable to AT&T | $ | 4,718 |
| $ | 4,273 |
|
|
|
|
|
|
Basic Earnings per Share Attributable to AT&T | $ | 0.65 |
| $ | 0.59 |
Diluted Earnings per Share Attributable to AT&T | $ | 0.65 |
| $ | 0.59 |
|
|
|
|
|
|
For the nine months ended September 30, 2018 |
|
|
|
|
|
Consolidated Statements of Income: |
|
|
|
|
|
Service Revenues | $ | 109,849 |
| $ | 114,048 |
Equipment Revenues |
| 12,914 |
|
| 11,398 |
Total Operating Revenues |
| 122,763 |
|
| 125,446 |
Other cost of revenues |
| 24,215 |
|
| 26,964 |
Selling, general and administrative expenses |
| 26,179 |
|
| 27,909 |
Total Operating Expenses |
| 102,827 |
|
| 107,306 |
Operating income |
| 19,936 |
|
| 18,140 |
Income before income taxes |
| 19,128 |
|
| 17,332 |
Income tax expense |
| 4,305 |
|
| 3,865 |
Net income |
| 14,823 |
|
| 13,467 |
Net income attributable to AT&T | $ | 14,512 |
| $ | 13,173 |
|
|
|
|
|
|
Basic Earnings per Share Attributable to AT&T | $ | 2.19 |
| $ | 1.99 |
Diluted Earnings per Share Attributable to AT&T | $ | 2.19 |
| $ | 1.99 |
|
|
|
|
|
|
At September 30, 2018 |
|
|
|
|
|
Consolidated Balance Sheets: |
|
|
|
|
|
Other current assets | $ | 16,278 |
| $ | 13,750 |
Other Assets |
| 25,490 |
|
| 23,050 |
Accounts payable and accrued liabilities |
| 39,375 |
|
| 39,554 |
Advanced billings and customer deposits |
| 6,045 |
|
| 6,109 |
Deferred income taxes |
| 60,495 |
|
| 59,264 |
Other noncurrent liabilities |
| 26,490 |
|
| 26,252 |
Retained earnings |
| 57,624 |
|
| 53,929 |
Accumulated other comprehensive income |
| 5,383 |
|
| 5,385 |
Noncontrolling interest | $ | 1,123 |
| $ | 1,071 |
22
JUNE
Dollars in millions except per share amounts
NOTE 6. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,829$8,803 at JuneSeptember 30, 2018. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and accounted for as contributions. We distributed $280$420 to the trust during the sixnine months ended JuneSeptember 30, 2018. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan’s separate financial statements. However, becauseOn October 15, 2018, we made an additional voluntary contribution of $80 to 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.qualified pension plan.
We recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. During the first quarter of 2018, a substantive plan change involving the frequency of future health reimbursement account credit increases was communicated to our retirees. During the second quarter of 2018, a written plan change involving the ability of certain participants of the pension plan to receive their benefit in alump-sum amount upon retirement was communicated to our employees. These plan changes triggered a remeasurement of our postretirement and pension benefit obligations, resulting in an actuarial gain of $930 in the first quarter and $1,796 in the second quarter of 2018. These plan changes also resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by $752, and increasing our liability by $50 in the first and second quarters of 2018, respectively. Such credits amortize through earnings over a period approximating the average service period to full eligibility. These plan changes also triggered a remeasurement of our postretirement and pension benefit obligations, resulting in an actuarial gain of $930 in the first quarter and $1,796 in the second quarter of 2018. As a result of the plan changes and remeasurements, our postretirement and pension benefit obligations decreased $1,682 and postretirement benefit obligation decreased $1,746, and $1,682, respectively.
23
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table details pension and postretirement benefit costs included in the accompanying consolidated statements of income. The service cost component of net periodic pension cost (benefit) is recorded in operating expenses in the consolidated statements of income while the remaining components are recorded in other income (expense) – net. Service costs are eligible for capitalization as part of internal construction projects, providing a small reduction in the net expense recorded.
23
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
Pension cost: | ||||||||||||||||
Service cost – benefits earned during the period | $ | 284 | $ | 282 | $ | 575 | $ | 564 | ||||||||
Interest cost on projected benefit obligation | 504 | 484 | 991 | 968 | ||||||||||||
Expected return on assets | (755) | (784) | (1,515) | (1,567) | ||||||||||||
Amortization of prior service credit | (29) | (31) | (59) | (62) | ||||||||||||
Actuarial (gain) loss | (1,796) | - | (1,796) | - | ||||||||||||
Net pension (credit) cost | $ | (1,792) | $ | (49) | $ | (1,804) | $ | (97) | ||||||||
Postretirement cost: | ||||||||||||||||
Service cost – benefits earned during the period | $ | 26 | $ | 34 | $ | 55 | $ | 75 | ||||||||
Interest cost on accumulated postretirement benefit obligation | 195 | 202 | 386 | 424 | ||||||||||||
Expected return on assets | (75) | (79) | (152) | (159) | ||||||||||||
Amortization of prior service credit | (413) | (366) | (810) | (702) | ||||||||||||
Actuarial (gain) loss | - | (259) | (930) | (259) | ||||||||||||
Net postretirement (credit) cost | $ | (267) | $ | (468) | $ | (1,451) | $ | (621) | ||||||||
Combined net pension and postretirement (credit) cost | $ | (2,059) | $ | (517) | $ | (3,255) | $ | (718) | ||||||||
Dollars in millions except per share amounts
| Three months ended |
| Nine months ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Pension cost: |
|
|
|
|
|
|
|
|
|
|
|
Service cost – benefits earned during the period | $ | 270 |
| $ | 282 |
| $ | 845 |
| $ | 846 |
Interest cost on projected benefit obligation |
| 551 |
|
| 484 |
|
| 1,542 |
|
| 1,452 |
Expected return on assets |
| (761) |
|
| (783) |
|
| (2,276) |
|
| (2,350) |
Amortization of prior service credit |
| (28) |
|
| (31) |
|
| (87) |
|
| (93) |
Actuarial (gain) loss |
| - |
|
| - |
|
| (1,796) |
|
| - |
Net pension (credit) cost | $ | 32 |
| $ | (48) |
| $ | (1,772) |
| $ | (145) |
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement cost: |
|
|
|
|
|
|
|
|
|
|
|
Service cost – benefits earned during the period | $ | 27 |
| $ | 32 |
| $ | 82 |
| $ | 107 |
Interest cost on accumulated postretirement benefit obligation |
| 196 |
|
| 193 |
|
| 582 |
|
| 617 |
Expected return on assets |
| (76) |
|
| (81) |
|
| (228) |
|
| (240) |
Amortization of prior service credit |
| (412) |
|
| (382) |
|
| (1,222) |
|
| (1,084) |
Actuarial (gain) loss |
| - |
|
| - |
|
| (930) |
|
| (259) |
Net postretirement (credit) cost | $ | (265) |
| $ | (238) |
| $ | (1,716) |
| $ | (859) |
|
|
|
|
|
|
|
|
|
|
|
|
Combined net pension and postretirement (credit) cost | $ | (233) |
| $ | (286) |
| $ | (3,488) |
| $ | (1,004) |
As part of our first- and second-quarter 2018 remeasurements, we modified the weighted-average discount rate used to measure our benefit obligations increasing the rate to 4.10% for the postretirement obligation and to 4.30% for the pension obligation. The discount rate in effect for determining service and interest costs after remeasurement is 4.30% and 3.70%, respectively, for postretirement and 4.40% and 4.00% for pension. As a result of our plan changes and remeasurements, the total estimated prior service credits that will be amortized from accumulated OCI into net periodic benefit cost over the second half of 2018 is $882 ($665 net of tax) for postretirement benefits.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the secondthird quarter ended 2018 and 2017, net supplemental pension benefits costs not included in the table above were $21$24 and $23. $22. For the first sixnine months of 2018 and 2017, net supplemental pension benefit costs were $42$65 and $45.$67.
24
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2017.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:
| September 30, 2018 |
| December 31, 2017 | |||||||||||||||||||||||||
| June 30, 2018 | December 31, 2017 |
| Carrying |
| Fair |
| Carrying |
| Fair | |||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value |
| Amount |
| Value |
| Amount |
| Value | |||||||||||||||||
Notes and debentures1 | $ | 180,209 | $ | 182,732 | $ | 162,526 | $ | 171,938 | Notes and debentures1 | $ | 177,718 |
| $ | 180,887 |
| $ | 162,526 |
| $ | 171,938 | ||||||||
Commercial paper | 8,139 | 8,139 | - | - | Commercial paper |
| 3,787 |
|
| 3,787 |
|
| - |
|
| - | ||||||||||||
Bank borrowings | 15 | 15 | 2 | 2 | Bank borrowings |
| 3 |
|
| 3 |
|
| 2 |
|
| 2 | ||||||||||||
Investment securities2 | 3,511 | 3,511 | 2,447 | 2,447 | Investment securities2 |
| 3,646 |
|
| 3,646 |
|
| 2,447 |
|
| 2,447 | ||||||||||||
1 | Includes credit agreement borrowings. | |||||||||||||||||||||||||||
2 | Excludes investments accounted for under the equity method. | |||||||||||||||||||||||||||
1Includes credit agreement borrowings.
2 Excludes investments accounted for under the equity method.
The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
25
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Following is the fair value leveling for investment securities that are measured at fair value and derivatives as of JuneSeptember 30, 2018 and December 31, 2017. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.
| June 30, 2018 |
| September 30, 2018 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||||||||||||||
Equity Securities | Equity Securities |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Domestic equities | $ | 1,252 | $ | - | $ | - | $ | 1,252 | Domestic equities | $ | 1,279 |
| $ | - |
| $ | - |
| $ | 1,279 | ||||||||
International equities | 304 | - | - | 304 | International equities |
| 291 |
| - |
| - |
| 291 | |||||||||||||||
Fixed income equities | 149 | - | - | 149 | Fixed income equities |
| 149 |
| - |
| - |
| 149 | |||||||||||||||
Available-for-Sale Debt Securities | - | 890 | - | 890 | Available-for-Sale Debt Securities |
| - |
| 881 |
| - |
| 881 | |||||||||||||||
Asset Derivatives | Asset Derivatives |
|
|
|
|
|
|
|
| |||||||||||||||||||
Cross-currency swaps | - | 1,216 | - | 1,216 | Cross-currency swaps |
| - |
| 1,330 |
| - |
| 1,330 | |||||||||||||||
Foreign exchange contracts | - | 55 | - | 55 | Foreign exchange contracts |
| - |
| 52 |
| - |
| 52 | |||||||||||||||
Liability Derivatives | Liability Derivatives |
|
|
|
|
|
|
|
| |||||||||||||||||||
Interest rate swaps | - | (89) | - | (89) | Interest rate swaps |
| - |
| (90) |
| - |
| (90) | |||||||||||||||
Cross-currency swaps | - | (1,506) | - | (1,506) | Cross-currency swaps |
| - |
| (1,614) |
| - |
| (1,614) | |||||||||||||||
Foreign exchange contracts | Foreign exchange contracts |
| - |
| (3) |
| - |
| (3) | |||||||||||||||||||
| December 31, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Equity Securities | ||||||||||||||||
Domestic equities | $ | 1,142 | $ | - | $ | - | $ | 1,142 | ||||||||
International equities | 321 | - | - | 321 | ||||||||||||
Fixed income equities | - | 152 | - | 152 | ||||||||||||
Available-for-Sale Debt Securities | - | 581 | - | 581 | ||||||||||||
Asset Derivatives | ||||||||||||||||
Interest rate swaps | - | 17 | - | 17 | ||||||||||||
Cross-currency swaps | - | 1,753 | - | 1,753 | ||||||||||||
Liability Derivatives | ||||||||||||||||
Interest rate swaps | - | (31) | - | (31) | ||||||||||||
Cross-currency swaps | - | (1,290) | - | (1,290) | ||||||||||||
25
Dollars in millions except per share amounts
|
| December 31, 2017 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Equity Securities |
|
|
|
|
|
|
|
|
|
|
| |
Domestic equities | $ | 1,142 |
| $ | - |
| $ | - |
| $ | 1,142 | |
International equities |
| 321 |
|
| - |
|
| - |
|
| 321 | |
Fixed income equities |
| - |
|
| 152 |
|
| - |
|
| 152 | |
Available-for-Sale Debt Securities |
| - |
|
| 581 |
|
| - |
|
| 581 | |
Asset Derivatives |
|
|
|
|
|
|
|
|
|
|
| |
Interest rate swaps |
| - |
|
| 17 |
|
| - |
|
| 17 | |
Cross-currency swaps |
| - |
|
| 1,753 |
|
| - |
|
| 1,753 | |
Liability Derivatives |
|
|
|
|
|
|
|
|
|
|
| |
Interest rate swaps |
| - |
|
| (31) |
|
| - |
|
| (31) | |
Cross-currency swaps |
| - |
|
| (1,290) |
|
| - |
|
| (1,290) | |
Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities are estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Upon the adoption of ASU2016-01, we reclassified $658 of such unrealized gains and losses on equity securities to retained earnings and beginning in 2018, gains and losses, both realized and unrealized, on equity securities measured at fair value are included in “Other income (expense) – net” in the consolidated statements of income using the specific identification method.
26
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The components comprising total gains and losses on equity securities are as follows:
| Three months ended | Six months ended | Three months ended |
| Nine months ended | |||||||||||||||||||||||
| June 30, | June 30, | September 30, |
| September 30, | |||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 |
| 2017 |
| 2018 |
| 2017 | |||||||||||||||||
Total gains (losses) recognized on equity securities | $ | 21 | $ | 14 | $ | 8 | $ | 103 | $ | 80 |
| $ | 113 |
| $ | 88 |
| $ | 216 | ||||||||
Gains (Losses) recognized on equity securities sold | (3 | ) | - | 49 | 11 |
| 1 |
|
| 126 |
|
| 50 |
|
| 137 | |||||||||||
Unrealized gains (losses) recognized on equity securities held at end of period | 24 | 14 | (41 | ) | 92 |
| 79 |
|
| (13) |
|
| 38 |
|
| 79 | |||||||||||
Debt securities of $34$44 have maturities of less than one year, $136$146 within one to three years, $117$94 within three to five years and $603$597 for five or more years.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in “Other current assets” and our investment securities are recorded in “Other Assets” on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.
26
Dollars in millions except per share amounts
Fair Value HedgingWe designate ourfixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount.
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 sixnine months ended JuneSeptember 30, 2018 and June 30, 2017, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.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.
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 income (expense) – 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 sixnine months ended JuneSeptember 30, 2018 and June 30, 2017, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
27
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $60$61 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. In the six months ended June 30, 2018 and June 30, 2017, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At JuneSeptember 30, 2018, we had posted collateral of $580$468 (a deposit asset) and held collateral of $687$1,056 (a receipt liability). Under the agreements, if AT&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in June,September, we would have been required to post additional collateral of $138.$150. If DIRECTV Holdings LLC’s credit rating had been downgraded belowBBB- (S&P), we would have been required to post additional collateral of $199.$200. At December 31, 2017, we had posted collateral of $495 (a deposit asset) and held collateral of $968 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.
27
Dollars in millions except per share amounts
Following are the notional amounts of our outstanding derivative positions:
September 30, |
| December 31, | |||||||||||
| June 30, 2018 | December 31, 2017 | 2018 |
| 2017 | |||||||||
Interest rate swaps | $ | 7,333 | $ | 9,833 | $ | 7,333 |
| $ | 9,833 | ||||
Cross-currency swaps | 36,092 | 38,694 |
| 42,192 |
|
| 38,694 | ||||||
Foreign exchange contracts | 2,399 | - |
| 2,386 |
|
| - | ||||||
Total | $ | 45,824 | $ | 48,527 | $ | 51,911 |
| $ | 48,527 | ||||
Following are the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income | Effect of Derivatives on the Consolidated Statements of Income |
| Effect of Derivatives on the Consolidated Statements of Income |
|
|
|
|
|
| ||||||||||||||||||
| Three months ended | Six months ended | Three months ended |
| Nine months ended | |||||||||||||||||||||||
| June 30, | June 30, | September 30, |
| September 30, | |||||||||||||||||||||||
| Fair Value Hedging Relationships | 2018 | 2017 | 2018 | 2017 | 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||||||||||
Interest rate swaps (Interest expense): |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Gain (Loss) on interest rate swaps | $ | (9) | $ | (23) | $ | (62) | $ | (48) | $ | 2 |
| $ | (3) |
| $ | (60) |
| $ | (51) | ||||||||
Gain (Loss) on long-term debt | 9 | 23 | 62 | 48 |
| (2) |
|
| 3 |
|
| 60 |
|
| 51 | ||||||||||||
In addition, the net swap settlements that accrued and settled in the quarter ended JuneSeptember 30 were offset against interest expense.
28
| Three months ended |
| Nine months ended | ||||||||
| September 30, |
| September 30, | ||||||||
Cash Flow Hedging Relationships | 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Cross-currency swaps: |
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in accumulated OCI | $ | (13) |
| $ | 429 |
| $ | 308 |
| $ | (268) |
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in accumulated OCI |
| 17 |
|
| - |
|
| 17 |
|
| - |
Interest rate locks: |
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in accumulated OCI |
| - |
|
| 79 |
|
| - |
|
| - |
Interest income (expense) reclassified from accumulated OCI into income |
| (15) |
|
| (15) |
|
| (44) |
|
| (44) |
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| Cash Flow Hedging Relationships | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Cross-currency swaps: | ||||||||||||||||
Gain (Loss) recognized in accumulated OCI | $ | (533) | $ | (717) | $ | 321 | $ | (697) | ||||||||
Interest rate locks: | ||||||||||||||||
Gain (Loss) recognized in accumulated OCI | - | (79) | - | (79) | ||||||||||||
Interest income (expense) reclassified from accumulated OCI into income | (14) | (14) | (29) | (29) | ||||||||||||
NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Acquisitions
Time WarnerOn June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. The deal combines Time Warner’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’sworld's largestpay-TV subscriber bases and scale in TV, mobile and broadband distribution. We expect that the transaction will advance ourdirect-to-consumer efforts and provide us with the ability to develop innovative new offerings.
Under the merger agreement, each share of Time Warner stock was exchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to trusts consolidated by AT&T, share-based payment arrangements and fractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to Time Warner shareholders, giving them an approximate 16% stake in the combined company. Based on our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,114.$79,358, excluding Time Warner’s net debt at acquisition. On July 12, 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we will continue to vigorously defend our legal position in the appellate court.
Our second-quarter28
Dollars in millions except per share amounts
The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content,in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. Our JuneAt September 30, 2018, our consolidated balance sheet includes the assets and liabilities of Time Warner, which have been measured at fair value.
The following table summarizes the preliminary estimated fair values of the Time Warner assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date:
Assets acquired |
|
|
|
Cash |
| $ | 1,655 |
Accounts receivable |
|
| 9,016 |
All other current assets |
|
| 3,150 |
Noncurrent inventory and theatrical film and television production costs |
|
| 5,719 |
Property, plant and equipment |
|
| 4,906 |
Intangible assets subject to amortization |
|
|
|
Distribution network |
|
| 17,470 |
Released television and film content |
|
| 10,929 |
Trademarks and trade names |
|
| 18,081 |
Other |
|
| 10,300 |
Investments and other assets |
|
| 9,428 |
Goodwill |
|
| 38,955 |
Total assets acquired |
|
| 129,609 |
|
|
|
|
Liabilities assumed |
|
|
|
Current liabilities, excluding current portion of long-term debt |
|
| 8,280 |
Debt maturing within one year |
|
| 4,471 |
Long-term debt |
|
| 18,394 |
Other noncurrent liabilities |
|
| 19,105 |
Total liabilities assumed |
|
| 50,250 |
Net assets acquired |
|
| 79,359 |
Noncontrolling interest |
|
| (1) |
Aggregate value of consideration paid |
| $ | 79,358 |
29
JUNE
Dollars in millions except per share amounts
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecordedpre-acquisition contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that suchunknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units any changes in goodwill should be recorded.
Excluded from the table above are commitments of approximately $35,000 for future purchases primarily related to network programming obligations, including contracts to license sports programming.
Due to
The following unaudited pro forma consolidated results of operations assume that the proximityacquisition of Time Warner was completed as of January 1, 2017:
|
|
| Nine months ended | |||
|
|
| September 30, | |||
|
|
| 2018 |
|
| 2017 |
Total operating revenues |
| $ | 135,658 |
| $ | 139,236 |
Net Income Attributable to AT&T |
|
| 16,254 |
|
| 11,576 |
|
|
|
|
|
|
|
Basic Earnings Per Share Attributable to AT&T |
| $ | 2.23 |
| $ | 1.59 |
Diluted Earnings Per Share Attributable to AT&T |
| $ | 2.22 |
| $ | 1.57 |
These unaudited pro forma consolidated results reflect the adoption of ASC 606 for the nine-month period ended September 30, 2018, which is not on a comparable basis with the period ended September 30, 2017 (see Note 5). Pro forma data may not be indicative of the closing of this acquisition toresults that would have been obtained had these events occurred at the endbeginning of the periods presented, nor is it intended to be a projection of future results.
Otter Media On August 7, 2018, we acquired the remaining interest in Otter Media for $157 in cash and the conversion to equity of the $1,480 advance made in the first quarter. At acquisition, we remeasured the fair value of the total business, which exceeded the book value of our equity method investment and resulted in a pre-tax gain of $395 in the third quarter of 2018. We began consolidating that business upon close and recorded those assets at fair value, including $1,174 of goodwill that is reported in the WarnerMedia segment.
AppNexus On August 15, 2018, we were not ablepurchased AppNexus for $1,432 and recorded $1,223 of goodwill that is reported in the Xandr segment. Our investment will allow us to provide the requisite combined pro forma financial information.create a marketplace for TV and digital video advertising.
Held-for-Sale
In June 2018, we entered into an agreement to sell 31 of our data centers to Brookfield Infrastructure Partners (Brookfield) for $1,100. We expect the transaction to close within the next six to eight months,by December 31, 2018, subject to customary closing conditions.
We appliedheld-for-sale treatment to the assets associated with the data centers to be sold, which primarily consist of net property, plant and equipment of approximately $279 and goodwill of $236. These assets are included in “Other current assets,” on our JuneSeptember 30, 2018 consolidated balance sheet.
30
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a specified period of time and, in many cases, once certain conditions are met, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. As of JuneSeptember 30, 2018 and December 31, 2017, gross equipment installment receivables of $5,853$5,736 and $6,079 were included on our consolidated balance sheets, of which $3,781$3,370 and $3,340 are notes receivable that are included in “Accounts receivable - net.”
30
Dollars in millions except per share amounts
In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, in the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. As of JuneSeptember 30, 2018, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $5,723.$6,267.
