(Mark One) ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 or | |||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Large accelerated filer | [X] | Accelerated filer | [ | |||||
Non-accelerated filer | [ ] | Smaller reporting company | [ ] | |||||
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Emerging growth company | [ ] |
Name of each exchange | ||
Title of each class | Trading Symbol(s) | on which registered |
Common Shares (Par Value $1.00 Per Share) | T | New York Stock Exchange |
Floating Rate AT&T Inc. | T 19B | New York Stock Exchange |
Global Notes due June 4, 2019 | ||
Floating Rate AT&T Inc. | T 20C | New York Stock Exchange |
Global Notes due August 3, 2020 | ||
1.875% AT&T Inc. | T 20 | New York Stock Exchange |
Global Notes due December 4, 2020 |
2.65% AT&T Inc. | T 21B | New York Stock Exchange |
Global Notes due December 17, 2021 | ||
1.45% AT&T Inc. | T 22B | New York Stock Exchange |
Global Notes due June 1, 2022 | ||
2.50% AT&T Inc. | T 23 | New York Stock Exchange |
Global Notes due March 15, 2023 | ||
Floating Rate AT&T Inc. | T23 D | New York Stock Exchange |
Global Notes due September 5, 2023 | ||
1.05% AT&T Inc. | T 23E | New York Stock Exchange |
Global Notes due September 5, 2023 | ||
1.30% AT&T Inc. | T 23A | New York Stock Exchange |
Global Notes due September 5, 2023 | ||
2.75% AT&T Inc. | T 23C | New York Stock Exchange |
Global Notes due May 19, 2023 | ||
2.40% AT&T Inc. | T 24A | New York Stock Exchange |
Global Notes due March 15, 2024 | ||
3.50% AT&T Inc. | T 25 | New York Stock Exchange |
Global Notes due December 17, 2025 | ||
1.80% AT&T Inc. | T 26D | New York Stock Exchange |
Global Notes due September 5, 2026 |
Name of each exchange | ||
Title of each class | Trading Symbol(s) | on which registered |
2.90% AT&T Inc. | T 26A | New York Stock Exchange |
Global Notes due December 4, 2026 | ||
2.35% AT&T Inc. | T 29D | New York Stock Exchange |
Global Notes due September 5, 2029 | ||
4.375% AT&T Inc. | T 29B | New York Stock Exchange |
Global Notes due September 14, 2029 | ||
�� | ||
2.60% AT&T Inc. | T 29A | New York Stock Exchange |
Global Notes due December 17, 2029 | ||
3.55% AT&T Inc. | T 32 | New York Stock Exchange |
Global Notes due December 17, 2032 | ||
5.20% AT&T Inc. | T 33 | New York Stock Exchange |
Global Notes due November 18, 2033 | ||
3.375% AT&T Inc. | T 34 | New York Stock Exchange |
Global Notes due March 15, 2034 | ||
2.45% AT&T Inc. | T 35 | New York Stock Exchange |
Global Notes due March 15, 2035 | ||
3.15% AT&T Inc. | T 36A | New York Stock Exchange |
Global Notes due September 4, 2036 | ||
7.00% AT&T Inc. | T 40 | New York Stock Exchange |
Global Notes due April 30, 2040 | ||
4.25% AT&T Inc. | T 43 | New York Stock Exchange |
Global Notes due June 1, 2043 | ||
4.875% AT&T Inc. | T 44 | New York Stock Exchange |
Global Notes due June 1, 2044 |
5.35% AT&T Inc. | TBB | New York Stock Exchange |
Global Notes due November 1, 2066 | ||
5.625% AT&T Inc. | TBC | New York Stock Exchange |
Global Notes due August 1, 2067 |
AT&T INC. | |||||
CONSOLIDATED STATEMENTS OF INCOME | |||||
Dollars in millions except per share amounts | |||||
(Unaudited) | |||||
Three months ended | |||||
March 31, | |||||
2019 | 2018 | ||||
Operating Revenues | |||||
Service | $ | 40,684 | $ | 33,646 | |
Equipment | 4,143 | 4,392 | |||
Total operating revenues | 44,827 | 38,038 | |||
Operating Expenses | |||||
Cost of revenues | |||||
Equipment | 4,502 | 4,848 | |||