The following table sets forth a summary of equipment installment receivables sold during the three and sixnine months ended JuneSeptember 30, 2018 and 2017:
| Three months ended | Six months ended |
| Three months ended |
| Nine months ended | |||||||||||||||||||||||
| June 30, | June 30, |
| September 30, |
| September 30, | |||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | |||||||||||||||||
Gross receivables sold | $ | 1,906 | $ | 1,752 | $ | 4,916 | $ | 4,598 | Gross receivables sold | $ | 2,161 |
| $ | 1,619 |
| $ | 7,077 |
| $ | 6,217 | ||||||||
Net receivables sold1 | 1,811 | 1,599 | 4,606 | 4,220 | Net receivables sold1 |
| 2,064 |
| 1,478 |
|
| 6,670 |
| 5,698 | ||||||||||||||
Cash proceeds received | 1,532 | 1,415 | 3,927 | 2,847 | Cash proceeds received |
| 1,752 |
| 1,292 |
|
| 5,679 |
| 4,139 | ||||||||||||||
Deferred purchase price recorded | 307 | 293 | 826 | 1,482 | Deferred purchase price recorded |
| 335 |
| 285 |
|
| 1,161 |
| 1,767 | ||||||||||||||
Guarantee obligation recorded | 72 | 74 | 195 | 74 | Guarantee obligation recorded |
| 75 |
| 65 |
|
| 270 |
| 139 | ||||||||||||||
| ||||||||||||||||||||||||||||
1 | Receivables net of allowance, imputed interest and trade-in right guarantees. | |||||||||||||||||||||||||||
1 Receivables net of allowance, imputed interest andtrade-in right guarantees.
The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of devicetrade-ins. The estimated value of the devicetrade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).
31
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price and cash during the three months and sixnine months ended JuneSeptember 30, 2018 and 2017:
| Three months ended | Six months ended |
| Three months ended |
| Nine months ended | |||||||||||||||||||||||
| June 30, | June 30, |
| September 30, |
| September 30, | |||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | |||||||||||||||||
Fair value of repurchased receivables | $ | 1,481 | $ | 337 | $ | 1,481 | $ | 714 | Fair value of repurchased receivables | $ | - |
| $ | 567 |
| $ | 1,481 |
| $ | 1,281 | ||||||||
Carrying value of deferred purchase price | 1,393 | 301 | 1,393 | 640 | Carrying value of deferred purchase price |
| - |
| 507 |
|
| 1,393 |
| 1,147 | ||||||||||||||
Gain (loss) on repurchases1 | $ | 88 | $ | 36 | $ | 88 | $ | 74 | Gain (loss) on repurchases1 | $ | - |
| $ | 60 |
| $ | 88 |
| $ | 134 | ||||||||
| ||||||||||||||||||||||||||||
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 JuneSeptember 30, 2018 and December 31, 2017, our deferred purchase price receivable was $1,686$1,981 and $2,749, respectively, of which $813$1,114 and $1,781 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at JuneSeptember 30, 2018 and December 31, 2017 was $362$418 and $204, respectively, of which $111$230 and $55 are included in “Accounts payable and accrued liabilities” on our consolidated balance sheets, with the remainder in “Other noncurrent liabilities.” Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.
31
Dollars in millions except per share amounts
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to “Total Assets” reported on our consolidated balance sheets. We reflect cash receipts on owned equipment installment receivables as cash flows from operations in our consolidated statements of cash flows. With the retrospective adoption of ASU2016-15 in 2018 (see Note 1), cash receipts on the deferred purchase price are now classified as cash flows from investing activities instead of cash flows from operating activities for all periods presented.
The outstanding portfolio of installment receivables derecognized from our consolidated balance sheets, but which we continue to service, was $7,564$8,428 and $7,446 at JuneSeptember 30, 2018 and December 31, 2017.
32
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 10. INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS
Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value and include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. The amount of capitalized film and television production costs recognized as broadcast, programming and operations expenses for a given period is determined using the film forecast computation method.
The following table summarizes inventories and theatrical film and television production costs as of JuneSeptember 30, 2018:
| June 30, 2018 | ||||
Inventories: | ||||
Programming costs, less amortization1 | $ | 4,252 | ||
Other inventory, primarily DVD andBlu-ray Discs | 154 | |||
Total inventories | 4,406 | |||
Less: current portion of inventory | (2,313 | ) | ||
Total noncurrent inventories | 2,093 | |||
Theatrical film production costs:2 | ||||
Released, less amortization | 6 | |||
Completed and not released | 49 | |||
In production | 1,249 | |||
Development andpre-production | 171 | |||
Television production costs:2 | ||||
Released, less amortization | 168 | |||
Completed and not released | 534 | |||
In production | 1,556 | |||
Development andpre-production | 23 | |||
Total theatrical film and television production costs | 3,756 | |||
Total noncurrent inventories and theatrical film and television production costs | $ | 5,849 | ||
|
| September 30, | |
|
| 2018 | |
Inventories: |
|
| |
Programming costs, less amortization1 | $ | 4,224 | |
Other inventory, primarily DVD and Blu-ray Discs |
| 177 | |
Total inventories |
| 4,401 | |
Less: current portion of inventory |
| (2,310) | |
Total noncurrent inventories |
| 2,091 | |
|
|
|
|
Theatrical film production costs:2 |
|
| |
Released, less amortization |
| 178 | |
Completed and not released |
| 821 | |
In production |
| 736 | |
Development and pre-production |
| 158 | |
|
|
|
|
Television production costs:2 |
|
| |
Released, less amortization |
| 582 | |
Completed and not released |
| 868 | |
In production |
| 1,762 | |
Development and pre-production |
| 25 | |
Total theatrical film and television production costs |
| 5,130 | |
Total noncurrent inventories and theatrical film and television production costs | $ | 7,221 | |
1 | Includes the costs of certain programming rights, primarily sports, for which payments have been made prior to the related rights | ||
| being received. |
|
|
2 | Does not include $9,184 of acquired film and television library intangible assets as of September 30, 2018, which are included in | ||
| "Other Intangible Assets - Net" on our consolidated balance sheet. | ||
33
32
JUNE
Dollars in millions except per share amounts
NOTE 11. ADDITIONAL FINANCIAL INFORMATION
Cash and Cash FlowFlows
We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments. The following summarizes cash and cash equivalents and restricted cash balances contained on our consolidated balance sheets:
| June 30, | December 31, |
| September 30, |
| December 31, | |||||||||||||||||||||||||||
| Cash and Cash Equivalents and Restricted Cash | 2018 | 2017 | 2017 | 2016 |
|
| 2018 |
| 2017 |
|
| 2017 |
|
| 2016 | |||||||||||||||||
Cash and cash equivalents | $ | 13,523 | $ | 25,617 | $ | 50,498 | $ | 5,788 |
| $ | 8,657 |
| $ | 48,499 |
| $ | 50,498 |
| $ | 5,788 | ||||||||||||
Restricted cash in Other current assets | 12 | 6 | 6 | 7 |
|
| 56 |
|
| 6 |
|
| 6 |
|
| 7 | ||||||||||||||||
Restricted cash in Other Assets | 218 | 202 | 428 | 140 |
|
| 75 |
|
| 241 |
|
| 428 |
|
| 140 | ||||||||||||||||
Cash and cash equivalents and restricted cash | $ | 13,753 | $ | 25,825 | $ | 50,932 | $ | 5,935 |
| $ | 8,788 |
| $ | 48,746 |
| $ | 50,932 |
| $ | 5,935 | ||||||||||||
| Six months ended | ||||||||||||||||||||||||||||||||
| June 30, | ||||||||||||||||||||||||||||||||
| Consolidated Statements of Cash Flows | 2018 | 2017 | ||||||||||||||||||||||||||||||
Cash paid (received) during the period for: | ||||||||||||||||||||||||||||||||
Interest | $ | 4,045 | $ | 3,095 | ||||||||||||||||||||||||||||
Income taxes, net of refunds | (757 | ) | 1,470 | |||||||||||||||||||||||||||||
|
| Nine months ended | ||||
|
| September 30, | ||||
Consolidated Statements of Cash Flows |
|
| 2018 |
|
| 2017 |
Cash paid (received) during the period for: |
|
|
|
|
|
|
Interest |
| $ | 6,943 |
| $ | 5,031 |
Income taxes, net of refunds |
|
| (537) |
|
| 1,861 |
As of JuneSeptember 30, 2018, our total long-term debt obligations totaled $190,167.$183,418. During the first sixnine months we completed the following debt activity:
|
|
|
|
|
|
3433
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
OVERVIEW
RESULTS OF OPERATIONS
AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (“Notes”)(Notes). We completed the acquisition of Time Warner Inc. (referred to as “Time Warner” or “WarnerMedia”)Time Warner) on June 14, 2018, and have included WarnerMediaits results for the16-day period ended June 30, 2018.after that date. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from WarnerMediaTime Warner prior to the acquisition are excluded.
Consolidated ResultsIn the first quarter of 2018, we adopted new revenue accounting rules that significantly affect the comparability of our consolidated
We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our segment operating results (see Note 5). As a supplement to our discussion of operating results, comparable financial results presented under the historical method of accountingin Note 4 and discussed below for each segment follow our internal management reporting. Percentage increases and decreases that are available in “Supplemental Results Under Historical Accounting Method.” Our financial resultsnot considered meaningful are denoted with a dash.
| Third Quarter |
|
| Nine-Month Period |
| ||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
|
| Percent |
|
| 2018 |
| 2017 | Change |
|
| 2018 |
| 2017 | Change |
| ||||
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications | $ | 36,230 |
| $ | 37,115 | (2.4) | % |
| $ | 107,173 |
| $ | 111,268 | (3.7) | % |
WarnerMedia |
| 8,204 |
|
| 107 | - |
|
|
| 9,709 |
|
| 323 | - |
|
Latin America |
| 1,833 |
|
| 2,099 | (12.7) |
|
|
| 5,809 |
|
| 6,054 | (4.0) |
|
Xandr |
| 445 |
|
| 333 | 33.6 |
|
|
| 1,174 |
|
| 992 | 18.3 |
|
Corporate and other |
| 308 |
|
| 293 | 5.1 |
|
|
| 961 |
|
| 1,093 | (12.1) |
|
Eliminations and consolidation |
| (1,281) |
|
| (279) | - |
|
|
| (2,063) |
|
| (860) | - |
|
AT&T Operating Revenues |
| 45,739 |
|
| 39,668 | 15.3 |
|
|
| 122,763 |
|
| 118,870 | 3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications |
| 8,182 |
|
| 8,071 | 1.4 |
|
|
| 24,623 |
|
| 24,821 | (0.8) |
|
WarnerMedia |
| 2,528 |
|
| 2 | - |
|
|
| 2,992 |
|
| 21 | - |
|
Latin America |
| (201) |
|
| (125) | (60.8) |
|
|
| (462) |
|
| (257) | (79.8) |
|
Xandr |
| 333 |
|
| 294 | 13.3 |
|
|
| 952 |
|
| 873 | 9.0 |
|
Segment Operating Contribution | $ | 10,842 |
| $ | 8,242 | 31.5 | % |
| $ | 28,105 |
| $ | 25,458 | 10.4 | % |
The Communications segment provides services to businesses and consumers located in the second quarterU.S. or in U.S. territories and forbusinesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the first six months of 2018, including impacts from new revenue accounting rules,following business units:
·Mobility provides nationwide wireless service and 2017 are summarizedequipment.
·Entertainment Group provides video, internet and voice communications services to residential customers.
·Business Wireline provides advanced IP-based services (referred to as follows:
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| Percent | Percent | |||||||||||||||||||||||
| 2018 | 2017 | Change | 2018 | 2017 | Change | |||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||
Service | $ | 33,773 | $ | 36,538 | (7.6 | )% | $ | 67,419 | $ | 72,994 | (7.6 | )% | ||||||||||||
Equipment | 4,080 | 3,299 | 23.7 | 8,472 | 6,208 | 36.5 | ||||||||||||||||||
Media | 1,133 | - | - | 1,133 | - | - | ||||||||||||||||||
Total Operating Revenues | 38,986 | 39,837 | (2.1 | ) | 77,024 | 79,202 | (2.7 | ) | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||
Equipment | 4,377 | 4,138 | 5.8 | 9,225 | 7,986 | 15.5 | ||||||||||||||||||
Broadcast, programming and operations | 5,449 | 4,898 | 11.2 | 10,615 | 9,872 | 7.5 | ||||||||||||||||||
Other cost of revenues | 7,632 | 9,569 | (20.2 | ) | 15,564 | 18,857 | (17.5 | ) | ||||||||||||||||
Selling, general and administrative | 8,684 | 8,559 | 1.5 | 16,581 | 17,331 | (4.3 | ) | |||||||||||||||||
Depreciation and amortization | 6,378 | 6,147 | 3.8 | 12,372 | 12,274 | 0.8 | ||||||||||||||||||
Total Operating Expenses | 32,520 | 33,311 | (2.4 | ) | 64,357 | 66,320 | (3.0 | ) | ||||||||||||||||
Operating Income | 6,466 | 6,526 | (0.9 | ) | 12,667 | 12,882 | (1.7 | ) | ||||||||||||||||
Income Before Income Taxes | 6,780 | 6,070 | 11.7 | 12,921 | 11,448 | 12.9 | ||||||||||||||||||
Net Income | 5,248 | 4,014 | 30.7 | 10,007 | 7,588 | 31.9 | ||||||||||||||||||
Net Income Attributable to AT&T | $ | 5,132 | $ | 3,915 | 31.1 | % | $ | 9,794 | $ | 7,384 | 32.6 | % | ||||||||||||
Overview
Operating revenuesdecreased $851, or 2.1%“strategic services”), in the second quarter and $2,178, or 2.7%, for the first six months of 2018.
Servicerevenues decreased $2,765, or 7.6%, in the second quarter and $5,575, or 7.6%, for the first six months of 2018. The decreases in the second quarter and first six months were primarily due to our adoption of a new revenue accounting standard, which included our policy election to record Universal Service Fund (USF) fees on a net basis and also resulted in less revenue allocation to the service component of bundled contracts. Also contributing to the decrease was the continued decline in video services and legacy wirelineas well as traditional voice and data products.
Equipmentrevenues increased $781, or 23.7%, in the second quarter and $2,264, or 36.5%, for the first six months of 2018. The increases were dueservices to the adoption of new revenue accounting standards that contributed to higher revenue allocations from bundled contracts and the sale of higher-priced devices.business customers.
35The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. This segment contains the following business units:
·Warner Bros. principally produces and distributes television shows, feature films and video games.
·Home Box Office primarily operates multichannel premium pay television services.
·Turner creates and programs branded news, entertainment, sports and kids multi-platform content.
34
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:
·Vrio provides video services primarily to residential customers using satellite technology.
·Mexico provides wireless service and equipment to customers in Mexico.
The MediaXandr revenues for the second quarter and first six months were $1,133 and in each casesegment provides advertising services. These services utilize data insights to develop higher value targeted advertising.
RESULTS OF OPERATIONS
Consolidated Results Our financial results are attributable to the16-day period since acquiring WarnerMedia.
Operatingexpenses decreased $791, or 2.4%,summarized in the secondfollowing discussions. Additional analysis is discussed in our “Segment Results” section. Percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
| Third Quarter |
|
| Nine-Month Period |
| ||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
|
| Percent |
|
| 2018 |
| 2017 | Change |
|
| 2018 |
| 2017 | Change |
| ||||
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service | $ | 41,297 |
| $ | 36,378 | 13.5 | % |
| $ | 109,849 |
| $ | 109,372 | 0.4 | % |
Equipment |
| 4,442 |
|
| 3,290 | 35.0 |
|
|
| 12,914 |
|
| 9,498 | 36.0 |
|
Total Operating Revenues |
| 45,739 |
|
| 39,668 | 15.3 |
|
|
| 122,763 |
|
| 118,870 | 3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 30,304 |
|
| 27,819 | 8.9 |
|
|
| 82,289 |
|
| 81,865 | 0.5 |
|
Depreciation and amortization |
| 8,166 |
|
| 6,042 | 35.2 |
|
|
| 20,538 |
|
| 18,316 | 12.1 |
|
Total Operating Expenses |
| 38,470 |
|
| 33,861 | 13.6 |
|
|
| 102,827 |
|
| 100,181 | 2.6 |
|
Operating Income |
| 7,269 |
|
| 5,807 | 25.2 |
|
|
| 19,936 |
|
| 18,689 | 6.7 |
|
Interest expense |
| (2,051) |
|
| (1,686) | 21.6 |
|
|
| (5,845) |
|
| (4,374) | 33.6 |
|
Equity in net income (loss) of affiliates |
| (64) |
|
| 11 | - |
|
|
| (71) |
|
| (148) | (52.0) |
|
Other income (expense) – net |
| 1,053 |
|
| 842 | 25.1 |
|
|
| 5,108 |
|
| 2,255 | - |
|
Income Before Income Taxes |
| 6,207 |
|
| 4,974 | 24.8 |
|
|
| 19,128 |
|
| 16,422 | 16.5 |
|
Net Income |
| 4,816 |
|
| 3,123 | 54.2 |
|
|
| 14,823 |
|
| 10,711 | 38.4 |
|
Net Income Attributable to AT&T | $ | 4,718 |
| $ | 3,029 | 55.8 | % |
| $ | 14,512 |
| $ | 10,413 | 39.4 | % |
Operating revenues increased in the third quarter and $1,963, or 3.0%, for the first sixnine months of 2018 primarily due to growth in our WarnerMedia and Xandr segments, driven by business acquisitions in 2018. Partially offsetting the increases was our adoption of a new revenue accounting standard, which included our policy election to record Universal Service Fund (USF) fees on a net basis. Also offsetting revenues were declines in our Communications segment, which continues to experience pressure from developing technology and shifts in customer behavior, partially offset increased equipment revenues.
Equipment
Operations and supportexpenses increased $239, or 5.8%, in the secondthird quarter and $1,239, or 15.5%, for the first sixnine months of 2018. The increases during the second quarter and the first six months were driven by an increase in the sale of higher-priced devices.
Broadcast, programming and operations expenses increased $551, or 11.2%, in the second quarter and $743, or 7.5%, for the first six months of 2018. Expense increases during the second quarter and first six months were2018, primarily due to annual content cost increasesbusiness acquisitions in 2018 and additional programminghigher equipment costs including programmingrelated to wireless device sales and production costs associated with WarnerMedia for the16-day period since acquisition.
Other cost of revenuesexpenses decreased $1,937, or 20.2%,upgrades in the second quarter and $3,293, or 17.5%, for the first six months of 2018. The decreases during the second quarter and first six months reflectour Communications segment. Increases were partially offset by our adoption of new accounting rules, which included our policy election to record USF fees net. Also contributing toon a net basis.
35
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Depreciation and amortization expense increased in the decreases were lower expenses due to cost managementthird quarter and utilizationfor the first nine months of automation and digitalization where appropriate.2018.
Selling, general and administrativeexpenses·Depreciation expense increased $125,$159, or 1.5%3.2%, in the secondthird quarter and decreased $750, or 4.3%, for the first six months of 2018. The increase in the second quarter was primarily attributable to expenses from WarnerMedia, including acquisition-related expenses due to the closing of the Time Warner transaction. Also contributing to the second quarter increase were higher employee separation costs. Offsetting some of the increases during the second quarter, and contributing to the overall decrease during the first six months, was the effect of new accounting standards, which resulted in commissions being deferred and amortized over the contract period or expected customer life, in addition to expense reductions due to our disciplined cost management. Partially offsetting the decrease during the first six months were higher costs due to natural disasters and, in the comparable period of 2017, gains on wireless spectrum transactions.
Depreciation and amortization expense increased $231, or 3.8%, in the second quarter and $98, or 0.8%, for the first six months of 2018. Depreciation expense increased $123, or 2.5%, in the second quarter and $130,$191, or 1.3%, for the first sixnine months of 2018. The increases were2018, primarily due to16-days of WarnerMedia results as well as ongoing capital spending for network upgrades and expansion offset by lower expense resulting from our fourth-quarter 2017 abandonment of certain copper network assets.
·Amortization expense increased $108, or 9.2%,$1,965 in the secondthird quarter and decreased $32,increased $2,031, or 1.3%57.9%, for the first sixnine months of 2018. The increase in the second quarter was2018, primarily due to the amortization of intangibles associated with the previously mentioned acquisition. For thesix-monthWarnerMedia. period, the decrease was due to amortization of intangibles for customer lists associated with prior acquisitions mostly offset by the WarnerMedia acquisition.
Operatingincomedecreased $60, or 0.9%,increased in the secondthird quarter and decreased $215, or 1.7%, for the first sixnine months of 2018. Our operating income margin in the secondthird quarter increased from 16.4%14.6% in 2017 to 16.6%15.9% in 2018, and for the first sixnine months increased from 16.3%15.7% in 2017 to 16.4%16.2% in 2018.
Interest expense increased $628, or 45.0%, in the secondthird quarter and $1,106, or 41.1%, for the first sixnine months of 2018. The increase was primarily due to higher debt balances related to our acquisition of Time Warner, including interest expense on Time Warner notes for16-days,notes. and an increase in average interest rates when compared to the prior year.
Equity in net income (loss) of affiliates decreased $30 in the secondthird quarter of 2018 and increased $152, or 95.6%, for the first sixnine months of 2018. Results for the secondthird quarter and the first six months of 2018 include net losses from investments acquired through our purchase of Time Warner. The increase in the first sixnine months of 2018 was predominantly due to losses in the first quarter of 2017 from our legacy publishing business, which was sold in June 2017. This increase was partially offset by the net losses from Time Warner investments.
36
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Other income (expense) – netincreased $1,428 in the secondthird quarter and $2,642 for the first sixnine months. The increases wereincrease in the third quarter was primarily due to a gain resulting from our Otter Media Holdings (Otter Media) transaction, in which we acquired the remaining equity interest during the quarter (see Note 8), partly offset by lower interest income after closing of the Time Warner transaction. The increase for the first nine months was primarily due to actuarial gains of $1,796 and $2,726 resultingin 2018 compared to a gain of $259 in 2017, which resulted from remeasurement of our pension and postretirement benefit obligations and increasedin the first half of 2018. The nine-month increase also included $224 of additional interest income of $94 and $258, partiallythe gain on our Otter Media transaction that was offset by premiums on the redemption of debt of $226 in the second quarter of 2018.
Income taxesdecreased $524, or 25.5%, in the secondthird quarter of 2018 and decreased $946, or 24.5%, for the first sixnine months of 2018. Our effective tax rate was 22.6%22.4% in the secondthird quarter and 22.5% for the first sixnine months of 2018, as compared to 33.9%37.2% for the secondthird quarter and 33.7%34.8% for the first sixnine months of 2017.2017. The stand-alonestandalone effective tax rate of WarnerMedia was 20.3%approximately 21.5% for the16-day third quarter and the 108-day period ended JuneSeptember 30, 2018. The decreases in income tax expense and our effective tax rates for the second quarter and the first six months of 2018 were primarily due to the December 2017 enactment of U.S. corporate tax reform, which reduced the federal tax rate from 35% to 21%. Partially offsetting the decreased tax rates waswere higher earnings in the second quarter and first six months of 2018.earnings. We continue to expect our effective tax rate, for 2018, including WarnerMedia, to be approximately 23%.
Selected Financial and Operating Data | ||||||||
| June 30, | ||||||||
Subscribers and connections in (000s) | 2018 | 2017 | ||||||
Domestic wireless subscribers | 146,889 | 136,102 | ||||||
Mexican wireless subscribers | 16,398 | 13,082 | ||||||
North American wireless subscribers | 163,287 | 149,184 | ||||||
North American branded subscribers | 109,806 | 104,022 | ||||||
North American branded net additions | 2,138 | 1,639 | ||||||
Domestic satellite video subscribers | 19,984 | 20,856 | ||||||
AT&TU-verse®(U-verse) video subscribers | 3,680 | 3,853 | ||||||
DIRECTV NOW video subscribers | 1,809 | 491 | ||||||
Latin America satellite video subscribers1 | 13,713 | 13,622 | ||||||
Total video subscribers | 39,186 | 38,822 | ||||||
Total domestic broadband connections | 15,772 | 15,686 | ||||||
Network access lines in service | 10,832 | 12,791 | ||||||
U-verse VoIP connections | 5,449 | 5,853 | ||||||
Debt ratio2 | 50.8% | 53.3% | ||||||
Net debt ratio3 | 47.2% | 43.8% | ||||||
Ratio of earnings to fixed charges4 | 3.64 | 3.84 | ||||||
Number of AT&T employees | 273,210 | 260,480 | ||||||
|
|
|
|
3736
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Selected Financial and Operating Data |
|
|
| |
| September 30, | |||
Subscribers and connections in (000s) | 2018 |
| 2017 | |
Domestic wireless subscribers | 150,252 |
| 138,445 | |
Mexican wireless subscribers | 17,305 |
| 13,779 | |
North American wireless subscribers | 167,557 |
| 152,224 | |
|
|
|
| |
North American branded subscribers | 110,982 |
| 105,717 | |
North American branded net additions | 3,351 |
| 2,812 | |
|
|
|
| |
Domestic satellite video subscribers | 19,625 |
| 20,605 | |
AT&T U-verse® (U-verse) video subscribers | 3,693 |
| 3,718 | |
DIRECTV NOW video subscribers | 1,858 |
| 787 | |
Latin America satellite video subscribers1 | 13,640 |
| 13,490 | |
Total video subscribers | 38,816 |
| 38,600 | |
|
|
|
| |
Total domestic broadband connections | 15,747 |
| 15,715 | |
|
|
|
| |
Network access lines in service | 10,399 |
| 12,249 | |
U-verse VoIP connections | 5,274 |
| 5,774 | |
|
|
|
| |
Debt ratio2 | 49.8% |
| 56.4% | |
Net debt ratio3 | 47.4% |
| 39.7% | |
Ratio of earnings to fixed charges4 | 3.55 |
| 3.55 | |
Number of AT&T employees | 269,280 |
| 256,800 | |
1 | Excludes subscribers of our Latin America segment equity investment in SKY Mexico, in which we own a 41.3% stake. | |||
| At June 30, 2018 and September 30, 2017, SKY Mexico had 8.0 million subscribers. | |||
2 | Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital | |||
| (total debt plus total stockholders’ equity) and do not consider cash available to pay down debt. See our "Liquidity and | |||
| Capital Resources” section for discussion. | |||
3 | Net debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) less cash available | |||
| by total capital (total debt plus total stockholders’ equity). | |||
4 | See Exhibit 12. |
|
|
|
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. We have five reportable segments: (1) Consumer Mobility, (2) Business Solutions, (3) Entertainment Group (4) International, and (5) WarnerMedia.
We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
To most effectively implement our strategies for 2018, effective January 1, 2018, we retrospectively realigned certain responsibilities and operations within our reportable segments. The most significant of these changes was to report individual wireless accounts with employer discounts in our Consumer Mobility segment, instead of our Business Solutions segment.
With our acquisition of WarnerMedia, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset. For consolidated reporting, all amortization ofpre-acquisition released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we will continue to report the historic content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historic content production cost amortization reported in the segment results was $189 for the16-day period ended June 30, 2018, $98 of which was forpre-acquisition released programming.
TheConsumer Mobility segmentprovides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We provide voice and data services, including high-speed internet over wireless devices.
TheBusiness Solutions segment provides services to business customers, including multinational companies and governmental and wholesale customers. We provide advancedIP-based services including Virtual Private Networks (VPN); Ethernet-related products; FlexWare, a service that relies on Software Defined Networking and Network Function Virtualization to provide application-based routing, and broadband, collectively referred to as strategic services; as well as traditional data and voice products. We provide a complete communications solution to our business customers.
TheEntertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories.
TheInternational 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 (operations in countries with highly inflationary economies consider the U.S. dollar as the functional currency).
TheWarnerMediasegment provides global media and entertainment services through television networks and film, using its brands to create, package and deliver high-quality content worldwide. The segment consists of Turner, Home Box Office (HBO) and Warner Bros. businesses.
3837
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
COMMUNICATIONS SEGMENT | Third Quarter |
|
| Nine-Month Period |
| ||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
|
| Percent |
|
| 2018 |
| 2017 | Change |
|
| 2018 |
| 2017 | Change |
| ||||
Segment Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility | $ | 17,938 |
| $ | 17,370 | 3.3 | % |
| $ | 52,575 |
| $ | 51,922 | 1.3 | % |
Entertainment Group |
| 11,589 |
|
| 12,467 | (7.0) |
|
|
| 34,498 |
|
| 37,435 | (7.8) |
|
Business Wireline |
| 6,703 |
|
| 7,278 | (7.9) |
|
|
| 20,100 |
|
| 21,911 | (8.3) |
|
Total Segment Operating Revenues |
| 36,230 |
|
| 37,115 | (2.4) |
|
|
| 107,173 |
|
| 111,268 | (3.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobility |
| 5,603 |
|
| 5,333 | 5.1 |
|
|
| 16,267 |
|
| 15,929 | 2.1 |
|
Entertainment Group |
| 1,104 |
|
| 1,284 | (14.0) |
|
|
| 3,888 |
|
| 4,470 | (13.0) |
|
Business Wireline |
| 1,475 |
|
| 1,455 | 1.4 |
|
|
| 4,468 |
|
| 4,422 | 1.0 |
|
Total Segment Operating Contribution | $ | 8,182 |
| $ | 8,072 | 1.4 | % |
| $ | 24,623 |
| $ | 24,821 | (0.8) | % |
Our domestic business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our shared asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment. We push down administrative activities into the business units to better manage costs and serve our customers.
Consumer Mobility
Segment Results
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Service | $ | 11,853 | $ | 12,467 | (4.9 | )% | $ | 23,465 | $ | 24,932 | (5.9 | )% | ||||||||||||
Equipment | 3,016 | 2,624 | 14.9 | 6,390 | 4,965 | 28.7 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Revenues | 14,869 | 15,091 | (1.5 | ) | 29,855 | 29,897 | (0.1 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 8,085 | 8,636 | (6.4 | ) | 16,609 | 17,196 | (3.4 | ) | ||||||||||||||||
Depreciation and amortization | 1,806 | 1,716 | 5.2 | 3,613 | 3,432 | 5.3 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Expenses | 9,891 | 10,352 | (4.5 | ) | 20,222 | 20,628 | (2.0 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Segment Operating Income | 4,978 | 4,739 | 5.0 | 9,633 | 9,269 | 3.9 | ||||||||||||||||||
Equity in Net Income of Affiliates | - | - | - | - | - | - | ||||||||||||||||||
|
| |||||||||||||||||||||||
Segment Contribution | $ | 4,978 | $ | 4,739 | 5.0 | % | $ | 9,633 | $ | 9,269 | 3.9 | % | ||||||||||||
The following tables highlight other key measures of performance for the Consumer Mobility segment:
| June 30, | Percent | |||||||||||
| (in 000s) | 2018 | 2017 | Change | |||||||||
Consumer Mobility Subscribers | ||||||||||||
Postpaid | 65,326 | 65,570 | (0.4 | )% | ||||||||
Prepaid | 15,376 | 14,187 | 8.4 | |||||||||
Branded | 80,702 | 79,757 | 1.2 | |||||||||
Reseller | 8,484 | 10,182 | (16.7 | ) | ||||||||
Total Consumer Mobility Subscribers | 89,186 | 89,939 | (0.8 | )% | ||||||||
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| (in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Consumer Mobility Net Additions1 | ||||||||||||||||||||||||
Postpaid | (49 | ) | (28 | ) | (75.0 | )% | (113 | ) | (310 | ) | 63.5 | % | ||||||||||||
Prepaid | 356 | 267 | 33.3 | 548 | 549 | (0.2 | ) | |||||||||||||||||
Branded Net Additions | 307 | 239 | 28.5 | 435 | 239 | 82.0 | ||||||||||||||||||
Reseller | (451 | ) | (364 | ) | (23.9 | ) | (841 | ) | (951 | ) | 11.6 | |||||||||||||
Consumer Mobility Net Subscriber Additions | (144 | ) | (125 | ) | (15.2 | )% | (406 | ) | (712 | ) | 43.0 | % | ||||||||||||
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
Operating Revenuesrevenues decreased $222, or 1.5%, in the secondthird quarter and $42, or 0.1%, for the first sixnine months of 2018. The decreases were duereflected declines in our Entertainment Group and Business Wireline business units, partially offset by increases in our Mobility business unit. The decreases reflect continued declines in legacy voice and data products, shift to lower service revenues resulting from customers choosing unlimited wireless plans and the impact of newly adopted accounting rules, which includeover-the-top (OTT) video offerings, and our policy election to recordno longer include USF fees on a net basis. Lower servicein revenues, were partially offset by higher equipment revenues.revenues, from increased postpaid smartphone sales.
39In the first half of 2018, we continued to see pressure from legacy services revenues and from wireless service revenues as we lapped the first year of offering unlimited data plans. Since our unlimited plans have now been in effect for over a year, service revenues on a comparable basis have shown improvements, which we expect to continue for the remainder of 2018.
Operating contribution increased in the third quarter and decreased for the first nine months of 2018, and was positively impacted by new revenue accounting rules. Operating contribution reflected improvement in our Mobility and Business Wireline business units, partially offset by declines in our Entertainment Group. Our Communications segment operating income margin in the third quarter increased from 21.7% in 2017 to 22.6% in 2018, and for the first nine months increased from 22.3% in 2017 to 23.0% in 2018.
38
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Communications Business Unit Discussion | |||||||||||||||
Mobility Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
| Nine-Month Period | ||||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service | $ | 13,989 |
| $ | 14,475 | (3.4) | % |
| $ | 41,074 |
| $ | 43,414 | (5.4) | % |
Equipment |
| 3,949 |
|
| 2,895 | 36.4 |
|
|
| 11,501 |
|
| 8,508 | 35.2 |
|
Total Operating Revenues |
| 17,938 |
|
| 17,370 | 3.3 |
|
|
| 52,575 |
|
| 51,922 | 1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 10,255 |
|
| 10,029 | 2.3 |
|
|
| 30,020 |
|
| 30,005 | - |
|
Depreciation and amortization |
| 2,079 |
|
| 2,008 | 3.5 |
|
|
| 6,287 |
|
| 5,988 | 5.0 |
|
Total Operating Expenses |
| 12,334 |
|
| 12,037 | 2.5 |
|
|
| 36,307 |
|
| 35,993 | 0.9 |
|
Operating Income |
| 5,604 |
|
| 5,333 | 5.1 |
|
|
| 16,268 |
|
| 15,929 | 2.1 |
|
Equity in Net Income (Loss) of Affiliates |
| (1) |
|
| - | - |
|
|
| (1) |
|
| - | - |
|
Operating Contribution | $ | 5,603 |
| $ | 5,333 | 5.1 | % |
| $ | 16,267 |
| $ | 15,929 | 2.1 | % |
The following tables highlight other key measures of performance for Mobility:
|
|
|
| September 30, | Percent | |||||
(in 000s) |
|
|
| 2018 |
|
| 2017 | Change | ||
Wireless Subscribers1 |
|
|
|
|
|
|
|
|
| |
Postpaid smartphones |
|
|
| 60,408 |
|
| 59,278 | 1.9 | % | |
Postpaid feature phones and data-centric devices |
|
|
| 16,588 |
|
| 17,756 | (6.6) |
| |
Postpaid |
|
|
| 76,996 |
|
| 77,034 | - |
| |
Prepaid |
|
|
| 16,894 |
|
| 15,136 | 11.6 |
| |
Branded |
|
|
| 93,890 |
|
| 92,170 | 1.9 |
| |
Reseller |
|
|
| 8,183 |
|
| 9,877 | (17.2) |
| |
Connected devices2 |
|
|
| 48,179 |
|
| 36,398 | 32.4 |
| |
Total Wireless Subscribers |
|
|
| 150,252 |
|
| 138,445 | 8.5 |
| |
|
|
|
|
|
|
|
|
|
| |
Branded Smartphones |
|
|
| 74,917 |
|
| 72,242 | 3.7 |
| |
Smartphones under our installment programs at end of period |
|
|
| 31,441 |
|
| 31,207 | 0.7 | % | |
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. | |||||||||
39
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
|
| Third Quarter |
| Nine-Month Period | ||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
| Percent | ||
(in 000s) | 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change | |||
Wireless Net Additions1 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Postpaid4 | (232) |
| 134 |
| - | % |
| (110) |
| 83 |
| - | % | |
Prepaid | 570 |
| 324 |
| 75.9 |
|
| 1,264 |
| 873 |
| 44.8 |
| |
Branded Net Additions | 338 |
| 458 |
| (26.2) |
|
| 1,154 |
| 956 |
| 20.7 |
| |
Reseller | (434) |
| (391) |
| (11.0) |
|
| (1,266) |
| (1,341) |
| 5.6 |
| |
Connected devices2 | 3,459 |
| 2,274 |
| 52.1 |
|
| 9,169 |
| 7,102 |
| 29.1 |
| |
Wireless Net Subscriber Additions | 3,363 |
| 2,341 |
| 43.7 |
|
| 9,057 |
| 6,717 |
| 34.8 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Smartphones sold under our installment programs during period | 3,997 |
| 3,491 |
| 14.5 | % |
| 11,634 |
| 10,575 |
| 10.0 | % | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Branded Churn3 | 1.70 | % | 1.70 | % | - | BP |
| 1.62 | % | 1.66 | % | (4) | BP | |
Postpaid Churn3 | 1.17 | % | 1.06 | % | 11 | BP |
| 1.08 | % | 1.06 | % | 2 | BP | |
Postpaid Phone-Only Churn3, 4 | 0.93 | % | 0.84 | % | 9 | BP |
| 0.87 | % | 0.84 | % | 3 | 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. | |||||||||||||
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 | Postpaid phone net adds were 69 and (145) in the third quarter and 60 and (613) for the first nine months of 2018 and 2017, respectively. | |||||||||||||
Servicerevenue decreased $614, or 4.9%, in the secondthird quarter and $1,467, or 5.9%, for the first sixnine months of 2018. The decreases were largely due to our adoption of a new accounting standard that included our policy election to no longer include USF fees in revenues which resulted in less revenue being allocated to the service component of bundled contracts. Also contributing to the decrease was the impact of customers continuing to shift to discounted monthly service charges under our unlimited plans, partially offset by higher prepaid service revenues resulting from growth in Cricket and AT&T PREPAIDSM subscribers. Since our unlimited plans have now been in effect for over a year, service revenues on a comparable basis should increasehave shown improvements, which we expect to continue for the remainder of 2018.
Equipment
ARPU
ARPU has been affected by the new revenue increased $392, or 14.9%,accounting standard, which reduced the revenue recognized, and by customers shifting to unlimited plans, which decreases overage revenues; however, price changes and the sale of higher-priced smartphones are partially offsetting that decline.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn was higher in the secondthird quarter, and $1,425, or 28.7%,but only slightly higher for the first sixnine months of 2018. The increases2018, even with higher tablet churn. Postpaid phone-only churn was higher in equipment revenues resulted the third quarter and for the nine months, partly reflecting the introduction of new handsets, at promotional prices, by competitors in the third quarter as opposed to the traditional fourth quarter.
Equipment revenue increased in the third quarter and for the first nine months resulting from the sale of higher-priced devices as well as the adoption of a new accounting standardsstandard that contributed to higher revenue allocations from bundled contracts. Equipment revenue is unpredictable as customers are choosing to upgrade devices less frequently or bring their own devices.devices.
40
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Operations and supportexpenses decreased $551, or 6.4%,increased in the secondthird quarter and $587, or 3.4%, for the first sixnine months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.
Decreased operations and support expenses were primarily due to increased equipment costs related to wireless equipment sales and upgrades, partially offset by our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to the decrease were2018, as well as increased operational efficiencies partially offset by increased equipment costs related to wireless equipment sales and upgrades..
Depreciation expense increased $90, or 5.2%, in the secondthird quarter and $181, or 5.3%, for the first sixnine months of 2018. The increases were primarily due to ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets.
Operating income increased $239, or 5.0%, in the secondthird quarter and $364, or 3.9%, for the first six months of 2018.nine months. Our Consumer Mobility segment operating income margin in the secondthird quarter increased from 31.4%30.7% in 2017 to 33.5%31.2% in 2018, and for the first six months increased from 31.0% in 2017 to 32.3% in 2018. Our Consumer Mobility EBITDA margin in the second quarter increased from 42.8% in 2017 to 45.6% in 2018, and for the first six months increased from 42.5% in 2017 to 44.4% in 2018.
40
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Business Solutions
Segment Results
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Wireless service | $ | 1,829 | $ | 2,004 | (8.7 | )% | $ | 3,620 | $ | 4,007 | (9.7) | % | ||||||||||||
Strategic services | 3,039 | 2,958 | 2.7 | 6,109 | 5,862 | 4.2 | ||||||||||||||||||
Legacy voice and data services | 2,723 | 3,423 | (20.4 | ) | 5,561 | 6,971 | (20.2) | |||||||||||||||||
Other service and equipment | 888 | 922 | (3.7 | ) | 1,727 | 1,800 | (4.1) | |||||||||||||||||
Wireless equipment | 584 | 360 | 62.2 | 1,162 | 648 | 79.3 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Revenues | 9,063 | 9,667 | (6.2 | ) | 18,179 | 19,288 | (5.7) | |||||||||||||||||
|
| |||||||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 5,616 | 6,053 | (7.2 | ) | 11,210 | 12,051 | (7.0) | |||||||||||||||||
Depreciation and amortization | 1,487 | 1,483 | 0.3 | 2,945 | 2,943 | 0.1 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Expenses | 7,103 | 7,536 | (5.7 | ) | 14,155 | 14,994 | (5.6) | |||||||||||||||||
|
| |||||||||||||||||||||||
Segment Operating Income | 1,960 | 2,131 | (8.0 | ) | 4,024 | 4,294 | (6.3) | |||||||||||||||||
Equity in Net Income of Affiliates | 1 | - | - | - | - | - | ||||||||||||||||||
|
| |||||||||||||||||||||||
Segment Contribution | $ | 1,961 | $ | 2,131 | (8.0 | )% | $ | 4,024 | $ | 4,294 | (6.3) | % | ||||||||||||
The following tables highlight other key measures of performance for the Business Solutions segment:
| June 30, | Percent | |||||||||||||||||||||||
| (in 000s) | 2018 | 2017 | Change | |||||||||||||||||||||
Business Wireless Subscribers | ||||||||||||||||||||||||
Postpaid | 12,046 | 11,432 | 5.4 | % | ||||||||||||||||||||
Prepaid 1 | 841 | - | - | |||||||||||||||||||||
Branded | 12,887 | 11,432 | 12.7 | |||||||||||||||||||||
Reseller | 98 | 73 | 34.2 | |||||||||||||||||||||
Connected devices1,2 | 44,718 | 34,658 | 29.0 | |||||||||||||||||||||
Total Business Wireless Subscribers | 57,703 | 46,163 | 25.0 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Business IP Broadband Connections | 1,017 | 992 | 2.5 | % | ||||||||||||||||||||
41
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| (in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Business Wireless Net Additions 1 | ||||||||||||||||||||||||
Postpaid | 122 | 171 | (28.7 | )% | 235 | 259 | (9.3 | )% | ||||||||||||||||
Prepaid 2 | 97 | - | - | 146 | - | - | ||||||||||||||||||
Branded | 219 | 171 | 28.1 | 381 | 259 | 47.1 | ||||||||||||||||||
Reseller | 7 | (4 | ) | - | 9 | 1 | - | |||||||||||||||||
Connected devices3 | 2,982 | 2,256 | 32.2 | 5,710 | 4,828 | 18.3 | ||||||||||||||||||
Business Wireless Net SubscriberAdditions | 3,208 | 2,423 | 32.4 | 6,100 | 5,088 | 19.9 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Business IP Broadband Net Additions | (4 | ) | 12 | - | % | (8 | ) | 16 | - | % | ||||||||||||||
Operating Revenues decreased $604, or 6.2%, in the second quarter and $1,109 or 5.7%, for the first six months of 2018, primarily due to our adoption of a new revenue accounting standard, which included our policy election to no longer include USF fees in revenue. Technological shifts away from legacy products, as well as decreasing wireless service revenues resulting from customers shifting to unlimited plans, also contributed to revenue declines. These decreases were partially offset by continued but slowing growth in strategic services, which represent 46% ofnon-wireless (or fixed) revenues and wireless equipment revenue.
Wireless servicerevenues decreased $175, or 8.7%, in the second quarter and $387, or 9.7%, for the first six months of 2018. The decrease was due to our adoption of a new accounting standard that resulted in less revenue allocation to the service component of bundled contracts and included our policy election to no longer include USF fees in revenues.
At June 30, 2018, we served 57.7 million subscribers, an increase of 25.0% from the prior year. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 29.0% from the prior year. Connected devices include our connected car business and other data centric devices that connect to the network and rely on embedded computing systems and/or software, commonly known as IoT.
Strategic servicesrevenues increased $81, or 2.7%, in the second quarter and $247, or 4.2%, for the first six months of 2018. Our revenues increased in the second quarter and first six months of 2018 primarily due to: Dedicated Internet services of $26 and $63; Ethernet services of $20 and $56; VoIP of $14 and $49; and Security services of $20 and $43, respectively.
Legacy wired voice and data servicerevenues decreased $700, or 20.4%, in the second quarter and $1,410, or 20.2%, for the first six months of 2018. The decrease was primarily due to lower demand, as customers continue to shift to our more advancedIP-based offerings or to competitors, and our netting of USF fees in 2018.
Wireless equipment revenues increased $224, or 62.2%, in the second quarter and $514, or 79.3%, for the first six months of 2018, primarily due to the adoption of new accounting standards which increased the amount of revenue attributable to equipment from our bundled contracts.
42
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Operations and supportexpenses decreased $437, or 7.2%, in the second quarter and $841, or 7.0%, for the first six months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.
Decreased operations and support expenses for the second quarter and first six months were primarily due to our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to declines were our ongoing efforts to automate and digitize our support activities, partially offset by higher costs from our implementation of FirstNet and higher equipment costs from increased sales of higher-priced wireless devices.
Depreciationexpense increased $4, or 0.3%, in the second quarter and $2, or 0.1%, for the first six months of 2018. The increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by updates to the asset lives of certain network assets and our fourth-quarter 2017 abandonment of certain copper network assets.