Broadcast, programming and operations | 7,652 | 5,166 | |||
Other cost of revenues (exclusive of depreciation and amortization shown separately below) | 8,585 | 7,932 | |||
Selling, general and administrative | 9,649 | 7,897 | |||
Depreciation and amortization | 7,206 | 5,994 | |||
Total operating expenses | 37,594 | 31,837 | |||
Operating Income | 7,233 | 6,201 | |||
Other Income (Expense) | |||||
Interest expense | (2,141) | (1,771) | |||
Equity in net income (loss) of affiliates | (7) | 9 | |||
Other income (expense) – net | 286 | 1,702 | |||
Total other income (expense) | (1,862) | (60) | |||
Income Before Income Taxes | 5,371 | 6,141 | |||
Income tax expense | 1,023 | 1,382 | |||
Net Income | 4,348 | 4,759 | |||
Less: Net Income Attributable to Noncontrolling Interest | (252) | (97) | |||
Net Income Attributable to AT&T | $ | 4,096 | $ | 4,662 | |
Basic Earnings Per Share Attributable to AT&T | $ | 0.56 | $ | 0.75 | |
Diluted Earnings Per Share Attributable to AT&T | $ | 0.56 | $ | 0.75 | |
Weighted Average Number of Common Shares Outstanding – Basic (in millions) | 7,313 | 6,161 | |||
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions) | 7,342 | 6,180 | |||
See Notes to Consolidated Financial Statements. |
AT&T INC. | |||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||
Dollars in millions | |||||
(Unaudited) | |||||
Three months ended | |||||
March 31, | |||||
2019 | 2018 | ||||
Net income | $ | 4,348 | $ | 4,759 | |
Other comprehensive income (loss), net of tax: | |||||
Foreign currency: | |||||
Translation adjustment (includes $0 and $2 attributable to noncontrolling interest), net of taxes of $49 and $175 | 288 | 108 | |||
Securities: | |||||
Net unrealized gains (losses), net of taxes of $5 and $(4) | 16 | (12) | |||
Derivative instruments: | |||||
Net unrealized gains, net of taxes of $34 and $180 | 127 | 674 | |||
Reclassification adjustment included in net income, net of taxes of $2 and $3 | 11 | 12 | |||
Defined benefit postretirement plans: | |||||
Net prior service (cost) credit arising during period, net of taxes of $0 and $185 | - | 567 | |||
Amortization of net prior service credit included in net income, net of taxes of $(113) and $(105) | (346) | (323) | |||
Other comprehensive income (loss) | 96 | 1,026 | |||
Total comprehensive income | 4,444 | 5,785 | |||
Less: Total comprehensive income attributable to noncontrolling interest | (252) | (99) | |||
Total Comprehensive Income Attributable to AT&T | $ | 4,192 | $ | 5,686 | |
See Notes to Consolidated Financial Statements. |
AT&T INC. | |||||
CONSOLIDATED BALANCE SHEETS | |||||
Dollars in millions except per share amounts | |||||
March 31, | December 31, | ||||
2019 | 2018 | ||||
Assets | (Unaudited) | ||||
Current Assets | |||||
Cash and cash equivalents | $ | 6,516 | $ | 5,204 | |
Accounts receivable - net of allowances for doubtful accounts of $905 and $907 | 23,863 | 26,472 | |||
Prepaid expenses | 1,518 | 2,047 | |||
Other current assets | 14,575 | 17,704 | |||
Total current assets | 46,472 | 51,427 | |||
Noncurrent Inventories and Theatrical Film and Television Production Costs | 10,270 | 7,713 | |||
Property, plant and equipment | 332,517 | 330,690 | |||
Less: accumulated depreciation and amortization | (200,466) | (199,217) | |||
Property, Plant and Equipment – Net | 132,051 | 131,473 | |||
Goodwill | 146,434 | 146,370 | |||
Licenses – Net | 97,001 | 96,144 | |||
Trademarks and Trade Names – Net | 24,218 | 24,345 | |||
Distribution Networks – Net | 16,623 | 17,069 | |||