Operating income decreased $171, or 8.0%, in the second quarter and $270, or 6.3%, for the first six months of 2018. Our Business Solutions segment operating income margin in the second quarter decreased from 22.0% in 2017 to 21.6% in 2018, and for the first six months decreased from 22.3% in 2017 to 22.1% in 2018. Our Business Solutions EBITDA margin in the second quarter increased from 37.4% in 2017 to 38.0% in 2018, and for the first six months increased from 37.5% in 2017 to 38.3% in 2018.
Entertainment Group
Segment Results
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Video entertainment | $ | 8,331 | $ | 9,153 | (9.0 | )% | $ | 16,690 | $ | 18,173 | (8.2 | )% | ||||||||||||
High-speed internet | 1,981 | 1,927 | 2.8 | 3,859 | 3,868 | (0.2 | ) | |||||||||||||||||
Legacy voice and data services | 785 | 981 | (20.0 | ) | 1,604 | 2,012 | (20.3 | ) | ||||||||||||||||
Other service and equipment | 553 | 600 | (7.8 | ) | 1,074 | 1,209 | (11.2 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Revenues | 11,650 | 12,661 | (8.0 | ) | 23,227 | 25,262 | (8.1 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 8,852 | 9,561 | (7.4 | ) | 17,791 | 19,166 | (7.2 | ) | ||||||||||||||||
Depreciation and amortization | 1,346 | 1,458 | (7.7 | ) | 2,658 | 2,878 | (7.6 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total Segment Operating Expenses | 10,198 | 11,019 | (7.5 | ) | 20,449 | 22,044 | (7.2 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Segment Operating Income | 1,452 | 1,642 | (11.6 | ) | 2,778 | 3,218 | (13.7 | ) | ||||||||||||||||
Equity in Net Income (Loss) of Affiliates | (20 | ) | (12 | ) | (66.7 | ) | (11 | ) | (18) | 38.9 | ||||||||||||||
|
| |||||||||||||||||||||||
Segment Contribution | $ | 1,432 | $ | 1,630 | (12.1 | )% | $ | 2,767 | $ | 3,200 | (13.5 | )% | ||||||||||||
43
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The following tables highlight other key measures of performance for the Entertainment Group segment:
| June 30, | Percent | |||||||||||||||||||||||
| (in 000s) | 2018 | 2017 | Change | |||||||||||||||||||||
Video Connections | ||||||||||||||||||||||||
Satellite | 19,984 | 20,856 | (4.2 | )% | ||||||||||||||||||||
U-verse | 3,656 | 3,825 | (4.4 | ) | ||||||||||||||||||||
DIRECTV NOW1 | 1,809 | 491 | - | |||||||||||||||||||||
Total Video Connections | 25,449 | 25,172 | 1.1 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Broadband Connections | ||||||||||||||||||||||||
IP | 13,692 | 13,242 | 3.4 | |||||||||||||||||||||
DSL | 763 | 1,060 | (28.0 | ) | ||||||||||||||||||||
Total Broadband Connections | 14,455 | 14,302 | 1.1 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Retail Consumer Switched Access Lines | 4,333 | 5,257 | (17.6 | ) | ||||||||||||||||||||
U-verse Consumer VoIP Connections | 4,950 | 5,439 | (9.0 | ) | ||||||||||||||||||||
Total Retail Consumer Voice Connections | 9,283 | 10,696 | (13.2 | )% | ||||||||||||||||||||
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| (in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Video Net Additions | ||||||||||||||||||||||||
Satellite 1 | (286 | ) | (156 | ) | (83.3 | )% | (474 | ) | (156 | ) | - | % | ||||||||||||
U-verse 1 | 24 | (195 | ) | - | 25 | (428 | ) | - | ||||||||||||||||
DIRECTV NOW 2 | 342 | 152 | - | 654 | 224 | - | ||||||||||||||||||
Net Video Additions | 80 | (199 | ) | - | 205 | (360 | ) | - | ||||||||||||||||
Broadband Net Additions | ||||||||||||||||||||||||
IP | 76 | 112 | (32.1 | ) | 230 | 354 | (35.0 | ) | ||||||||||||||||
DSL | (53 | ) | (104 | ) | 49.0 | (125 | ) | (231 | ) | 45.9 | ||||||||||||||
Net Broadband Additions | 23 | 8 | - | % | 105 | 123 | (14.6 | )% | ||||||||||||||||
Operating revenuesdecreased $1,011, or 8.0%, in the second quarter and $2,035, or 8.1%, for the first six months of 2018, primarily due to lower video and legacy service revenues, and to a lesser extent, new accounting rules.
As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite andU-verse subscribers. In November 2016, we launched DIRECTV NOW, our video streaming option that does not require either satellite orU-verse service (commonly calledover-the-top video service).
Video entertainmentrevenues decreased $822, or 9.0%, in the second quarter and $1,483, or 8.2%, for the first six months of 2018, largely driven by a 4.2% decline in linear video subscribers. Ourover-the-top video subscriber net adds more than offset our decline in linear video connections. However, this shift by our customers, consistent with the rest of the industry, from a premium linear service to our more economically pricedover-the-top video service has pressured our video revenues. Also contributing to the decrease was the impact of newly adopted accounting rules, which resulted in less revenue allocated to video services when these services are bundled with other offerings. Churn rose for subscribers with linear video only service, partially reflecting price increases.
44
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
High-speed internet revenues increased $54, or 2.8%, in the second quarter and decreased slightly for the first six months of 2018. During the quarter, we reviewed and refined the estimates used to allocate customer discounts amongst bundled services, contributing to higher high-speed internet revenues in the second quarter of 2018. When compared to 2017, IP broadband subscribers increased 3.4%, to 13.7 million subscribers at June 30, 2018. Our bundling strategy is helping to lower churn with subscribers who bundle broadband with another AT&T service having about half the churn of broadband-only subscribers.
To compete more effectively against other broadband providers, we continued to deploy ourall-fiber, high-speed wireline network, which has improved customer retention rates. We also expect our planned 5G national deployment to aid in our ability to provide more locations with competitive broadband speeds.
Legacy voice and data servicerevenues decreased $196, or 20.0%, in the second quarter and $408, or 20.3%, for the first six months of 2018, reflecting continued decreases in local voice, long-distance and traditional data services. The decreases reflect the continued migration of customers to our more advancedIP-based offerings or to competitors, and the impact of netting USF fees.
Operations and supportexpenses decreased $709, or 7.4%, in the second quarter and $1,375, or 7.2%, for the first six months of 2018. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, including costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.
Decreased operations and support expenses were primarily impacted by our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to the decreases was our ongoing focus on cost efficiencies and merger synergies, lower employee-related expenses resulting from workforce reductions, lower amortization of fulfillment cost deferrals due to a longer estimated economic life for our entertainment group customers (see Note 1) and lower advertising costs, which were partially offset by annual content cost increases.
Depreciation expense decreased $112, or 7.7%, in the second quarter and $220, or 7.6%, for the first six months of 2018. The decreases were primarily due to our fourth-quarter 2017 abandonment of certain copper network assets, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income decreased $190, or 11.6%, in the second quarter and $440, or 13.7%, for the first six months of 2018. Our Entertainment Group segment operating income margin in the second quarter decreased from 13.0% in 2017 to 12.5% in 2018, and for the first six months decreased from 12.7% in 2017 to 12.0% in 2018. Our Entertainment Group segment EBITDA margin in the second quarter decreased from 24.5% in 2017 to 24.0% in 2018, and for the first six months decreased from 24.1% in 2017 to 23.4% in 2018.
45
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
International
Segment Results
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Video entertainment | $ | 1,254 | $ | 1,361 | (7.9 | )% | $ | 2,608 | $ | 2,702 | (3.5 | )% | ||||||||||||
Wireless service | 417 | 535 | (22.1 | ) | 821 | 1,010 | (18.7 | ) | ||||||||||||||||
Wireless equipment | 280 | 130 | 115.4 | 547 | 243 | 125.1 | ||||||||||||||||||
Total Segment Operating Revenues | 1,951 | 2,026 | (3.7 | ) | 3,976 | 3,955 | 0.5 | |||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 1,803 | 1,772 | 1.7 | 3,607 | 3,531 | 2.2 | ||||||||||||||||||
Depreciation and amortization | 313 | 311 | 0.6 | 645 | 601 | 7.3 | ||||||||||||||||||
Total Segment Operating Expenses | 2,116 | 2,083 | 1.6 | 4,252 | 4,132 | 2.9 | ||||||||||||||||||
Segment Operating Income (Loss) | (165 | ) | (57 | ) | - | (276 | ) | (177 | ) | (55.9 | ) | |||||||||||||
Equity in Net Income (Loss) of Affiliates | 15 | 25 | (40.0 | ) | 15 | 45 | (66.7 | ) | ||||||||||||||||
Segment Contribution | $ | (150 | ) | $ | (32 | ) | - | % | $ | (261 | ) | $ | (132 | ) | (97.7 | )% | ||||||||
The following tables highlight other key measures of performance for the International segment:
| June 30, | Percent | |||||||||||||||||||||||
| (in 000s) | 2018 | 2017 | Change | |||||||||||||||||||||
Mexican Wireless Subscribers | ||||||||||||||||||||||||
Postpaid | 5,749 | 5,187 | 10.8 | % | ||||||||||||||||||||
Prepaid | 10,468 | 7,646 | 36.9 | |||||||||||||||||||||
Branded | 16,217 | 12,833 | 26.4 | |||||||||||||||||||||
Reseller | 181 | 249 | (27.3 | ) | ||||||||||||||||||||
Total Mexican Wireless Subscribers | 16,398 | 13,082 | 25.3 | |||||||||||||||||||||
| ||||||||||||||||||||||||
Latin America Satellite Subscribers | ||||||||||||||||||||||||
Total Latin America Satellite Subscribers1 | 13,713 | 13,622 | 0.7 | % | ||||||||||||||||||||
46
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| (in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Mexican Wireless Net Additions | ||||||||||||||||||||||||
Postpaid | 142 | 92 | 54.3 | % | 251 | 222 | 13.1 | % | ||||||||||||||||
Prepaid | 611 | 402 | 52.0 | 1,070 | 919 | 16.4 | ||||||||||||||||||
Branded Net Additions | 753 | 494 | 52.4 | 1,321 | 1,141 | 15.8 | ||||||||||||||||||
Reseller | 3 | (18 | ) | - | (22 | ) | (32 | ) | 31.3 | |||||||||||||||
Mexican Wireless | 756 | 476 | 58.8 | 1,299 | 1,109 | 17.1 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Latin America Satellite Net Additions | ||||||||||||||||||||||||
Latin America Satellite | 140 | (56 | ) | - | % | 125 | 35 | - | % | |||||||||||||||
Operating Results
Our International segment consists of the Latin American satellite video operations as well as our Mexican wireless operations. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Operating revenues decreased $75, or 3.7%, in the second quarter and increased $21, or 0.5%, for the first six months of 2018. Revenue from video services in Latin America decreased $107 and $94 due to foreign exchange pressures. Mexico wireless revenues increased $32, or 4.8%, in the second quarter and $115, or 9.2%, for the first six months of 2018, primarily due to growth in equipment revenues as we have increased our subscriber base, partially offset by competitive pricing for services, our shutdown of a legacy wholesale business and our adoption of the new U.S. revenue accounting standard.
Operations and support expenses increased $31, or 1.7%, in the second quarter and $76, or 2.2%, for the first six months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits. The increase in expenses is primarily due to higher programming, including World Cup programming costs in the second quarter, and other operating costs partially offset by changes in foreign currency exchange rates and lower wholesale costs in Mexico. Approximately 15 % of our expenses in Mexico and Latin America are U.S. dollar based, with the remainder in the local currency.
Depreciationexpense increased $2, or 0.6%, in the second quarter and $44, or 7.3%, for the first six months of 2018. The increases were primarily due to higher capital spending in Mexico as we essentially complete our network upgrades.
Operating income decreased $108 in the second quarter and $99, or 55.9%, for the first six months of 2018, and were negatively impacted by foreign exchange pressure. Our International segment operating income margin in the second quarter decreased from (2.8)% in 2017 to (8.5)% in 2018, and for the first six months decreased from (4.5)% in 2017 to (6.9)% in 2018. Our International EBITDA margin in the second quarter decreased from 12.5% in 2017 to 7.6% in 2018, and for the first six months decreased from 10.7% in 2017 to 9.3% in 2018.
47
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
WarnerMedia
Segment Results for the period from June 15, 2018 to June 30, 2018
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||
Content | $ | 487 | $ | - | - | % | $ | 487 | $ | - | - | % | ||||||||||||
Subscription | 591 | - | - | 591 | - | - | ||||||||||||||||||
Advertising | 208 | - | - | 208 | - | - | ||||||||||||||||||
Other | 51 | - | - | 51 | - | - | ||||||||||||||||||
Intrasegment eliminations | (62 | ) | - | - | (62 | ) | - | - | ||||||||||||||||
Total Segment Operating Revenues | 1,275 | - | - | 1,275 | - | - | ||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||||||
Operations and support | 794 | - | - | 794 | - | - | ||||||||||||||||||
Depreciation and amortization | 30 | - | - | 30 | - | - | ||||||||||||||||||
Total Segment Operating Expenses | 824 | - | - | 824 | - | - | ||||||||||||||||||
Segment Operating Income (Loss) | 451 | - | - | 451 | - | - | ||||||||||||||||||
Equity in Net Income (Loss) of Affiliates | (6 | ) | - | - | (6 | ) | - | - | ||||||||||||||||
Segment Contribution | $ | 445 | $ | - | - | % | $ | 445 | $ | - | - | % | ||||||||||||
The WarnerMedia segment consists of the results of Time Warner after we completed our acquisition June 14, 2018. Our WarnerMedia segment operating income margin was 35.4% for the16-day period ended June 30, 2018. Consistent with our past practice, many of the fair value adjustments from the application of purchase accounting required under GAAP have not been allocated to the segment, instead they are reported as acquisition-related items in the reconciliation to consolidated results. The WarnerMedia segment consists of the following businesses:
48
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
WarnerMedia
Segment Results for the period from June 15, 2018 to June 30, 2018
| Second Quarter | Six-Month Period | |||||||||||||||||||||||||||
| 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||||||
Segment operating revenues | ||||||||||||||||||||||||||||
Turner | $ | 549 | $ | - | - | % | $ 549 | $ | - | - | % | |||||||||||||||||
Warner Bros. | 507 | - | - | 507 | - | - | ||||||||||||||||||||||
HBO | 281 | - | - | 281 | - | - | ||||||||||||||||||||||
Intrasegment eliminations | (62 | ) | - | - | (62 | ) | - | - | ||||||||||||||||||||
Total Segment Operating Revenues | 1,275 | - | - | 1,275 | - | - | ||||||||||||||||||||||
Segment Operating Contribution | ||||||||||||||||||||||||||||
Turner | 280 | - | - | 280 | - | - | ||||||||||||||||||||||
Warner Bros. | 90 | - | - | 90 | - | - | ||||||||||||||||||||||
HBO | 105 | - | - | 105 | - | - | ||||||||||||||||||||||
Corporate | (13 | ) | - | - | (13 | ) | - | - | ||||||||||||||||||||
Intrasegment eliminations | (11 | ) | - | - | (11 | ) | - | - | ||||||||||||||||||||
Segment Operating Income (Loss) | $ | 451 | $ | - | - | % | $ 451 | $ | - | - | % | |||||||||||||||||
Operating Revenues were $1,275 for the16-day period ended June 30, 2018.
Contentrevenues were $487 for the period, including $455 from Warner Bros., $21 from Turner and $11 from HBO. Content revenues are derived from content production and distribution. Revenue from the distribution of television programs and series totaled $186 for Warner Bros. for the16-day period. Revenues from the distribution of feature films by Warner Bros., or theatrical revenues, were $222 and revenues from games and other totaled $47 for the period.
Subscription revenues were $591 for the period, including $314 from Turner, $270 from HBO and $7 from Warner Bros. Subscription revenues are derived from the provision of programming to operators and digital distributors who have contracted to receive and distribute programming to their customers. Revenues reflect higher domestic rates and growth at Turner’s international networks, partially offset by the impact of lower domestic subscribers and unfavorable foreign exchange rates. Subscriber trends remain stable with growth from virtual MVPDs and international offset by lower traditional subscribers.
Advertisingrevenues were $208 for the period, including $200 from Turner and $8 from Warner Bros. These revenues result from sale of advertising on our networks and digital properties and the digital properties we manage and/or operate for others.
Operations and support expenses were $794 for the period and are primarily attributable to programming expenses along with marketing costs. Programming expenses reflect higher original and acquired programming costs.
Depreciation expense was $30 for the16-day period ended June 30, 2018.
49
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility). See “Discussion and Reconciliation ofNon-GAAP Measures” for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.
AT&T Mobility Results
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | |||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||
Service | $ | 13,682 | $ | 14,471 | (5.5 | )% | $ | 27,085 | $ | 28,939 | (6.4) | % | ||||||||||||
Equipment | 3,600 | 2,984 | 20.6 | 7,552 | 5,613 | 34.5 | ||||||||||||||||||
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| |||||||||||||||||||||||
Total Operating Revenues | 17,282 | 17,455 | (1.0 | ) | 34,637 | 34,552 | 0.2 | |||||||||||||||||
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| |||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Operations and support | 9,663 | 10,091 | (4.2 | ) | 19,765 | 19,976 | (1.1) | |||||||||||||||||
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| |||||||||||||||||||||||
EBITDA | 7,619 | 7,364 | 3.5 | 14,872 | 14,576 | 2.0 | ||||||||||||||||||
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| |||||||||||||||||||||||
Depreciation and amortization | 2,113 | 1,988 | 6.3 | 4,208 | 3,980 | 5.7 | ||||||||||||||||||
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| |||||||||||||||||||||||
Total Operating Expenses | 11,776 | 12,079 | (2.5 | ) | 23,973 | 23,956 | 0.1 | |||||||||||||||||
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| |||||||||||||||||||||||
Operating Income | $ | 5,506 | $ | 5,376 | 2.4 | % | $ | 10,664 | $ | 10,596 | 0.6 | % | ||||||||||||
The following tables highlight other key measures of performance for AT&T Mobility:
| June 30, | Percent Change | |||||||||||
| (in 000s) | 2018 | 2017 | ||||||||||
Wireless Subscribers1 | ||||||||||||
Postpaid smartphones | 60,183 | 59,178 | 1.7 | % | ||||||||
Postpaid feature phones and data-centric devices | 17,189 | 17,824 | (3.6) | |||||||||
Postpaid | 77,372 | 77,002 | 0.5 | |||||||||
Prepaid3 | 16,217 | 14,187 | 14.3 | |||||||||
Branded | 93,589 | 91,189 | 2.6 | |||||||||
Reseller | 8,582 | 10,255 | (16.3) | |||||||||
Connected devices2, 3 | 44,718 | 34,658 | 29.0 | |||||||||
Total Wireless Subscribers | 146,889 | 136,102 | 7.9 | |||||||||
Branded Smartphones | 73,797 | 71,818 | 2.8 | |||||||||
Smartphones under our installment programs at end of period | 31,918 | 31,649 | 0.8 | % | ||||||||
50
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
| Second Quarter | Six-Month Period | |||||||||||||||||||||||
| (in 000s) | 2018 | 2017 | Percent Change | 2018 | 2017 | Percent Change | ||||||||||||||||||
Wireless Net Additions1 | ||||||||||||||||||||||||
Postpaid5 | 73 | 143 | (49.0)% | 122 | (51) | - | % | |||||||||||||||||
Prepaid4 | 453 | 267 | 69.7 | 694 | 549 | 26.4 | ||||||||||||||||||
Branded Net Additions | 526 | 410 | 28.3 | 816 | 498 | 63.9 | ||||||||||||||||||
Reseller | (444 | ) | (368 | ) | (20.7) | (832 | ) | (950 | ) | 12.4 | ||||||||||||||
Connected devices2, 4 | 2,982 | 2,256 | 32.2 | 5,710 | 4,828 | 18.3 | ||||||||||||||||||
Wireless Net Subscriber Additions | 3,064 | 2,298 | 33.3 | 5,694 | 4,376 | 30.1 | ||||||||||||||||||
Smartphones sold under our installment programs during period | 3,644 | 3,583 | 1.7 % | 7,637 | 7,084 | 7.8 | % | |||||||||||||||||
Branded Churn3 | 1.50% | 1.57% | (7) BP | 1.57% | 1.64% | (7) BP | ||||||||||||||||||
Postpaid Churn3 | 1.02% | 1.01% | 1 BP | 1.04% | 1.07% | (3) BP | ||||||||||||||||||
Postpaid Phone Only Churn3,5 | 0.82% | 0.79% | 3 BP | 0.83% | 0.84% | (1) BP | ||||||||||||||||||
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Operating income increased $130, or 2.4%, in the second quarter and $68, or 0.6%, for the first six months of 2018. The second-quarter operating income margin of AT&T Mobility increased from 30.8% in 2017 to 31.9% in 2018 and for the first sixnine months increased from 30.7% in 2017 to 30.8%30.9% in 2018. AT&T Mobility’s second-quarterOur Mobility EBITDA margin in the third quarter increased from 42.2%42.3% in 2017 to 44.1%42.8% in 2018, and for the first sixnine months increased from 42.2% in 2017 to 42.9% in 2018. AT&T Mobility’s second-quarter EBITDA service margin increased from 50.9%is defined as operating contribution excluding equity in 2017 to 55.7% in 2018net income (loss) of affiliates and for the first six months increased from 50.4% in 2017 to 54.9% in 2018 (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues). Our 2018 margins were positively impacted by our policy election to net USF fees.amortization.
Subscriber Relationships
As the wireless industry has matured, future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and to provide these services in bundled product offerings with our video and broadband services. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. To support higher mobile video and data usage, our priority is to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a mature and highly competitive market, we have launched a wide variety of plans, including unlimited and bundled services, as well as equipment installment programs.
ARPU
Postpaid phone-only ARPU was $54.18 for the second quarter and $53.63 for the first six months of 2018, compared to $58.30 and $58.20 in 2017, primarily reflecting lower revenues recognized under new revenue accounting standards. ARPUprograms.
51
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
has also been affected by customers shifting to unlimited plans, which decreases overage revenues; however, customers are adding additional devices helping to offset that decline.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn was slightly higher in the second quarter, but lower for the first six months of 2018, even with higher tablet churn. Postpaid phone only churn was higher in the second quarter, but lower for the six months.
Branded Subscribers
Branded subscribers increased 0.5% in the second quarter of 2018 when compared to March 31, 2018 and increased 2.6% when compared to June 30, 2017. The year-over-year increase includes increases of 0.5% and 14.3% in postpaid and prepaid subscribers, respectively.
At JuneSeptember 30, 2018, approximately 94%95% of our postpaid phone subscriber base used smartphones, compared to 92%93% at JuneSeptember 30, 2017, with the majority of phone sales during both years attributable to smartphones.
Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.
Our equipment installment purchase programs allowprogram allows for postpaid subscribers to purchase certain devices in installments over a specified period of time, with the option to trade in the original device for a new device and have the remaining unpaid balance paid or settled once conditions are met. A significant percentage of our customers choosing equipment installment programsprogram pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. Over half of the postpaid smartphone base is on an equipment installment program and the majority of postpaid smartphone gross adds and upgrades for all periods presented were either equipment installment plansprogram 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 includesinclude data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Connected device subscribers increased 7.2%in 2018, and during the second quarter when compared to March 31, 2018 and 29.0% when compared to June 30, 2017. During the secondthird quarter and first sixnine months of 2018, we added approximately 1.92.2 million and 3.65.9 million wholesale connected cars through agreements with various carmakers, and experienced strong growth in other IoTInternet of Things (IoT) connections as well. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.
5241
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Entertainment Group Results |
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| Third Quarter |
|
| Nine-Month Period |
| ||||||||||
|
|
|
|
|
| Percent |
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|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Operating revenues |
|
|
|
|
|
|
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|
|
|
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|
Video entertainment | $ | 8,283 |
| $ | 9,052 | (8.5) | % |
| $ | 24,681 |
| $ | 26,967 | (8.5) | % |
High-speed internet |
| 2,045 |
|
| 1,916 | 6.7 |
|
|
| 5,904 |
|
| 5,784 | 2.1 |
|
Legacy voice and data services |
| 740 |
|
| 913 | (18.9) |
|
|
| 2,317 |
|
| 2,889 | (19.8) |
|
Other service and equipment |
| 521 |
|
| 586 | (11.1) |
|
|
| 1,596 |
|
| 1,795 | (11.1) |
|
Total Operating Revenues |
| 11,589 |
|
| 12,467 | (7.0) |
|
|
| 34,498 |
|
| 37,435 | (7.8) |
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Operating expenses |
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|
Operations and support |
| 9,155 |
|
| 9,804 | (6.6) |
|
|
| 26,623 |
|
| 28,711 | (7.3) |
|
Depreciation and amortization |
| 1,331 |
|
| 1,379 | (3.5) |
|
|
| 3,986 |
|
| 4,254 | (6.3) |
|
Total Operating Expenses |
| 10,486 |
|
| 11,183 | (6.2) |
|
|
| 30,609 |
|
| 32,965 | (7.1) |
|
Operating Income |
| 1,103 |
|
| 1,284 | (14.1) |
|
|
| 3,889 |
|
| 4,470 | (13.0) |
|
Equity in Net Income (Loss) of Affiliates |
| 1 |
|
| (1) | - |
|
|
| (1) |
|
| - | - |
|
Operating Contribution | $ | 1,104 |
| $ | 1,283 | (14.0) | % |
| $ | 3,888 |
| $ | 4,470 | (13.0) | % |
The following tables highlight other key measures of performance for the Entertainment Group business unit:
|
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|
|
|
|
| September 30, | Percent Change | |||||
(in 000s) |
|
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|
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|
| 2018 |
|
| 2017 | ||||
Video Connections |
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|
|
| |
Satellite |
|
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|
|
| 19,625 |
|
| 20,605 | (4.8) | % | |
U-verse |
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|
| 3,669 |
|
| 3,691 | (0.6) |
| |
DIRECTV NOW1 |
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|
| 1,858 |
|
| 787 | - |
| |
Total Video Connections |
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|
| 25,152 |
|
| 25,083 | 0.3 |
| |
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Broadband Connections |
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IP |
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| 13,723 |
|
| 13,367 | 2.7 |
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DSL |
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| 718 |
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| 964 | (25.5) |
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Total Broadband Connections |
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| 14,441 |
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| 14,331 | 0.8 |
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Retail Consumer Switched Access Lines |
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| 4,144 |
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| 4,996 | (17.1) |
| |||
U-verse Consumer VoIP Connections |
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| 4,757 |
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| 5,337 | (10.9) |
| |||
Total Retail Consumer Voice Connections |
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| 8,901 |
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| 10,333 | (13.9) | % | |||
1 | Consistent with industry practice, DIRECTV NOW includes connections that are on a free-trial. | |||||||||||||||
42
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
|
| Third Quarter |
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| Nine-Month Period | ||||||||||
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| Percent |
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| Percent | ||
(in 000s) | 2018 |
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| 2017 | Change |
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| 2018 |
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| 2017 | Change | |||
Video Net Additions |
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Satellite 1 | (359) |
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| (251) | (43.0) | % |
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| (833) |
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| (407) | - | % | |
U-verse 1 | 13 |
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| (134) | - |
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| 38 |
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| (562) | - |
| |
DIRECTV NOW 2 | 49 |
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| 296 | (83.4) |
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| 703 |
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| 520 | 35.2 |
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Net Video Additions | (297) |
|
| (89) | - |
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| (92) |
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| (449) | 79.5 |
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Broadband Net Additions |
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IP | 31 |
|
| 125 | (75.2) |
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| 261 |
|
| 479 | (45.5) |
| |
DSL | (45) |
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| (96) | 53.1 |
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| (170) |
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| (327) | 48.0 |
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Net Broadband Additions | (14) |
|
| 29 | - | % |
|
| 91 |
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| 152 | (40.1) | % | |
1 | Includes disconnections for customers that migrated to DIRECTV NOW. | ||||||||||||||
2 | Consistent with industry practice, DIRECTV NOW includes connections that are on a free-trial. | ||||||||||||||
Video entertainment revenues are comprised of subscription and advertising revenues. Revenues decreased in the third quarter and for the first nine months of 2018, largely driven by a 4.1% decline in linear video subscribers and, for the third quarter, a 2017 pay-per-view event. For the first nine months of 2018, our over-the-top video subscriber net additions partially offset our decline in linear video connections. However, this shift by our customers, consistent with the rest of the industry, from a premium linear service to our more economically priced OTT video service has pressured our video revenues. OTT net additions declined in the third quarter due to price changes and promotions. Also contributing to the decrease was the impact of newly adopted accounting rules, which resulted in less revenue allocated to video services when these services are bundled with other offerings. Churn rose for subscribers with linear video only service, partially reflecting price increases.
High-speed internet revenues increased in the third quarter and for the first nine months of 2018. Our bundling strategy is helping to lower churn with subscribers who bundle broadband with another AT&T service, having about half the churn of broadband-only subscribers.
Legacy voice and data servicerevenues decreased in the third quarter and for the first nine months of 2018, reflecting the continued migration of customers to our more advanced IP-based offerings or to competitors.
Operations and support expenses decreased in the third quarter and for the first nine months of 2018, primarily due to our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to the decreases were our ongoing focus on cost efficiencies and merger synergies, lower employee-related expenses resulting from workforce reductions, lower amortization of fulfillment cost deferrals due to a longer estimated economic life for our entertainment group customers (see Note 1) and lower advertising costs, which were partially offset by annual content cost increases and an additional week in the third quarter of NFL SUNDAY TICKET.
Depreciation expenses decreased in the third quarter and for the first nine months of 2018, primarily due to our fourth-quarter 2017 abandonment of certain copper network assets, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income decreased in the third quarter and for the first nine months of 2018. Our Entertainment Group operating income margin in the third quarter decreased from 10.3% in 2017 to 9.5% in 2018, and for the first nine months decreased from 11.9% in 2017 to 11.3% in 2018. Our Entertainment Group EBITDA margin in the third quarter decreased from 21.4% in 2017 to 21.0% in 2018, and for the first nine months decreased from 23.3% in 2017 to 22.8% in 2018.
43
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Business Wireline Results |
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| Third Quarter |
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| Nine-Month Period |
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| Percent |
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| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Operating revenues |
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Strategic services | $ | 3,059 |
| $ | 3,018 | 1.4 | % |
| $ | 9,168 |
| $ | 8,880 | 3.2 | % |
Legacy voice and data services |
| 2,615 |
|
| 3,343 | (21.8) |
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|
| 8,176 |
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| 10,314 | (20.7) |
|
Other service and equipment |
| 1,029 |
|
| 917 | 12.2 |
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| 2,756 |
|
| 2,717 | 1.4 |
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Total Operating Revenues |
| 6,703 |
|
| 7,278 | (7.9) |
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| 20,100 |
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| 21,911 | (8.3) |
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Operating expenses |
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Operations and support |
| 4,030 |
|
| 4,635 | (13.1) |
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|
| 12,084 |
|
| 13,906 | (13.1) |
|
Depreciation and amortization |
| 1,197 |
|
| 1,189 | 0.7 |
|
|
| 3,547 |
|
| 3,583 | (1.0) |
|
Total Operating Expenses |
| 5,227 |
|
| 5,824 | (10.3) |
|
|
| 15,631 |
|
| 17,489 | (10.6) |
|
Operating Income |
| 1,476 |
|
| 1,454 | 1.5 |
|
|
| 4,469 |
|
| 4,422 | 1.1 |
|
Equity in Net Income of Affiliates |
| (1) |
|
| 1 | - |
|
|
| (1) |
|
| - | - |
|
Operating Contribution | $ | 1,475 |
| $ | 1,455 | 1.4 | % |
| $ | 4,468 |
| $ | 4,422 | 1.0 | % |
Strategic servicesrevenues increased in the third quarter and for the first nine months of 2018, driven by increases in Dedicated Internet services of $19 and $82; VoIP of $26 and $75; Security services of $32 and $75; and Ethernet services of $14 and $69, in the third quarter and for the first nine months, respectively.
Legacy voice and dataservicerevenues decreased in the third quarter and for the first nine months of 2018, primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.
Other service and equipmentrevenues increased in the third quarter and for the first nine months of 2018, driven by revenues from intangible assets. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing, government professional services and customer premises equipment.
Operations and support expenses decreased in the third quarter and for the first nine months of 2018, primarily due to our adoption of new accounting rules, resulting in netting of USF fees in 2018. Also contributing to declines were our ongoing efforts to automate and digitize our support activities.
Depreciation expense increased in the third quarter and decreased for the first nine months of 2018. The increase in the third quarter was primarily due to increases in capital spending for network upgrades and expansion. The decrease in the first nine months was primarily due to updates to the asset lives of certain network assets and our fourth-quarter 2017 abandonment of certain copper network assets.
Operating income increased in the third quarter and for the first nine months of 2018. Our Business Wireline operating income margin in the third quarter increased from 20.0% in 2017 to 22.0% in 2018, and for the first nine months increased from 20.2% in 2017 to 22.2% in 2018. Our Business Wireline EBITDA margin in the third quarter increased from 36.3% in 2017 to 39.9% in 2018, and for the first nine months increased from 36.5% in 2017 to 39.9% in 2018.
44
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
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 |
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| Third Quarter |
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| Nine-Month Period |
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| 2018 |
| 2017 | Percent Change |
| 2018 |
| 2017 | Percent Change | ||||||
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Operating revenues |
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|
Wireless service | $ | 1,877 |
| $ | 2,023 | (7.2) | % |
| $ | 5,497 |
| $ | 6,030 | (8.8) | % |
Strategic services |
| 3,059 |
|
| 3,018 | 1.4 |
|
|
| 9,168 |
|
| 8,880 | 3.2 |
|
Legacy voice and data services |
| 2,615 |
|
| 3,343 | (21.8) |
|
|
| 8,176 |
|
| 10,314 | (20.7) |
|
Other service and equipment |
| 1,029 |
|
| 917 | 12.2 |
|
|
| 2,756 |
|
| 2,717 | 1.4 |
|
Wireless equipment |
| 590 |
|
| 340 | 73.5 |
|
|
| 1,752 |
|
| 988 | 77.3 |
|
Total Operating Revenues |
| 9,170 |
|
| 9,641 | (4.9) |
|
|
| 27,349 |
|
| 28,929 | (5.5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 5,598 |
|
| 6,096 | (8.2) |
|
|
| 16,808 |
|
| 18,147 | (7.4) |
|
Depreciation and amortization |
| 1,499 |
|
| 1,466 | 2.3 |
|
|
| 4,444 |
|
| 4,409 | 0.8 |
|
Total Operating Expenses |
| 7,097 |
|
| 7,562 | (6.1) |
|
|
| 21,252 |
|
| 22,556 | (5.8) |
|
Operating Income |
| 2,073 |
|
| 2,079 | (0.3) |
|
|
| 6,097 |
|
| 6,373 | (4.3) |
|
Equity in Net Income of Affiliates |
| (1) |
|
| - | - |
|
|
| (1) |
|
| - | - |
|
Operating Contribution | $ | 2,072 |
| $ | 2,079 | (0.3) | % |
| $ | 6,096 |
| $ | 6,373 | (4.3) | % |
45
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
WARNERMEDIA SEGMENT | Third Quarter |
|
| Nine-Month Period |
| ||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Segment Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turner | $ | 2,988 |
| $ | 107 | - | % |
| $ | 3,767 |
| $ | 323 | - | % |
Home Box Office |
| 1,644 |
|
| - | - |
|
|
| 1,925 |
|
| - | - |
|
Warner Bros. |
| 3,720 |
|
| - | - |
|
|
| 4,227 |
|
| - | - |
|
Eliminations & Other |
| (148) |
|
| - | - |
|
|
| (210) |
|
| - | - |
|
Total Segment Operating Revenues |
| 8,204 |
|
| 107 | - |
|
|
| 9,709 |
|
| 323 | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turner |
| 1,449 |
|
| 22 | - |
|
|
| 1,802 |
|
| 79 | - |
|
Home Box Office |
| 630 |
|
| - | - |
|
|
| 734 |
|
| - | - |
|
Warner Bros. |
| 553 |
|
| - | - |
|
|
| 642 |
|
| - | - |
|
Eliminations & Other |
| (104) |
|
| (20) | - |
|
|
| (186) |
|
| (58) | - |
|
Total Segment Operating Contribution | $ | 2,528 |
| $ | 2 | - | % |
| $ | 2,992 |
| $ | 21 | - | % |
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.
The WarnerMedia segment does not include results from Time Warner operations for the periods prior to our June 14, 2018 acquisition, and as such, increased operating revenues and expenses are a result of the 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 $8,204 in the third quarter and $9,709 for the first nine months of 2018.
Operating contribution was $2,528 for the third quarter and $2,992 for the first nine months of 2018. Our WarnerMedia segment operating income margin was 31.3% in the third quarter and 31.4% for the first nine months of 2018.
46
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
WarnerMedia Business Unit Discussion | |||||||||||||||
Turner Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
|
| Nine-Month Period | |||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription | $ | 1,855 |
| $ | 90 | - | % |
| $ | 2,363 |
| $ | 271 | - | % |
Advertising |
| 944 |
|
| 17 | - |
|
|
| 1,181 |
|
| 52 | - |
|
Content and other |
| 189 |
|
| - | - |
|
|
| 223 |
|
| - | - |
|
Total Operating Revenues |
| 2,988 |
|
| 107 | - |
|
|
| 3,767 |
|
| 323 | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 1,487 |
|
| 97 | - |
|
|
| 1,933 |
|
| 273 | - |
|
Depreciation and amortization |
| 59 |
|
| 1 | - |
|
|
| 71 |
|
| 3 | - |
|
Total Operating Expenses |
| 1,546 |
|
| 98 | - |
|
|
| 2,004 |
|
| 276 | - |
|
Operating Income |
| 1,442 |
|
| 9 | - |
|
|
| 1,763 |
|
| 47 | - |
|
Equity in Net Income of Affiliates |
| 7 |
|
| 13 | (46.2) |
|
|
| 39 |
|
| 32 | 21.9 |
|
Operating Contribution | $ | 1,449 |
| $ | 22 | - | % |
| $ | 1,802 |
| $ | 79 | - | % |
Turner includes the WarnerMedia businesses managed by Turner as well as our financial results for Regional Sports Networks (RSN), which comprise the 2017 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 third quarter included $1,855 of subscription, $944 of advertising and $189 of content and other revenue. For the nine-month period, revenues included $2,363 of subscription, $1,181 of advertising and $223 of content and other revenue.
Operations and support expenses totaled $1,487 for the third quarter and $1,933 for the first nine months of 2018.
Operating income was $1,442 in the third quarter and $1,763 for the first nine months of 2018. Our Turner operating income margin was 48.3% in the third quarter and 46.8% for the first nine months of 2018. Our Turner EBITDA margin was 50.2% in the third quarter and 48.7% for the first nine months of 2018.
47
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Home Box Office Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
| Nine-Month Period | ||||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription | $ | 1,517 |
| $ | - | - | % |
| $ | 1,787 |
| $ | - | - | % |
Content and other |
| 127 |
|
| - | - |
|
|
| 138 |
|
| - | - |
|
Total Operating Revenues |
| 1,644 |
|
| - | - |
|
|
| 1,925 |
|
| - | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 991 |
|
| - | - |
|
|
| 1,162 |
|
| - | - |
|
Depreciation and amortization |
| 25 |
|
| - | - |
|
|
| 30 |
|
| - | - |
|
Total Operating Expenses |
| 1,016 |
|
| - | - |
|
|
| 1,192 |
|
| - | - |
|
Operating Income |
| 628 |
|
| - | - |
|
|
| 733 |
|
| - | - |
|
Equity in Net Income of Affiliates |
| 2 |
|
| - | - |
|
|
| 1 |
|
| - | - |
|
Operating Contribution | $ | 630 |
| $ | - | - | % |
| $ | 734 |
| $ | - | - | % |
Operatingrevenues for Home Box Office are generated from the exploitation of original and licensed programming through distribution outlets. Revenues for the third quarter included $1,517 of subscription and $127 of content and other revenue. For the nine-month period, revenues included $1,787 of subscription and $138 of content and other revenue.
Operations and support expenses totaled $991 for the third quarter and $1,162 for the first nine months of 2018.
Operating income was $628 in the third quarter and $733 for the first nine months of 2018. Our Home Box Office operating income margin was 38.2% in the third quarter and 38.1% for the first nine months of 2018. Our Home Box Office EBITDA margin was 39.7% in the third quarter and 39.6% for the first nine months of 2018.
Warner Bros. Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
| Nine-Month Period | ||||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
|
| Percent | |
| 2018 |
| 2017 | Change |
|
| 2018 |
| 2017 | Change | |||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical product | $ | 1,694 |
| $ | - | - | % |
| $ | 1,917 |
| $ | - | - | % |
Television product |
| 1,591 |
|
| - | - |
|
|
| 1,794 |
|
| - | - |
|
Games and other |
| 435 |
|
| - | - |
|
|
| 516 |
|
| - | - |
|
Total Operating Revenues |
| 3,720 |
|
| - | - |
|
|
| 4,227 |
|
| - | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 3,104 |
|
| - | - |
|
|
| 3,507 |
|
| - | - |
|
Depreciation and amortization |
| 40 |
|
| - | - |
|
|
| 54 |
|
| - | - |
|
Total Operating Expenses |
| 3,144 |
|
| - | - |
|
|
| 3,561 |
|
| - | - |
|
Operating Income |
| 576 |
|
| - | - |
|
|
| 666 |
|
| - | - |
|
Equity in Net Income (Loss) of Affiliates |
| (23) |
|
| - | - |
|
|
| (24) |
|
| - | - |
|
Operating Contribution | $ | 553 |
| $ | - | - | % |
| $ | 642 |
| $ | - | - | % |
48
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
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 third quarter, total operating revenues were $3,720 and included $1,694 from theatrical product, $1,591 from television product and $435 from games and other. For the nine-month period, total operating revenues were $4,227 and included $1,917 from theatrical product, $1,794 from television product and $516 from games and other.
Operations and support expenses totaled $3,104 for the third quarter and $3,507 for the first nine months of 2018.
Operating income was $576 in the third quarter and $666 for the first nine months of 2018. Our Warner Bros. operating income margin was 15.5% in the third quarter and 15.8% for the first nine months of 2018. Our Warner Bros. EBITDA margin was 16.6% in the third quarter and 17.0% for the first nine months of 2018.
LATIN AMERICA SEGMENT | Third Quarter |
| Nine-Month Period | ||||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Segment Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio | $ | 1,102 |
| $ | 1,363 | (19.1) | % |
| $ | 3,710 |
| $ | 4,065 | (8.7) | % |
Mexico |
| 731 |
|
| 736 | (0.7) |
|
|
| 2,099 |
|
| 1,989 | 5.5 |
|
Total Segment Operating Revenues |
| 1,833 |
|
| 2,099 | (12.7) |
|
|
| 5,809 |
|
| 6,054 | (4.0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio |
| 66 |
|
| 99 | (33.3) |
|
|
| 281 |
|
| 362 | (22.4) |
|
Mexico |
| (267) |
|
| (224) | (19.2) |
|
|
| (743) |
|
| (619) | (20.0) |
|
Total Segment Operating Contribution | $ | (201) |
| $ | (125) | (60.8) | % |
| $ | (462) |
| $ | (257) | (79.8) | % |
Operating Results
Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our Latin America segment is subject to foreign currency fluctuations.
Latin America Business Unit Discussion |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Vrio Results |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Third Quarter |
|
| Nine-Month Period | |||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Operating revenues | $ | 1,102 |
| $ | 1,363 | (19.1) | % |
| $ | 3,710 |
| $ | 4,065 | (8.7) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 877 |
|
| 1,075 | (18.4) |
|
|
| 2,894 |
|
| 3,123 | (7.3) |
|
Depreciation and amortization |
| 168 |
|
| 206 | (18.4) |
|
|
| 559 |
|
| 642 | (12.9) |
|
Total Operating Expenses |
| 1,045 |
|
| 1,281 | (18.4) |
|
|
| 3,453 |
|
| 3,765 | (8.3) |
|
Operating Income |
| 57 |
|
| 82 | (30.5) |
|
|
| 257 |
|
| 300 | (14.3) |
|
Equity in Net Income of Affiliates |
| 9 |
|
| 17 | (47.1) |
|
|
| 24 |
|
| 62 | (61.3) |
|
Operating Contribution | $ | 66 |
| $ | 99 | (33.3) | % |
| $ | 281 |
| $ | 362 | (22.4) | % |
49
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
|
|
|
|
|
|
|
|
|
| September 30, | Percent | ||||
(in 000s) |
|
|
|
|
|
|
|
| 2018 |
|
| 2017 | Change | ||
Vrio Satellite Subscribers1 |
|
|
|
|
|
|
|
| 13,640 |
|
| 13,490 | 1.1 | % | |
1 | Excludes subscribers of our equity investment in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 8.0 million | ||||||||||||||
| subscribers at June 30, 2018 and September 30, 2017. |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
|
| Nine-Month Period | ||||||||||
(in 000s) | 2018 |
|
| 2017 | Percent Change |
|
| 2018 |
|
| 2017 | Percent Change | |||
Vrio Satellite Net Subscriber Additions1 | (73) |
|
| (132) | 44.7 | % |
|
| 52 |
|
| (97) | - | % | |
1 | Excludes SKY Mexico net subscriber additions of 51 and 5 for the quarter ended June 30, 2018 and 2017, respectively. | ||||||||||||||
Operating revenues decreased in the third quarter and for the first nine months of 2018, primarily due to foreign exchange pressures.