Other Intangible Assets – Net | 24,732 | 26,269 | |||
Investments in and Advances to Equity Affiliates | 6,230 | 6,245 | |||
Operating Lease Right-of-Use Assets | 20,235 | - | |||
Other Assets | 24,118 | 24,809 | |||
Total Assets | $ | 548,384 | $ | 531,864 | |
Liabilities and Stockholders’ Equity | |||||
Current Liabilities | |||||
Debt maturing within one year | $ | 11,538 | $ | 10,255 | |
Accounts payable and accrued liabilities | 42,306 | 43,184 | |||
Advanced billings and customer deposits | 5,956 | 5,948 | |||
Accrued taxes | 1,130 | 1,179 | |||
Dividends payable | 3,722 | 3,854 | |||
Total current liabilities | 64,652 | 64,420 | |||
Long-Term Debt | 163,942 | 166,250 | |||
Deferred Credits and Other Noncurrent Liabilities | |||||
Deferred income taxes | 59,207 | 57,859 | |||
Postemployment benefit obligation | 19,664 | 19,218 | |||
Operating lease liabilities | 18,253 | - | |||
Other noncurrent liabilities | 27,715 | 30,233 | |||
Total deferred credits and other noncurrent liabilities | 124,839 | 107,310 | |||
Stockholders’ Equity | |||||
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2019 and December 31, 2018: issued 7,620,748,598 at March 31, 2019 and December 31, 2018) | 7,621 | 7,621 | |||
Additional paid-in capital | 125,174 | 125,525 | |||
Retained earnings | 59,424 | 58,753 | |||
Treasury stock (323,523,763 at March 31, 2019 and 339,120,073 | |||||
at December 31, 2018, at cost) | (11,452) | (12,059) | |||
Accumulated other comprehensive income | 4,345 | 4,249 | |||
Noncontrolling interest | 9,839 | 9,795 | |||
Total stockholders’ equity | 194,951 | 193,884 | |||
Total Liabilities and Stockholders’ Equity | $ | 548,384 | $ | 531,864 | |
See Notes to Consolidated Financial Statements. |
AT&T INC. | |||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
Dollars in millions | |||||
(Unaudited) | |||||
Three months ended | |||||
March 31, | |||||
2019 | 2018 | ||||
Operating Activities | |||||
Net income | $ | 4,348 | $ | 4,759 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |||||
Depreciation and amortization | 7,206 | 5,994 | |||
Amortization of television and film costs | 2,497 | - | |||
Undistributed earnings from investments in equity affiliates | 112 | (2) | |||
Provision for uncollectible accounts | 592 | 438 | |||
Deferred income tax expense | 1,069 | 1,222 | |||
Net (gain) loss from investments, net of impairments | (175) | 2 | |||
Actuarial (gain) loss on pension and postretirement benefits | 432 | (930) | |||
Changes in operating assets and liabilities: | |||||
Accounts receivable | 1,894 | (439) | |||
Other current assets, inventories and theatrical film and television production costs | (2,510) | 614 | |||
Accounts payable and other accrued liabilities | (3,686) | (1,962) | |||
Equipment installment receivables and related sales | 652 | 505 | |||
Deferred customer contract acquisition and fulfillment costs | (375) | (826) | |||
Retirement benefit funding | - | (140) | |||
Other - net | (1,004) | (288) | |||
Total adjustments | 6,704 | 4,188 | |||
Net Cash Provided by Operating Activities | 11,052 | 8,947 | |||
Investing Activities | |||||
Capital expenditures: | |||||
Purchase of property and equipment | (5,121) | (5,957) | |||
Interest during construction | (61) | (161) | |||
Acquisitions, net of cash acquired | (117) | (234) | |||
Dispositions | 10 | 56 | |||
(Purchases) sales of securities, net | (1) | (116) | |||
Advances to and investments in equity affiliates, net | (111) | (1,007) | |||