Operations and support expenses decreased in the third quarter and for the first nine months of 2018, primarily due to changes in foreign currency exchange rates partially offset by higher programming and other operating costs. Approximately 14% of Vrio expenses are U.S. dollar based, with the remainder in the local currency.
Depreciation expense decreased in the third quarter and for the first nine months of 2018, primarily due to changes in foreign currency exchange rates.
Operating income decreased in the third quarter and for the first nine months of 2018. Our Vrio operating income margin in the third quarter decreased from 6.0% in 2017 to 5.2% in 2018, and for the first nine months decreased from 7.4% in 2017 to 6.9% in 2018. Our Vrio EBITDA margin in the third quarter decreased from 21.1% in 2017 to 20.4% in 2018, and for the first nine months decreased from 23.2% in 2017 to 22.0% in 2018.
Mexico Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
|
| Nine-Month Period |
| ||||||||||
| 2018 |
| 2017 | Percent Change |
| 2018 |
| 2017 | Percent Change | ||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service | $ | 440 |
| $ | 536 | (17.9) | % |
| $ | 1,261 |
| $ | 1,546 | (18.4) | % |
Equipment |
| 291 |
|
| 200 | 45.5 |
|
|
| 838 |
|
| 443 | 89.2 |
|
Total Operating Revenues |
| 731 |
|
| 736 | (0.7) |
|
|
| 2,099 |
|
| 1,989 | 5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 869 |
|
| 862 | 0.8 |
|
|
| 2,459 |
|
| 2,345 | 4.9 |
|
Depreciation and amortization |
| 129 |
|
| 98 | 31.6 |
|
|
| 383 |
|
| 263 | 45.6 |
|
Total Operating Expenses |
| 998 |
|
| 960 | 4.0 |
|
|
| 2,842 |
|
| 2,608 | 9.0 |
|
Operating Income (Loss) |
| (267) |
|
| (224) | (19.2) |
|
|
| (743) |
|
| (619) | (20.0) |
|
Equity in Net Income of Affiliates |
| - |
|
| - | - |
|
|
| - |
|
| - | - |
|
Operating Contribution | $ | (267) |
| $ | (224) | (19.2) | % |
| $ | (743) |
| $ | (619) | (20.0) | % |
50
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
The following tables highlight other key measures of performance for Mexico:
|
|
|
|
|
|
|
|
|
| September 30, | Percent | ||||
(in 000s) |
|
|
|
|
|
|
|
| 2018 |
|
| 2017 | Change | ||
Mexico Wireless Subscribers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postpaid |
|
|
|
|
|
|
|
|
| 5,822 |
|
| 5,316 | 9.5 | % |
Prepaid |
|
|
|
|
|
|
|
|
| 11,270 |
|
| 8,231 | 36.9 |
|
Branded |
|
|
|
|
|
|
|
|
| 17,092 |
|
| 13,547 | 26.2 |
|
Reseller |
|
|
|
|
|
|
|
|
| 213 |
|
| 232 | (8.2) |
|
Total Mexico Wireless Subscribers |
|
|
|
|
|
|
|
|
| 17,305 |
|
| 13,779 | 25.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
|
| Nine-Month Period | ||||||||||
(in 000s) |
| 2018 |
|
| 2017 | Percent Change |
|
| 2018 |
|
| 2017 | Percent Change | ||
Mexico Wireless Net Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postpaid |
| 73 |
|
| 129 | (43.4) | % |
|
| 324 |
|
| 351 | (7.7) | % |
Prepaid |
| 802 |
|
| 585 | 37.1 |
|
|
| 1,873 |
|
| 1,504 | 24.5 |
|
Branded |
| 875 |
|
| 714 | 22.5 |
|
|
| 2,197 |
|
| 1,855 | 18.4 |
|
Reseller |
| 32 |
|
| (17) | - |
|
|
| 9 |
|
| (49) | - |
|
Mexico Wireless Net Subscriber Additions |
| 907 |
|
| 697 | 30.1 |
|
|
| 2,206 |
|
| 1,806 | 22.1 | % |
Service revenues decreased in the third quarter and for the first nine months of 2018, primarily due to competitive pricing for services, our shutdown of a legacy wholesale business and our adoption of the new U.S. revenue accounting standard.
Equipment revenues increased in the third quarter and for the first nine months of 2018, primarily due to the offering of equipment installment programs and growth in our subscriber base.
Operations and support expenses increased in the third quarter and for the first nine months of 2018, primarily driven by higher operational costs partly associated with higher equipment sales and expenses associated with our network expansion, partially offset by lower wholesale costs and changes in foreign currency exchange rates. Approximately 13% of Mexico expenses are U.S. dollar based, with the remainder in the local currency.
Depreciation expense increased in the third quarter and for the first nine months of 2018 due to higher capital spending in Mexico.
Operating income decreased in the third quarter and for the first nine months of 2018. Our Mexico operating income margin in the third quarter decreased from (30.4)% in 2017 to (36.5)% in 2018, and for the first nine months decreased from (31.1)% in 2017 to (35.4)% in 2018. Our Mexico EBITDA margin in the third quarter decreased from (17.1)% in 2017 to (18.9)% in 2018, and for the first nine months increased from (17.9)% in 2017 to (17.2)% in 2018.
51
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
XANDR SEGMENT |
|
|
|
|
|
|
|
|
| ||||||
| Third Quarter |
|
| Nine-Month Period |
| ||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Operating revenues | $ | 445 |
| $ | 333 | 33.6 | % |
| $ | 1,174 |
| $ | 992 | 18.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 109 |
|
| 39 | - |
|
|
| 218 |
|
| 118 | 84.7 |
|
Depreciation and amortization |
| 3 |
|
| - | - |
|
|
| 4 |
|
| 1 | - |
|
Total Operating Expenses |
| 112 |
|
| 39 | - |
|
|
| 222 |
|
| 119 | 86.6 |
|
Operating Income |
| 333 |
|
| 294 | 13.3 |
|
|
| 952 |
|
| 873 | 9.0 |
|
Equity in Net Income of Affiliates |
| - |
|
| - | - |
|
|
| - |
|
| - | - |
|
Operating Contribution | $ | 333 |
| $ | 294 | 13.3 | % |
| $ | 952 |
| $ | 873 | 9.0 | % |
Operating revenues increased in the third quarter and for the first nine months of 2018, primarily due to higher political advertising revenues and our acquisition of AppNexus in August 2018 (see Note 8).
Operations and support expenses increased in the third quarter and for the first nine months of 2018, primarily due to our acquisition of AppNexus and our ongoing development of the platform supporting Xandr’s business.
Operating income increased in the third quarter and for the first nine months of 2018. Our Xandr segment operating income margin in the third quarter decreased from 88.3% in 2017 to 74.8% in 2018, and for the first nine months decreased from 88.0% in 2017 to 81.1% in 2018.
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
|
| Nine-Month Period |
| ||||||||||
|
|
|
|
|
| Percent |
|
|
|
|
|
| Percent | ||
| 2018 |
| 2017 | Change |
| 2018 |
| 2017 | Change | ||||||
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WarnerMedia | $ | 983 |
| $ | 17 | - | % |
| $ | 1,222 |
| $ | 52 | - | % |
Communications |
| 478 |
|
| 368 | 29.9 |
|
|
| 1,284 |
|
| 1,093 | 17.5 |
|
Xandr |
| 445 |
|
| 333 | 33.6 |
|
|
| 1,174 |
|
| 992 | 18.3 |
|
Eliminations |
| (401) |
|
| (329) | (21.9) |
|
|
| (1,122) |
|
| (980) | (14.5) |
|
Total Advertising Revenues | $ | 1,505 |
| $ | 389 | - | % |
| $ | 2,558 |
| $ | 1,157 | - | % |
52
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Supplemental Results Under Historical Accounting Method
As a supplemental discussion of our operating results, we are providing results under the comparative historical accounting method prior to our adoption of ASC 606 for the three-months ended JuneSeptember 30, 2018.
| Second Quarter | ||||||||||||||||||||
| Reported | Promotions & Other | USF | Commission Deferrals | Historical Accounting | ||||||||||||||||
Service Revenues | ||||||||||||||||||||
Consumer Mobility | $ | 11,853 | $ | (245 | ) | $ (358) | $ | - | $ | 12,456 | ||||||||||
Business Solutions | 8,282 | (146 | ) | (384) | - | 8,812 | ||||||||||||||
Entertainment Group | 11,647 | (44 | ) | (162) | - | 11,853 | ||||||||||||||
International | 1,671 | (40 | ) | - | - | 1,711 | ||||||||||||||
Corporate and Other | 320 | (7 | ) | (4) | - | 331 | ||||||||||||||
AT&T Service Revenues | 33,773 | (482 | ) | (908) | - | 35,163 | ||||||||||||||
AT&T Mobility | 13,682 | (390 | ) | (423) | - | 14,495 | ||||||||||||||
Equipment Revenues | ||||||||||||||||||||
Consumer Mobility | 3,016 | 291 | - | - | 2,725 | |||||||||||||||
Business Solutions | 781 | 158 | - | - | 623 | |||||||||||||||
Entertainment Group | 3 | - | - | - | 3 | |||||||||||||||
International | 280 | 18 | - | - | 262 | |||||||||||||||
Corporate and Other | - | 2 | - | - | (2 | ) | ||||||||||||||
AT&T Equipment Revenues | 4,080 | 469 | - | - | 3,611 | |||||||||||||||
AT&T Mobility | 3,600 | 451 | - | - | 3,149 | |||||||||||||||
Total Operating Revenues | ||||||||||||||||||||
Consumer Mobility | 14,869 | 46 | (358) | - | 15,181 | |||||||||||||||
Business Solutions | 9,063 | 12 | (384) | - | 9,435 | |||||||||||||||
Entertainment Group | 11,650 | (44 | ) | (162) | - | 11,856 | ||||||||||||||
International | 1,951 | (22 | ) | - | - | 1,973 | ||||||||||||||
WarnerMedia | 1,275 | (2 | ) | - | - | 1,277 | ||||||||||||||
Corporate and Other | 319 | (5 | ) | (4) | - | 328 | ||||||||||||||
Eliminations | (141 | ) | - | - | - | (141 | ) | |||||||||||||
AT&T Operating Revenues | 38,986 | (15 | ) | (908) | - | 39,909 | ||||||||||||||
AT&T Mobility | 17,282 | 61 | (423) | - | 17,644 | |||||||||||||||
Total Operating Expenses | ||||||||||||||||||||
Consumer Mobility | 9,891 | 85 | (358) | (298 | ) | 10,462 | ||||||||||||||
Business Solutions | 7,103 | 4 | (384) | (63 | ) | 7,546 | ||||||||||||||
Entertainment Group | 10,198 | 2 | (162) | (265 | ) | 10,623 | ||||||||||||||
International | 2,116 | 6 | - | (47 | ) | 2,157 | ||||||||||||||
WarnerMedia | 824 | (6 | ) | - | - | 830 | ||||||||||||||
Corporate and Other | 2,529 | 4 | (4) | - | 2,529 | |||||||||||||||
Eliminations | (141 | ) | - | - | - | (141 | ) | |||||||||||||
AT&T Operating Expenses | 32,520 | 95 | (908) | (673 | ) | 34,006 | ||||||||||||||
AT&T Mobility | 11,776 | 86 | (423) | (333 | ) | 12,446 | ||||||||||||||
Total Operating Income | ||||||||||||||||||||
Consumer Mobility | 4,978 | (39 | ) | - | 298 | 4,719 | ||||||||||||||
Business Solutions | 1,960 | 8 | - | 63 | 1,889 | |||||||||||||||
Entertainment Group | 1,452 | (46 | ) | - | 265 | 1,233 | ||||||||||||||
International | (165 | ) | (28 | ) | - | 47 | (184 | ) | ||||||||||||
WarnerMedia | 451 | 4 | - | - | 447 | |||||||||||||||
Corporate and Other | (2,210 | ) | (9 | ) | - | - | (2,201 | ) | ||||||||||||
AT&T Operating Income | 6,466 | (110 | ) | - | 673 | 5,903 | ||||||||||||||
AT&T Mobility | 5,506 | (25 | ) | - | 333 | 5,198 | ||||||||||||||
|
| Reported |
| Promotions & Other |
| USF |
| Commission Deferrals |
| Historical Accounting |
Service Revenues |
|
|
|
|
|
|
|
|
|
|
Communications |
|
|
|
|
|
|
|
|
|
|
Mobility | $ | 13,989 | $ | (380) | $ | (441) | $ | - | $ | 14,810 |
Entertainment Group |
| 11,586 |
| (49) |
| (158) |
| - |
| 11,793 |
Business Wireline |
| 6,504 |
| 2 |
| (316) |
| - |
| 6,818 |
WarnerMedia |
| 8,204 |
| - |
| - |
| - |
| 8,204 |
Latin America |
| 1,542 |
| (34) |
| - |
| - |
| 1,576 |
Xandr |
| 445 |
| - |
| - |
| - |
| 445 |
Corporate and Other |
| 308 |
| (6) |
| (2) |
| - |
| 316 |
Eliminations |
| (1,281) |
| - |
| - |
| - |
| (1,281) |
AT&T Service Revenues |
| 41,297 |
| (467) |
| (917) |
| - |
| 42,681 |
Business Solutions |
| 8,580 |
| (138) |
| (382) |
| - |
| 9,100 |
|
|
|
|
|
|
|
|
|
|
|
Equipment Revenues |
|
|
|
|
|
|
|
|
|
|
Communications |
|
|
|
|
|
|
|
|
|
|
Mobility |
| 3,949 |
| 505 |
| - |
| - |
| 3,444 |
Entertainment Group |
| 3 |
| 1 |
| - |
| - |
| 2 |
Business Wireline |
| 199 |
| - |
| - |
| - |
| 199 |
WarnerMedia |
| - |
| - |
| - |
| - |
| - |
Latin America |
| 291 |
| 10 |
| - |
| - |
| 281 |
Corporate and Other |
| - |
| - |
| - |
| - |
| - |
AT&T Equipment Revenues |
| 4,442 |
| 516 |
| - |
| - |
| 3,926 |
Business Solutions |
| 590 |
| 167 |
| - |
| - |
| 423 |
53
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
|
| Reported |
| Promotions & Other |
| USF |
| Commission Deferrals |
| Historical Accounting |
Total Operating Revenues |
|
|
|
|
|
|
|
|
|
|
Communications |
|
|
|
|
|
|
|
|
|
|
Mobility |
| 17,938 |
| 125 |
| (441) |
| - |
| 18,254 |
Entertainment Group |
| 11,589 |
| (48) |
| (158) |
| - |
| 11,795 |
Business Wireline |
| 6,703 |
| 2 |
| (316) |
| - |
| 7,017 |
WarnerMedia |
| 8,204 |
| - |
| - |
| - |
| 8,204 |
Latin America |
| 1,833 |
| (24) |
| - |
| - |
| 1,857 |
Xandr |
| 445 |
| - |
| - |
| - |
| 445 |
Corporate and Other |
| 308 |
| (6) |
| (2) |
| - |
| 316 |
Eliminations |
| (1,281) |
| - |
| - |
| - |
| (1,281) |
AT&T Operating Revenues |
| 45,739 |
| 49 |
| (917) |
| - |
| 46,607 |
Business Solutions |
| 9,170 |
| 29 |
| (382) |
| - |
| 9,523 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
|
|
|
|
|
|
|
|
Communications |
|
|
|
|
|
|
|
|
|
|
Mobility |
| 12,334 |
| 72 |
| (441) |
| (281) |
| 12,984 |
Entertainment Group |
| 10,486 |
| (3) |
| (158) |
| (270) |
| 10,917 |
Business Wireline |
| 5,227 |
| 7 |
| (316) |
| (30) |
| 5,566 |
WarnerMedia |
| 5,637 |
| - |
| - |
| - |
| 5,637 |
Latin America |
| 2,043 |
| 8 |
| - |
| (46) |
| 2,081 |
Xandr |
| 112 |
| - |
| - |
| - |
| 112 |
Corporate and Other |
| 3,545 |
| (4) |
| (2) |
| - |
| 3,551 |
Eliminations |
| (914) |
| - |
| - |
| - |
| (914) |
AT&T Operating Expenses |
| 38,470 |
| 80 |
| (917) |
| (627) |
| 39,934 |
Business Solutions |
| 7,097 |
| 9 |
| (382) |
| (31) |
| 7,501 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income |
|
|
|
|
|
|
|
|
|
|
Communications |
|
|
|
|
|
|
|
|
|
|
Mobility |
| 5,604 |
| 53 |
| - |
| 281 |
| 5,270 |
Entertainment Group |
| 1,103 |
| (45) |
| - |
| 270 |
| 878 |
Business Wireline |
| 1,476 |
| (5) |
| - |
| 30 |
| 1,451 |
WarnerMedia |
| 2,567 |
| - |
| - |
| - |
| 2,567 |
Latin America |
| (210) |
| (32) |
| - |
| 46 |
| (224) |
Xandr |
| 333 |
| - |
| - |
| - |
| 333 |
Corporate and Other |
| (3,237) |
| (2) |
| - |
| - |
| (3,235) |
Eliminations |
| (367) |
| - |
| - |
| - |
| (367) |
AT&T Operating Income |
| 7,269 |
| (31) |
| - |
| 627 |
| 6,673 |
Business Solutions |
| 2,073 |
| 20 |
| - |
| 31 |
| 2,022 |
Consumer Mobility
Supplemental Segment Results
| Second Quarter | ||||||||||||||||||||
| Reported 2018 | Accounting Impact | Historical Method 2018 | 2017 | Percent Change | ||||||||||||||||
Segment operating revenues | ||||||||||||||||||||
Service | $ | 11,853 | $ | (603 | ) | $ | 12,456 | $ | 12,467 | (0.1 | )% | |||||||||
Equipment | 3,016 | 291 | 2,725 | 2,624 | 3.8 | |||||||||||||||
Total Segment Operating Revenues | 14,869 | (312 | ) | 15,181 | 15,091 | 0.6 | ||||||||||||||
Segment operating expenses | ||||||||||||||||||||
Operations and support | 8,085 | (571 | ) | 8,656 | 8,636 | 0.2 | ||||||||||||||
EBITDA | 6,784 | 259 | 6,525 | 6,455 | 1.1 | |||||||||||||||
Depreciation and amortization | 1,806 | - | 1,806 | 1,716 | 5.2 | |||||||||||||||
Total Segment Operating Expenses | 9,891 | (571 | ) | 10,462 | 10,352 | 1.1 | ||||||||||||||
Segment Operating Income | 4,978 | 259 | 4,719 | 4,739 | (0.4 | ) | ||||||||||||||
Equity in Net Income of Affiliates | - | - | - | - | - | |||||||||||||||
Segment Contribution | $ | 4,978 | $ | 259 | $ | 4,719 | $ | 4,739 | (0.4 | )% | ||||||||||
Operating Income Margin | 33.5% | 31.1% | 31.4% | (30)BP | ||||||||||||||||
EBITDA Margin | 45.6% | 43.0% | 42.8% | 20 BP | ||||||||||||||||
EBITDA Service Margin | 57.2% | 52.4% | 51.8% | 60 BP | ||||||||||||||||
54
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Mobility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
| ||||||||||||
|
|
|
|
|
| Historical |
|
|
|
|
| |||
| Reported |
| Accounting |
| Method |
|
|
|
| Percent | ||||
| 2018 |
| Impact |
| 2018 |
| 2017 |
| Change | |||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service | $ | 13,989 |
| $ | (821) |
| $ | 14,810 |
| $ | 14,475 |
| 2.3 | % |
Equipment |
| 3,949 |
|
| 505 |
|
| 3,444 |
|
| 2,895 |
| 19.0 |
|
Total Operating Revenues |
| 17,938 |
|
| (316) |
|
| 18,254 |
|
| 17,370 |
| 5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 10,255 |
|
| (650) |
|
| 10,905 |
|
| 10,029 |
| 8.7 |
|
EBITDA |
| 7,683 |
|
| 334 |
|
| 7,349 |
|
| 7,341 |
| 0.1 |
|
Depreciation and amortization |
| 2,079 |
|
| - |
|
| 2,079 |
|
| 2,008 |
| 3.5 |
|
Total Operating Expenses |
| 12,334 |
|
| (650) |
|
| 12,984 |
|
| 12,037 |
| 7.9 |
|
Operating Income |
| 5,604 |
|
| 334 |
|
| 5,270 |
|
| 5,333 |
| (1.2) |
|
Equity in Net Income (Loss) of Affiliates |
| (1) |
|
| - |
|
| (1) |
|
| - |
| - |
|
Operating Contribution | $ | 5,603 |
| $ | 334 |
| $ | 5,269 |
| $ | 5,333 |
| (1.2) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Margin |
| 31.2 | % |
|
|
|
| 28.9 | % |
| 30.7 | % | (180) | BP |
EBITDA Margin |
| 42.8 | % |
|
|
|
| 40.3 | % |
| 42.3 | % | (200) | BP |
EBITDA Service Margin |
| 54.9 | % |
|
|
|
| 49.6 | % |
| 50.7 | % | (110) | BP |
Business Solutions
Supplemental Segment Results
| Second Quarter | ||||||||||||||||||||
| Reported 2018 | Accounting Impact | Historical Method 2018 | 2017 | Percent Change | ||||||||||||||||
Segment operating revenues | ||||||||||||||||||||
Wireless service | $ | 1,829 | $ (209) | $ | 2,038 | $ | 2,004 | 1.7 | % | |||||||||||
Strategic services | 3,039 | (2) | 3,041 | 2,958 | 2.8 | |||||||||||||||
Legacy voice and data services | 2,723 | (251) | 2,974 | 3,423 | (13.1) | |||||||||||||||
Other service and equipment | 888 | (70) | 958 | 922 | 3.9 | |||||||||||||||
Wireless equipment | 584 | 160 | 424 | 360 | 17.8 | |||||||||||||||
Total Segment Operating Revenues | 9,063 | (372) | 9,435 | 9,667 | (2.4) | |||||||||||||||
Segment operating expenses | ||||||||||||||||||||
Operations and support | 5,616 | (443) | 6,059 | 6,053 | 0.1 | |||||||||||||||
EBITDA | 3,447 | 71 | 3,376 | 3,614 | (6.6) | |||||||||||||||
Depreciation and amortization | 1,487 | - | 1,487 | 1,483 | 0.3 | |||||||||||||||
Total Segment Operating Expenses | 7,103 | (443) | 7,546 | 7,536 | 0.1 | |||||||||||||||
Segment Operating Income | 1,960 | 71 | 1,889 | 2,131 | (11.4) | |||||||||||||||
Equity in Net Income of Affiliates | 1 | - | 1 | - | - | |||||||||||||||
Segment Contribution | $ | 1,961 | $ | 71 | $ | 1,890 | $ | 2,131 | (11.3) | % | ||||||||||
Operating Income Margin | 21.6% | 20.0% | 22.0% | (200) | BP | |||||||||||||||
EBITDA Margin | 38.0% | 35.8% | 37.4% | (160) | BP | |||||||||||||||
55
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Entertainment Group | ||||||||||||||
Supplemental Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter | ||||||||||||
|
|
|
|
|
|
| Historical |
|
|
|
|
|
| |
|
| Reported |
| Accounting |
| Method |
|
|
|
| Percent |
| ||
| 2018 |
| Impact |
| 2018 |
| 2017 |
| Change |
| ||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video entertainment | $ | 8,283 |
| $ | (113) |
| $ | 8,396 |
| $ | 9,052 |
| (7.2) | % |
High-speed internet |
| 2,045 |
|
| - |
|
| 2,045 |
|
| 1,916 |
| 6.7 |
|
Legacy voice and data services |
| 740 |
|
| (29) |
|
| 769 |
|
| 913 |
| (15.8) |
|
Other service and equipment |
| 521 |
|
| (64) |
|
| 585 |
|
| 586 |
| (0.2) |
|
Total Operating Revenues |
| 11,589 |
|
| (206) |
|
| 11,795 |
|
| 12,467 |
| (5.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 9,155 |
|
| (431) |
|
| 9,586 |
|
| 9,804 |
| (2.2) |
|
EBITDA |
| 2,434 |
|
| 225 |
|
| 2,209 |
|
| 2,663 |
| (17.0) |
|
Depreciation and amortization |
| 1,331 |
|
| - |
|
| 1,331 |
|
| 1,379 |
| (3.5) |
|
Total Operating Expenses |
| 10,486 |
|
| (431) |
|
| 10,917 |
|
| 11,183 |
| (2.4) |
|
Operating Income |
| 1,103 |
|
| 225 |
|
| 878 |
|
| 1,284 |
| (31.6) |
|
Equity in Net Income (Loss) of Affiliates |
| 1 |
|
| - |
|
| 1 |
|
| (1) |
| - |
|
Operating Contribution | $ | 1,104 |
| $ | 225 |
| $ | 879 |
| $ | 1,283 |
| (31.5) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Margin |
| 9.5 | % |
|
|
|
| 7.4 | % |
| 10.3 | % | (290) | BP |
EBITDA Margin |
| 21.0 | % |
|
|
|
| 18.7 | % |
| 21.4 | % | (270) | BP |
Entertainment Group
Supplemental Segment Results
| Second Quarter | ||||||||||||||||||||
| Reported 2018 | Accounting Impact | Historical Method 2018 | 2017 | Percent Change | ||||||||||||||||
Segment operating revenues | ||||||||||||||||||||
Video entertainment | $ | 8,331 | $ | (107) | $ | 8,438 | $ | 9,153 | (7.8) | % | ||||||||||
High-speed internet | 1,981 | - | 1,981 | 1,927 | 2.8 | |||||||||||||||
Legacy voice and data services | 785 | (33) | 818 | 981 | (16.6) | |||||||||||||||
Other service and equipment | 553 | (66) | 619 | 600 | 3.2 | |||||||||||||||
| ||||||||||||||||||||
Total Segment Operating Revenues | 11,650 | (206) | 11,856 | 12,661 | (6.4) | |||||||||||||||
| ||||||||||||||||||||
Segment operating expenses | ||||||||||||||||||||
Operations and support | 8,852 | (425) | 9,277 | 9,561 | (3.0) | |||||||||||||||
| ||||||||||||||||||||
EBITDA | 2,798 | 219 | 2,579 | 3,100 | (16.8) | |||||||||||||||
| ||||||||||||||||||||
Depreciation and amortization | 1,346 | - | 1,346 | 1,458 | (7.7) | |||||||||||||||
| ||||||||||||||||||||
Total Segment Operating Expenses | 10,198 | (425) | 10,623 | 11,019 | (3.6) | |||||||||||||||
| ||||||||||||||||||||
Segment Operating Income | 1,452 | 219 | 1,233 | 1,642 | (24.9) | |||||||||||||||
Equity in Net Income (Loss) of Affiliates | (20) | - | (20) | (12) | (66.7) | |||||||||||||||
| ||||||||||||||||||||
Segment Contribution | $ | 1,432 | $ | 219 | $ | 1,213 | $ | 1,630 | (25.6 | )% | ||||||||||
Operating Income Margin | 12.5 | % | 10.4 | % | 13.0 | % | (260) | BP | ||||||||||||
EBITDA | 24.0 | % | 21.8 | % | 24.5 | % | (270) | BP | ||||||||||||
56
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Business Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
| ||||||||||||
|
|
|
|
| Historical |
|
|
|
|
|
| |||
| Reported |
| Accounting |
| Method |
|
|
|
| Percent |
| |||
| 2018 |
| Impact |
| 2018 |
| 2017 |
| Change |
| ||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic services | $ | 3,059 |
| $ | (3) |
| $ | 3,062 |
| $ | 3,018 |
| 1.5 | % |
Legacy voice and data services |
| 2,615 |
|
| (242) |
|
| 2,857 |
|
| 3,343 |
| (14.5) |
|
�� Other service and equipment |
| 1,029 |
|
| (69) |
|
| 1,098 |
|
| 917 |
| 19.7 |
|
Total Operating Revenues |
| 6,703 |
|
| (314) |
|
| 7,017 |
|
| 7,278 |
| (3.6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 4,030 |
|
| (339) |
|
| 4,369 |
|
| 4,635 |
| (5.7) |
|
EBITDA |
| 2,673 |
|
| 25 |
|
| 2,648 |
|
| 2,643 |
| 0.2 |
|
Depreciation and amortization |
| 1,197 |
|
| - |
|
| 1,197 |
|
| 1,189 |
| 0.7 |
|
Total Operating Expenses |
| 5,227 |
|
| (339) |
|
| 5,566 |
|
| 5,824 |
| (4.4) |
|
Operating Income |
| 1,476 |
|
| 25 |
|
| 1,451 |
|
| 1,454 |
| (0.2) |
|
Equity in Net Income (Loss) of Affiliates |
| (1) |
|
| - |
|
| (1) |
|
| 1 |
| - |
|
Operating Contribution | $ | 1,475 |
| $ | 25 |
| $ | 1,450 |
| $ | 1,455 |
| (0.3) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Margin |
| 22.0 | % |
|
|
|
| 20.7 | % |
| 20.0 | % | 70 | BP |
EBITDA Margin |
| 39.9 | % |
|
|
|
| 37.7 | % |
| 36.3 | % | 140 | BP |
International
Supplemental Segment Results
| Second Quarter | ||||||||||||||||||||
| Historical | ||||||||||||||||||||
| Reported | Accounting | Method | Percent | |||||||||||||||||
| 2018 | Impact | 2018 | 2017 | Change | ||||||||||||||||
Segment operating revenues | ||||||||||||||||||||
Video entertainment | $ | 1,254 | $ | - | $ | 1,254 | $ | 1,361 | (7.9)% | |||||||||||
Wireless service | 417 | (40 | ) | 457 | 535 | (14.6) | ||||||||||||||
Wireless equipment | 280 | 18 | 262 | 130 | - | |||||||||||||||
Total Segment Operating Revenues | 1,951 | (22 | ) | 1,973 | 2,026 | (2.6) | ||||||||||||||
Segment operating expenses | ||||||||||||||||||||
Operations and support | 1,803 | (41 | ) | 1,844 | 1,772 | 4.1 | ||||||||||||||
EBITDA | 148 | 19 | 129 | 254 | (49.2) | |||||||||||||||
Depreciation and amortization | 313 | - | 313 | 311 | 0.6 | |||||||||||||||
Total Segment Operating Expenses | 2,116 | (41 | ) | 2,157 | 2,083 | 3.6 | ||||||||||||||
Segment Operating Income (Loss) | (165 | ) | 19 | (184 | ) | (57 | ) | - | ||||||||||||
Equity in Net Income (Loss) of Affiliates | 15 | - | 15 | 25 | (40.0) | |||||||||||||||
Segment Contribution | $ | (150 | ) | $ | 19 | $ | (169 | ) | $ | (32 | ) | - % | ||||||||
| ||||||||||||||||||||
Operating Income Margin | -8.5 | % | -9.3 | % | -2.8 | % | (650)BP | |||||||||||||
EBITDA Margin | 7.6 | % | 6.5 | % | 12.5 | % | (600)BP | |||||||||||||
AT&T Mobility Supplemental Results
| Second Quarter | ||||||||||||||||||||
| Historical | ||||||||||||||||||||
| Reported | Accounting | Method | Percent | |||||||||||||||||
| 2018 | Impact | 2018 | 2017 | Change | ||||||||||||||||
Operating revenues | ||||||||||||||||||||
Service | $ | 13,682 | $ | (813 | ) | $ | 14,495 | $ | 14,471 | 0.2% | ||||||||||
Equipment | 3,600 | 451 | 3,149 | 2,984 | 5.5 | |||||||||||||||
Total Operating Revenues | 17,282 | (362 | ) | 17,644 | 17,455 | 1.1 | ||||||||||||||
Operating expenses | ||||||||||||||||||||
Operations and support | 9,663 | (670 | ) | 10,333 | 10,091 | 2.4 | ||||||||||||||
EBITDA | 7,619 | 308 | 7,311 | 7,364 | (0.7) | |||||||||||||||
Depreciation and amortization | 2,113 | - | 2,113 | 1,988 | 6.3 | |||||||||||||||
Total Operating Expenses | 11,776 | (670 | ) | 12,446 | 12,079 | 3.0 | ||||||||||||||
Operating Income | $ | 5,506 | $ | 308 | $ | 5,198 | $ | 5,376 | (3.3) % | |||||||||||
| ||||||||||||||||||||
Operating Income Margin | 31.9% | 29.5% | 30.8% | (130)BP | ||||||||||||||||
EBITDA Margin | 44.1% | 41.4% | 42.2% | (80)BP | ||||||||||||||||
EBITDA Service Margin | 55.7% | 50.4% | 50.9% | (50)BP | ||||||||||||||||
57
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Business Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter |
| ||||||||||||
|
|
|
|
| Historical |
|
|
|
|
|
| |||
| Reported |
| Accounting |
| Method |
|
|
|
| Percent |
| |||
| 2018 |
| Impact |
| 2018 |
| 2017 |
| Change |
| ||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless service | $ | 1,877 |
| $ | (206) |
| $ | 2,083 |
| $ | 2,023 |
| 3.0 | % |
Strategic services |
| 3,059 |
|
| (3) |
|
| 3,062 |
|
| 3,018 |
| 1.5 |
|
Legacy voice and data services |
| 2,615 |
|
| (242) |
|
| 2,857 |
|
| 3,343 |
| (14.5) |
|
Other service and equipment |
| 1,029 |
|
| (69) |
|
| 1,098 |
|
| 917 |
| 19.7 |
|
Wireless equipment |
| 590 |
|
| 167 |
|
| 423 |
|
| 340 |
| 24.4 |
|
Total Operating Revenues |
| 9,170 |
|
| (353) |
|
| 9,523 |
|
| 9,641 |
| (1.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 5,598 |
|
| (404) |
|
| 6,002 |
|
| 6,096 |
| (1.5) |
|
EBITDA |
| 3,572 |
|
| 51 |
|
| 3,521 |
|
| 3,545 |
| (0.7) |
|
Depreciation and amortization |
| 1,499 |
|
| - |
|
| 1,499 |
|
| 1,466 |
| 2.3 |
|
Total Operating Expenses |
| 7,097 |
|
| (404) |
|
| 7,501 |
|
| 7,562 |
| (0.8) |
|
Operating Income |
| 2,073 |
|
| 51 |
|
| 2,022 |
|
| 2,079 |
| (2.7) |
|
Equity in Net Income (Loss) of Affiliates |
| (1) |
|
| - |
|
| (1) |
|
| - |
| - |
|
Operating Contribution | $ | 2,072 |
| $ | 51 |
| $ | 2,021 |
| $ | 2,079 |
| (2.8) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Margin |
| 22.6 | % |
|
|
|
| 21.2 | % |
| 21.6 | % | (40) | BP |
EBITDA Margin |
| 39.0 | % |
|
|
|
| 37.0 | % |
| 36.8 | % | 20 | BP |
58
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Segment Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third Quarter | |||||||||||||
|
|
|
|
|
|
| Historical |
|
|
|
|
| ||
| Reported |
| Accounting |
| Method |
|
|
|
| Percent | ||||
| 2018 |
| Impact |
| 2018 |
| 2017 |
| Change | |||||
Segment operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vrio | $ | 1,102 |
| $ | - |
| $ | 1,102 |
| $ | 1,363 |
| (19.1) | % |
Mexico |
| 731 |
|
| (24) |
|
| 755 |
|
| 736 |
| 2.6 |
|
Total Segment Operating Revenues |
| 1,833 |
|
| (24) |
|
| 1,857 |
|
| 2,099 |
| (11.5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 1,746 |
|
| (38) |
|
| 1,784 |
|
| 1,937 |
| (7.9) |
|
EBITDA |
| 87 |
|
| 14 |
|
| 73 |
|
| 162 |
| (54.9) |
|
Depreciation and amortization |
| 297 |
|
| - |
|
| 297 |
|
| 304 |
| (2.3) |
|
Total Segment Operating Expenses |
| 2,043 |
|
| (38) |
|
| 2,081 |
|
| 2,241 |
| (7.1) |
|
Segment Operating Income (Loss) |
| (210) |
|
| 14 |
|
| (224) |
|
| (142) |
| (57.7) |
|
Equity in Net Income (Loss) of Affiliates |
| 9 |
|
| - |
|
| 9 |
|
| 17 |
| (47.1) |
|
Segment Contribution | $ | (201) |
| $ | 14 |
| $ | (215) |
| $ | (125) |
| (72.0) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Margin |
| (11.5) | % |
|
|
|
| (12.1) | % |
| (6.8) | % | (530) | BP |
EBITDA Margin |
| 4.7 | % |
|
|
|
| 3.9 | % |
| 7.7 | % | (380) | BP |
OTHER BUSINESS MATTERS
Time WarnerOn June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. The deal combines Time Warner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world’sworld's largestpay-TV subscriber bases and scale in TV, mobile and broadband distribution. We expect that the transaction will advance ourdirect-to-consumer efforts and provide us with the ability to develop innovative new content offerings.
Under the merger agreement, each share of Time Warner stock was exchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to trusts consolidated by AT&T, share-based payment arrangements and fractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to Time Warner shareholders, giving them an approximate 16% stake in the combined company. Based on our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration including share-based payment arrangements and other adjustments totaled $79,114.$79,358, excludes Time Warner’s net debt at acquisition. On July 12, 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we will continue to vigorously defend our legal position in the appellate court.court, which has scheduled the oral arguments for December 6, 2018.
Litigation Challenging DIRECTV’s NFL SUNDAY TICKETMore 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 ofpre-trial proceedings. We vigorously dispute the allegations the complaints have asserted.allegations. In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. In 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. The appeal has been fully briefed and we anticipate the oral argument will occuris scheduled for December 7, 2018.
59
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in 2019.millions, except per share and per subscriber amounts
Federal Trade Commission Litigation Involving DIRECTVIn March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore 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. A bench trial began in August 2017, and was suspended after the FTC rested its case, so that the court could consider DIRECTV’s motion for judgment. The hearing on the motion occurred in October 2017, and the judge took it under advisement. On August 16, 2018, the court granted DIRECTV’s motion in large part, substantially limiting DIRECTV’s possible liability and damages. Following this decision, the FTC agreed to dismissal of its claims with prejudice.
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&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
58
AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC’s allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and,We are engaged in August 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. In February 2018, the Court issued itsen banc decision, finding that the FTC had jurisdiction to proceed with the lawsuit.pre-trial discovery. In addition to the FTC case, several class actions were filed challenging our MBR program. We secured dismissals in each of these cases exceptRoberts v. AT&T Mobility LLC,, which is ongoing.
Labor ContractsA contract now covering approximately 9,5008,600 traditional wireline employees in our Midwest region expired in April 2018 and employees are working under the terms of the prior contract, including benefits, while negotiations continue. In addition, a contract now covering approximately 3,6003,400 traditional wireline employees in our legacy AT&T Corp. business also expired in April 2018. Those employees are also working under the terms of their prior contract, including benefits, while negotiations continue. Work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.
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. The new leadership at the FCC is charting a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. Based on its public statements, we expect the FCC to continue to eliminate antiquated, unnecessary regulations and streamline processes. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to allIP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.
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SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
In April 2017, the FCC adopted an order that maintains light touch pricing regulation of packet-based services, extends such light touch pricing regulation to high-speed Time Division Multiplex (TDM) transport services and to most of our TDM channel termination services, based on a competitive market test for such services. For those services that do not qualify for light touch regulation, the order allows companies to offer volume and term discounts, as well as contract tariffs. Several parties appealed the FCC’s decision. These appeals were consolidated inOn August 28, 2018, the U.S. Court of Appeals for the Eighth Circuit where they remain pending.largely upheld the FCC decision, but found that the FCC had not provided adequate notice of the possibility that it might apply light touch regulation to all transport services. The FCC has since remedied that notice deficiency and has proposed to reinstate its light touch approach for transport services.
In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, includingso-called “edge” providers such as Google and Facebook. In April 2017, the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuance of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress.
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AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Privacy-related legislation has been considered in a number of states since the Congressional Review actAct was passed. The policy environment is complex and rapidly evolving. Legislative and regulatory action could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. On June 28, 2018, the State of California enacted comprehensive privacy legislation that gives California consumers the right to know what personal information is being collected about them, to know whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right toopt-out of the sale of personal information. The law applies the same rules to all companies that collect consumer information. The new law could significantly affect how data markets operate and will impose implementation costs and challenges. We will continue to support congressional action to codify a set of standard consumer rules of the internet including a federal privacy framework, which would have the effect of preempting state law under the supremacy clause of the U.S. Constitution.framework.
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. AT&T and several other parties appealed the FCC’s order. In June 2016, a divided panel of the District of Columbia Court of Appeals upheld the FCC’s rules by a2-1 vote, and petitions for rehearing en banc were denied in May 2017. Petitions for a writ of Certiorari at the U.S. Supreme Court remain pending. Meanwhile, in December 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. Several parties, including several state Attorneys General, net neutrality advocacy groups and others, have appealed the FCC’s December 2017 decision. Those appeals, which initially were consolidated in the U.S. Court of Appeals for the Ninth Circuit, were transferred at the request of the parties to the D.C. Circuit. In addition, althoughAlthough 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 FCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively reimposere-impose the repealed requirements. AT&T expects that these measures could resultSuits have recently been filed concerning laws in further litigation.California and Vermont, and other lawsuits are possible. We will continue to support congressional action to codify a set of standard consumer rules for the internet.
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.DIRECTV, and some of Warner Media’s businesses are also subject to obligations under the Communications Act and related FCC regulations. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provideIP-based service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for our services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
61
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
WarnerMedia creates, owns and distributes intellectual property, including copyrights, trademarks and licenses of intellectual property. To protect its intellectual property, WarnerMedia relies on a combination of laws and license agreements. Outside the U.S., laws and regulations relating to intellectual property protection and the effective enforcement of these laws and regulations vary greatly from country to country. The European Union Commission is pursuing legislative and regulatory initiatives that could impair Warner Bros.’ current country-by-country licensing approach in the European Union. Piracy, particularly of digital content, continues to threaten WarnerMedia’s revenues from products and services, and WarnerMedia works to limit that threat through a combination of approaches, including technological and legislative solutions. Outside the U.S., various laws and regulations, as well as trade agreements with the U.S., also apply to the distribution or licensing of feature films for exhibition in theaters and on broadcast and cable networks. For example, in certain countries, including China, laws and regulations limit the number of foreign films exhibited in such countries in a calendar year.
On September 27, 2018, the FCC released an order to ensure that state and local governments do not erect unreasonable barriers to 5G technology deployment. Among other things, the order clarifies that state and local governments may not charge excessive fees or impose unreasonable aesthetic standards for access to or placement of small wireless facilities in rights of way. It also established time limits for consideration of applications for placement of small wireless facilities.
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” equipment and therefore increase the need for local permitting 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 2018, the FCC adopted an order to streamline the wireless infrastructure review process in order to facilitate deployment of next-generation wireless facilities. Among other actions, the order excludes most small cell facilities from federal review under the National Environmental Policy Act and the National Historic Preservation Act, while clarifying and streamlining the process for tribal participation in historic preservation reviews where such review is still required. In addition, to date, 21 states have adopted legislation to facilitate small cell deployment.
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AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Also facilitating the deployment of next-generation wireless facilities, in May 2014, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining itscase-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 exceedsone-third of the available low band spectrum as presumptively harmful to competition. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers’ needs.
62
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
As the wireless industry has matured, future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and to provide these services in bundled product offerings to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, we have:
·Submitted winning bids for 251 Advanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality spectrum |
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Connect America Fund Phase II Auction (Auction 903) The FCC plans to conduct a reverse auction to award government funding to the lowest bidders in exchange for providing broadband service to rural, high-cost areas in the U.S. where it is uneconomicAWS-3 Auction.
·Redeployed spectrum previously used for carriersbasic 2G services to offer broadband. This issupport more advanced mobile internet services on our 3G and 4G networks.
·Secured the first timeFirst Responder Network Authority (FirstNet) contract, which provides us with access to 20 MHz of nationwide low band spectrum.
·Invested in 5G and millimeter-wave technologies with our acquisition of Fiber-Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (39 GHz) that the FCC recently reallocated for mobile broadband services. These bands will award universal service funding through an auction.help to accelerate our entry into 5G services.
LIQUIDITY AND CAPITAL RESOURCES
With the completion of the Time Warner transaction, we had $13,523$8,657 in cash and cash equivalents available at JuneSeptember 30, 2018. Cash and cash equivalents included cash of $3,457$3,083 and money market funds and other cash equivalents of $10,066.$5,574. Approximately $1,226$1,810 of our cash and cash equivalents residedwere held by our foreign entities in foreign jurisdictionsaccounts predominantly outside of the U.S. and were in foreign currencies, some of which may be subject to restrictions on repatriation.
Cash and cash equivalents decreased $36,975$41,841 since December 31, 2017. In the first sixnine months of 2018, cash inflows were primarily provided by the cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables and other customer receivables to third parties, issuance of commercial paper and long-term debt and collateral received from banks and other participants in our derivative arrangements. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, the acquisition of Time Warner and wireless spectrum,AppNexus, payment of operating expenses, funding capital expenditures, debt repayments, and dividends to stockholders.
We actively manage the timing of our vendor payments to optimize the use of our cash. Among other things, we seek to have vendor payments made on90-day or greater terms, while providing vendors with access to bank facilities that permit earlier payments at the vendors’ cost. For example,In addition, for payments to a key supplier, we have arrangements that allow us to extend payment terms between approximately 40 to 60 days at an additional cost to us. We believe these arrangements provide benefits to us relative to alternative financing arrangements. During the secondthird quarter of 2018 and for the first sixnine months then ended, the net impact of these cash management activities on our cash flows provided by operating activities was not material.
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AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
On December 22, 2017, federal tax reform was enacted into law. Beginning with 2018, the Act reduces the U.S. federal corporate tax rate from 35% to 21% and permits immediate deductions for certain new assets. As a result, cash taxes will be significantly lower than they would have been in 2018 and beyond without federal tax reform.
Cash Provided by or Used in Operating Activities
During the first sixnine months of 2018, cash provided by operating activities was $19,176,$31,522, compared to $17,670$28,473 for the first sixnine months of 2017. Higher operating cash flows in 2018 were primarily due to net tax refunds and contributions from WarnerMedia, offset by higher interest payments and acquisition-related costs.
Cash Used in or Provided by Investing Activities
For the first sixnine months of 2018, cash used in investing activities totaled $52,635,$59,987, and consisted primarily of $40,715$43,116 for acquisition costs related to Time Warner and other acquisitions and $10,959$16,695 for capital expenditures, excluding interest during construction.
The majority of our capital expenditures are spent on our networks, including product development and related support systems. Capital expenditures, excluding interest during construction, increased $209$939 in the first sixnine months. We do not report capital expenditures at the segment level. During 2018, approximately $800$1,400 of assets forrelated to FirstNet build have been placed into service with a net cash impact of $100.$660. Total reimbursements from the government for FirstNet during the first sixnine months of 2018 were $336. We expect reimbursement of approximately $1,300 during the fourth quarter of 2018 as the government has approved certain network build milestones.
63
SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
In connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing), which are excluded from our investing activities and reported as financing activities. We enter into these supplier arrangements when the terms provide benefits to us relative to alternative financing arrangements. For the first sixnine months of 2018, vendor financing payments related to capital investments were approximately $257.$349. During the first sixnine months, we entered into $188$872 of new vendor financing commitments, with $825$1,419 of vendor financing payables included in on our JuneSeptember 30, 2018 consolidated balance sheet, of which $340$910 are due within one year and the remainder are due between two and five years.
The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. We are also focused on ensuring DIRECTV merger commitments are met. As of JuneSeptember 30, 2018, we market ourfiber-to-the-premises network to 9.210.1 million customer locations and are on track to meet our FCC commitment of 12.5 million locations bymid-2019.
In 2018, we expect Capitalcapital investment, which consists of capital expenditures plus vendor financing payments, of approximately $25,000,$24,000, $22,000 net of expected FirstNet reimbursements and vendor financing.
Cash Provided by or Used in Financing Activities
For the first sixnine months of 2018, cash used in financing activities totaled $3,720$13,679 and included net proceeds of $26,478,$38,325, primarily resulting from drawing $20,925 on our Term Loan Credit Agreements in connection with our acquisition of Time Warner. Net proceeds forThe remaining amount consisted primarily of the first six monthsfollowing issuances:
·April issuance of 2018 also include a $1,500 three-year floating rate note andapproximately $2,000 of notes issued by our subsidiary Vrio Corp. (Vrio), see. See discussion below.
·June issuance of $1,500 of floating rate global notes due 2021.
·August issuance of $825 of 5.625% global notes due 2067.
·August issuance of €2,250 ($2,637 U.S. dollar equivalent) floating rate global notes due 2020.
·August issuance of $3,750 of floating rate global notes due 2024.
·August issuance of CAD$1,250 of 4.000% global notes due 2025 and CAD$750 of 5.100% global notes due 2048 (together, equivalent to $1,536 when issued).
·September issuance of £750 global notes due 2026 (equivalent to $972 when issued).
·September issuance of A$475 of floating rate notes due 2023, A$150 of 3.450% notes due 2023, A$300 of 4.100% notes due 2026 and A$400 of 4.600% notes due 2028 (together, equivalent to $955 when issued).
During the first sixnine months of 2018, we redeemed $29,447$43,579 of long-term debt. Approximately $21,236 were notes subject to mandatory redemption if we did not complete our acquisition of Time Warner by April 22, 2018. The remaining amount primarily consisted of the following redemptions:
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·$2,500 of 5.500% notes due 2018.
·$750 of 1.750% notes due 2018.
·$300 of 6.450% notes due 2018.
·$1,000 of 5.600% notes due 2018.
·$2,000 repayment of amounts outstanding under Warner Media, LLC’s Term Credit Agreement.
·$600 of 6.875% historic TW Inc. notes due 2018.
·$1,000 of notes issued by Vrio.
·$10,000 repayment of amounts outstanding under our Term Loan Agreement.
·$2,500 repayment of amounts outstanding under our June 2018 Term Loan.
·$57 of 5.200% notes due 2020.
·$58 of 5.875% notes due 2019.
·$1,400 of 4.875% Warner Media, LLC notes due 2020.
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SEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.3%4.4% as of JuneSeptember 30, 2018 and 4.4% as of December 31, 2017. We had $180,209$177,718 of total notes and debentures outstanding at JuneSeptember 30, 2018, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso, Canadian dollar and CanadianAustralian dollar denominated debt that totaled approximately $36,146.
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AT&T INC.
JUNE 30, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts$42,083.
As a result of the Time Warner acquisition, we acquired debt with a fair value of $22,846$22,865 at the time of acquisition, of which $18,876$17,121 at face value remained on our balance sheet as of JuneSeptember 30, 2018. The face value of the remaining debt acquired is summarized primarily as follows:
·$774 maturing between 2018 and 2019 with an interest rate ranging from 1.250% to 2.100%. ·$5,487 maturing between 2020 and 2024 with an interest rate ranging from 1.950% to 9.150%. ·$5,898 maturing between 2025 and 2034 with an interest rate ranging from 2.950% to 7.700%. ·$4,962 maturing between 2035 and 2045 with an interest rate ranging from 4.650% to 8.300%. |
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At JuneSeptember 30, 2018, we had $21,672$14,905 of debt maturing within one year, including $8,139$3,787 of commercial paper borrowing and $13,323$10,993 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. 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 and partially exchanged in the 2017 debt exchange offers) is held to maturity, the redemption amount will be $592. |
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Vrio, a consolidated holding company for our Latin American digital entertainment services units, DIRECTV Latin AmericanAmerica and SKY Brasil, subsidiaries of Vrio, entered into the following long-term debt issuances:
·April |
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On July 25, 2018 we issued $750borrowing of 5.625% global notes due 2067.approximately $1,000 of debt denominated in Brazilian reais that matures in 2021. The underwriters have an option to purchase up to an additional $113 aggregate principal amount within 30 days of the offering.
On July 30, 2018 we issued €2,250 ($2,637 U.S. dollar equivalent)current floating rate global notes due 2020.for the facility is based upon the Brazil interbank deposit rate annualized (DI Rate), plus 100 basis points. This borrowing is unhedged and remained outstanding at September 30, 2018.
At JuneSeptember 30, 2018, we had approximately 376 million shares remaining from share repurchase authorizations approved by the Board of Directors in 2013 and 2014. During the first sixnine months of 2018, we repurchased approximately 13 million shares under these authorizations.
We paid dividends of $6,144$9,775 during the first sixnine months of 2018, compared with $6,021$9,030 for the first sixnine months of 2017, 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 December 2017. Dividends declared by our Board of Directors totaled $1.00$1.50 per share in the first sixnine months of 2018 and $0.98$1.47 per share for the first sixnine months of 2017. Our dividend policy considers the 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.
Credit Facilities
The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form10-K.
We use credit facilities as a tool in managing our liquidity status. At JuneSeptember 30, 2018, we had no amounts outstanding on our five-year $12,000 revolving credit agreement.
In September 2017, we entered into a $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. We drew on the Tranche A Facility, the Tranche B Facility and the Tranche C Facilityall three facilities during the first quarter of 2018, with $2,250 in advances outstanding as of JuneSeptember 30, 2018.
6365
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases, as well as a commercial paper program.
In anticipation of the Time Warner acquisition, we entered into a $10,000$16,175 term loan agreement (“Term Loan”). In February 2018, we amended the Term Loan to extend the 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 toof December 31, 2018 and increased the commitments to $16,175 from $10,000. 2018. We drew on the entire Term Loan for the acquisition during the second quarter of 2018. On September 20, 2018, we repaid $5,000 of Tranche A loans and $5,000 of Tranche B loans, with $16,175$3,088 Tranche A loans and $3,087 Tranche B loans outstanding as of JuneSeptember 30, 2018.
On
In June 13, 2018, we entered into an additional $2,500 Term Loan Credit Agreement (“June 2018 Term Loan”) to finance a portion of the cash consideration of the Time Warner acquisition. We accordingly drew on the agreement with $2,500 outstanding as ofon June 30,14, 2018.
On June 26, In August 2018, we repaidprepaid in full all indebtedness and the June 2018 Term Loan was terminated the $2,000 unsecured term loan agreement that Time Warner had in place at the time the merger closed. At June 14, 2018, Time Warner had approximately $1,100 ofits entirety.
We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases, as well as a commercial paper outstanding, all of which was repaid by July 23, 2018.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 netdebt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than3.5-to-1. As of JuneSeptember 30, 2018, we were in compliance with the covenants for our credit facilities.
Collateral Arrangements
During the first sixnine months of 2018, we posted $365received $116 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 7)
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At JuneSeptember 30, 2018, our debt ratio was 50.8%49.8%, compared to 53.3%56.4% at JuneSeptember 30, 2017 and 53.6% at December 31, 2017. Our net debt ratio was 47.2%47.4% at JuneSeptember 30, 2018, compared to 43.8%39.7% at JuneSeptember 30, 2017 and 37.2% at December 31, 2017. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.
During the first sixnine months of 2018, we received $4,212$6,904 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the trust used to pay benefits under our qualified pension plans. The preferred equity interest had a value of $8,829$8,803 as of JuneSeptember 30, 2018, and $9,155 as of December 31, 2017, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts.amounts upon declaration. We distributed $280$420 to the trust during the first sixnine months of 2018. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares.
6466
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
DISCUSSION AND RECONCILIATION OFNON-GAAP MEASURES
We believe the following measures are relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. These supplemental measures should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.
Supplemental Operational Measures
We provide a supplemental discussion of our domestic wirelessBusiness Solutions operations that is calculated by combining our Consumer Mobility and Business Solutions segments,Wireline operating units, and then adjusting to removenon-wireless non-business operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.
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| June 30, 2018 | June 30, 2017 | |||||||||||||||||||||||||||||||||||
| Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | |||||||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||||||
Wireless service | $ | 11,853 | $ | 1,829 | $ | - | $ | 13,682 | $ | 12,467 | $ | 2,004 | $ | - | $ | 14,471 | ||||||||||||||||||||
Strategic services | - | 3,039 | (3,039 | ) | - | - | 2,958 | (2,958 | ) | - | ||||||||||||||||||||||||||
Legacy voice and data services | - | 2,723 | (2,723 | ) | - | - | 3,423 | (3,423 | ) | - | ||||||||||||||||||||||||||
Other service and equipment | - | 888 | (888 | ) | - | - | 922 | (922 | ) | - | ||||||||||||||||||||||||||
Wireless equipment | 3,016 | 584 | - | 3,600 | 2,624 | 360 | - | 2,984 | ||||||||||||||||||||||||||||
Total Operating Revenues | 14,869 | 9,063 | (6,650 | ) | 17,282 | 15,091 | 9,667 | (7,303 | ) | 17,455 | ||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||||||
Operations and support | 8,085 | 5,616 | (4,038 | ) | 9,663 | 8,636 | 6,053 | (4,598 | ) | 10,091 | ||||||||||||||||||||||||||
EBITDA | 6,784 | 3,447 | (2,612 | ) | 7,619 | 6,455 | 3,614 | (2,705 | ) | 7,364 | ||||||||||||||||||||||||||
Depreciation and amortization | 1,806 | 1,487 | (1,180 | ) | 2,113 | 1,716 | 1,483 | (1,211 | ) | 1,988 | ||||||||||||||||||||||||||
Total Operating Expense | 9,891 | 7,103 | (5,218 | ) | 11,776 | 10,352 | 7,536 | (5,809 | ) | 12,079 | ||||||||||||||||||||||||||
Operating Income | $ | 4,978 | $ | 1,960 | $ | (1,432 | ) | $ | 5,506 | $ | 4,739 | $ | 2,131 | $ | (1,494 | ) | $ | 5,376 | ||||||||||||||||||
1Business wireline operations reported in Business Solutions segment.results.
|
| Three Months Ended | |||||||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 | ||||||||||||
|
| Mobility |
| Business Wireline |
| Adjustments1 |
| Business Solutions |
|
| Mobility |
| Business Wireline |
| Adjustments1 |
| Business Solutions |
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless service | $ | 13,989 | $ | - | $ | (12,112) | $ | 1,877 |
| $ | 14,475 | $ | - | $ | (12,452) | $ | 2,023 |
Fixed strategic services |
| - |
| 3,059 |
| - |
| 3,059 |
|
| - |
| 3,018 |
| - |
| 3,018 |
Legacy voice and data services |
| - |
| 2,615 |
| - |
| 2,615 |
|
| - |
| 3,343 |
| - |
| 3,343 |
Other service and equipment |
| - |
| 1,029 |
| - |
| 1,029 |
|
| - |
| 917 |
| - |
| 917 |
Wireless equipment |
| 3,949 |
| - |
| (3,359) |
| 590 |
|
| 2,895 |
| - |
| (2,555) |
| 340 |
Total Operating Revenues |
| 17,938 |
| 6,703 |
| (15,471) |
| 9,170 |
|
| 17,370 |
| 7,278 |
| (15,007) |
| 9,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 10,255 |
| 4,030 |
| (8,687) |
| 5,598 |
|
| 10,029 |
| 4,635 |
| (8,568) |
| 6,096 |
EBITDA |
| 7,683 |
| 2,673 |
| (6,784) |
| 3,572 |
|
| 7,341 |
| 2,643 |
| (6,439) |
| 3,545 |
Depreciation and amortization |
| 2,079 |
| 1,197 |
| (1,777) |
| 1,499 |
|
| 2,008 |
| 1,189 |
| (1,731) |
| 1,466 |
Total Operating Expense |
| 12,334 |
| 5,227 |
| (10,464) |
| 7,097 |
|
| 12,037 |
| 5,824 |
| (10,299) |
| 7,562 |
Operating Income |
| 5,604 |
| 1,476 |
| (5,007) |
| 2,073 |
|
| 5,333 |
| 1,454 |
| (4,708) |
| 2,079 |
Equity in net income of affiliates |
| (1) |
| (1) |
| 1 |
| (1) |
|
| - |
| 1 |
| (1) |
| - |
Operating Income | $ | 5,603 | $ | 1,475 | $ | (5,006) | $ | 2,072 |
| $ | 5,333 | $ | 1,455 | $ | (4,709) | $ | 2,079 |
1Non-business wireless reported in the Communications segment under the Mobility business unit. | |||||||||||||||||
6567
JUNESEPTEMBER 30, 2018
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
|
| Nine Months Ended | |||||||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 | ||||||||||||
|
| Mobility |
| Business Wireline |
| Adjustments1 |
| Business Solutions |
|
| Mobility |
| Business Wireline |
| Adjustments1 |
| Business Solutions |
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless service | $ | 41,074 | $ | - | $ | (35,577) | $ | 5,497 |
| $ | 43,414 | $ | - | $ | (37,384) | $ | 6,030 |
Fixed strategic services |
| - |
| 9,168 |
| - |
| 9,168 |
|
| - |
| 8,880 |
| - |
| 8,880 |
Legacy voice and data services |
| - |
| 8,176 |
| - |
| 8,176 |
|
| - |
| 10,314 |
| - |
| 10,314 |
Other service and equipment |
| - |
| 2,756 |
| - |
| 2,756 |
|
| - |
| 2,717 |
| - |
| 2,717 |
Wireless equipment |
| 11,501 |
| - |
| (9,749) |
| 1,752 |
|
| 8,508 |
| - |
| (7,520) |
| 988 |
Total Operating Revenues |
| 52,575 |
| 20,100 |
| (45,326) |
| 27,349 |
|
| 51,922 |
| 21,911 |
| (44,904) |
| 28,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and support |
| 30,020 |
| 12,084 |
| (25,296) |
| 16,808 |
|
| 30,005 |
| 13,906 |
| (25,764) |
| 18,147 |
EBITDA |
| 22,555 |
| 8,016 |
| (20,030) |
| 10,541 |
|
| 21,917 |
| 8,005 |
| (19,140) |
| 10,782 |
Depreciation and amortization |
| 6,287 |
| 3,547 |
| (5,390) |
| 4,444 |
|
| 5,988 |
| 3,583 |
| (5,162) |
| 4,409 |
Total Operating Expense |
| 36,307 |
| 15,631 |
| (30,686) |
| 21,252 |
|
| 35,993 |
| 17,489 |
| (30,926) |
| 22,556 |
Operating Income |
| 16,268 |
| 4,469 |
| (14,640) |
| 6,097 |
|
| 15,929 |
| 4,422 |
| (13,978) |
| 6,373 |
Equity in Net Income of Affiliates |
| (1) |
| (1) |
| 1 |
| (1) |
|
| - |
| - |
| - |
| - |
Operating Income | $ | 16,267 | $ | 4,468 | $ | (14,639) | $ | 6,096 |
| $ | 15,929 | $ | 4,422 | $ | (13,978) | $ | 6,373 |
1Non-business wireless reported in the Communications segment under the Mobility business unit. | |||||||||||||||||
| Six Months Ended | ||||||||||||||||||||||||||||||||||||
| June 30, 2018 | June 30, 2017 | |||||||||||||||||||||||||||||||||||
| Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | Consumer Mobility | Business Solutions | Adjustments1 | AT&T Mobility | |||||||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||||||
Wireless service | $ | 23,465 | $ | 3,620 | $ | - | $ | 27,085 | $ | 24,932 | $ | 4,007 | $ | - | $ | 28,939 | ||||||||||||||||||||
Strategic services | - | 6,109 | (6,109 | ) | - | - | 5,862 | (5,862 | ) | - | ||||||||||||||||||||||||||
Legacy voice and data services | - | 5,561 | (5,561 | ) | - | - | 6,971 | (6,971 | ) | - | ||||||||||||||||||||||||||
Other service and equipment | - | 1,727 | (1,727 | ) | - | - | 1,800 | (1,800 | ) | - | ||||||||||||||||||||||||||
Wireless equipment | 6,390 | 1,162 | - | 7,552 | 4,965 | 648 | - | 5,613 | ||||||||||||||||||||||||||||
Total Operating Revenues | 29,855 | 18,179 | (13,397 | ) | 34,637 | 29,897 | 19,288 | (14,633 | ) | 34,552 | ||||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||||||
Operations and support | 16,609 | 11,210 | (8,054 | ) | 19,765 | 17,196 | 12,051 | (9,271 | ) | 19,976 | ||||||||||||||||||||||||||
EBITDA | 13,246 | 6,969 | (5,343 | ) | 14,872 | 12,701 | 7,237 | (5,362 | ) | 14,576 | ||||||||||||||||||||||||||
Depreciation and amortization | 3,613 | 2,945 | (2,350 | ) | 4,208 | 3,432 | 2,943 | (2,395 | ) | 3,980 | ||||||||||||||||||||||||||
Total Operating Expense | 20,222 | 14,155 | (10,404 | ) | 23,973 | 20,628 | 14,994 | (11,666 | ) | 23,956 | ||||||||||||||||||||||||||
Operating Income | $ | 9,633 | $ | 4,024 | $ | (2,993 | ) | $ | 10,664 | $ | 9,269 | $ | 4,294 | $ | (2,967 | ) | $ | 10,596 | ||||||||||||||||||
1Business wireline operations reported in Business Solutions segment.
6668
AT&T INC.
JUNESEPTEMBER 30, 2018
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At JuneSeptember 30, 2018, we had interest rate swaps with a notional value of $7,333 and a fair value of $(89)$(90).
We havefixed-to-fixed andfloating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $36,092$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 $(290)$(284) at JuneSeptember 30, 2018.
We have foreign exchange contracts with a U.S. dollar notional value of $2,399$2,386 to provide currency at a fixed rate to hedge a portion of the exchange risk involved in foreign currency-denominated transactions. These foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings and qualify asinclude fair value hedges, cash flow hedges and economic (nonqualifying) hedges with a total net fair value of $55$49 at JuneSeptember 30, 2018.
We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’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’s disclosure controls and procedures as of JuneSeptember 30, 2018. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of JuneSeptember 30, 2018.
6769
AT&T INC.
JUNESEPTEMBER 30, 2018
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” 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’ 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’ 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) 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; unbundled network elements and other wholesale obligations; multi-channel video programming distributor services and equipment; 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 absorb revenue losses caused by increasing competition, including offerings that use alternative technologies 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.
·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 and increasing fragmentation of customer viewing habits.
·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 non-regulation of comparable alternative technologies (e.g., VoIP and data usage).
·The continued development and delivery of attractive and profitable video and broadband offerings; 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, attract and offer a diverse portfolio of video, wireless service and devices and device financing plans.
70
AT&T INC.
SEPTEMBER 30, 2018
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
·Our ability to generate advertising revenue from attractive video content, especially from WarnerMedia, in the face of unpredictable and rapidly evolving public viewing habits.
·The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.
·Our ability to manage growth in wireless video and data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
·The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.
·The impact from major equipment failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks.
·The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
·The U.S. Department of Justice prevailing on its appeal of the court decision permitting our acquisition of Time Warner Inc.
·Our ability to successfully integrate our Warner Media operations, including the ability to manage various businesses in widely dispersed business locations and with decentralized management.
·Our ability to take advantage of the desire of advertisers to change traditional video advertising models.
·Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.
·Our increased exposure to 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.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
6871
AT&T INC.
JUNESEPTEMBER 30, 2018
PART II – OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form10-K was filed.
Our ability to successfully integrate our June 2018 acquisition of Time Warner, including the risk that the costs savings and revenue synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due to the issuance of additional shares; the addition of Time Warner’s existing debt to our balance sheet; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.
We completed our acquisition of Time Warner in June 2018. We believe that the acquisition will give us the scale, resources and ability to deploy video content more efficiently to more customers than otherwise possible and to provide very attractive integrated offerings of video, broadband and wireless services; compete more effectively against other video providers as well as other technology, media and communications companies; create premium advertising opportunities, and produce cost and revenue synergies. We must integrate a large number of operational and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. This acquisition also has increased the amount of debt on our balance sheet leading to additional interest expense and, due to the additional shares issued, will result in additional cash being required for any dividends declared. Both of these factors could put pressure on our financial flexibility to continue capital investments, develop new services and declare future dividends. In addition, events outside our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition. Following the closing, the U.S. Department of Justice filed an appeal of the court decision allowing us to complete the acquisition; we believe the lower court decision will be upheld.
6972
AT&T INC.
JUNESEPTEMBER 30, 2018
PART II – OTHER INFORMATION - CONTINUED
Dollars in millions except per share amounts
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(c) A summary of our repurchases of common stock during the | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
The authorizations have no expiration date. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2 | Of the shares repurchased, 403,258 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, 631,152 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Association (VEBA) trusts. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as a part of this report:
70
Exhibit
SIGNATURENumber
Exhibit Description
10-a
10-b
10-c
12
31
Rule 13a-14(a)/15d-14(a) Certifications
32
101
XBRL Instance Document
73
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.
| ||||||
71
November 2, 2018
AT&T Inc.
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
74