Cash collections of deferred purchase price | - | 267 | |||
Net Cash Used in Investing Activities | (5,401) | (7,152) | |||
Financing Activities | |||||
Net change in short-term borrowings with original maturities of three months or less | (256) | - | |||
Issuance of other short-term borrowings | 296 | - | |||
Repayment of other short-term borrowings | (176) | - | |||
Issuance of long-term debt | 9,182 | 2,565 | |||
Repayment of long-term debt | (9,840) | (4,911) | |||
Purchase of treasury stock | (189) | (145) | |||
Issuance of treasury stock | 167 | 11 | |||
Dividends paid | (3,714) | (3,070) | |||
Other | 109 | 2,048 | |||
Net Cash Used in Financing Activities | (4,421) | (3,502) | |||
Net increase (decrease) in cash and cash equivalents and restricted cash | 1,230 | (1,707) | |||
Cash and cash equivalents and restricted cash beginning of year | 5,400 | 50,932 | |||
Cash and Cash Equivalents and Restricted Cash End of Period | $ | 6,630 | $ | 49,225 | |
See Notes to Consolidated Financial Statements. |
AT&T INC. | |||||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY | |||||||||
Dollars and shares in millions except per share amounts | |||||||||
(Unaudited) | |||||||||
March 31, 2019 | March 31, 2018 | ||||||||
Shares | Amount | Shares | Amount | ||||||
Common Stock | |||||||||
Balance at beginning of year | 7,621 | $ | 7,621 | 6,495 | $ | 6,495 | |||
Issuance of stock | - | - | - | - | |||||
Balance at end of period | 7,621 | $ | 7,621 | 6,495 | $ | 6,495 | |||
Additional Paid-In Capital | |||||||||
Balance at beginning of year | $ | 125,525 | $ | 89,563 | |||||
Issuance of treasury stock | (77) | (4) | |||||||
Share-based payments | (274) | (155) | |||||||
Balance at end of period | $ | 125,174 | $ | 89,404 | |||||
Retained Earnings | |||||||||
Balance at beginning of year | $ | 58,753 | $ | 50,500 | |||||
Net income attributable to AT&T ($0.56 and $0.75 per diluted share) | 4,096 | 4,662 | |||||||
Dividends to stockholders ($0.51 and $0.50 per share) | (3,741) | (3,092) | |||||||
Cumulative effect of accounting changes | 316 | 2,997 | |||||||
Balance at end of period | $ | 59,424 | $ | 55,067 | |||||
Treasury Stock | |||||||||
Balance at beginning of year | (339) | $ | (12,059) | (356) | $ | (12,714) | |||
Repurchase and acquisition of common stock | (7) | (208) | (4) | (164) | |||||
Issuance of treasury stock | 22 | 815 | 12 | 446 | |||||
Balance at end of period | (324) | $ | (11,452) | (348) | $ | (12,432) | |||
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax | |||||||||
Balance at beginning of year | $ | 4,249 | $ | 7,017 | |||||
Other comprehensive income attributable to AT&T | 96 | 1,024 | |||||||
Amounts reclassified to retained earnings | - | (655) | |||||||
Balance at end of period | $ | 4,345 | $ | 7,386 | |||||
Noncontrolling Interest | |||||||||
Balance at beginning of year | $ | 9,795 | $ | 1,146 | |||||
Net income attributable to noncontrolling interest | 252 | 97 | |||||||
Interest acquired by noncontrolling owners | 9 | - | |||||||
Distributions | (246) | (124) | |||||||
Translation adjustments attributable to noncontrolling interest, net of taxes | - | 2 | |||||||
Cumulative effect of accounting changes | 29 | 35 | |||||||
Balance at end of period | $ | 9,839 | $ | 1,156 | |||||
�� | |||||||||
Total Stockholders’ Equity at beginning of year | $ | 193,884 | $ | 142,007 | |||||
Total Stockholders’ Equity at end of period | $ | 194,951 | $ | 147,076 | |||||
See Notes to Consolidated Financial Statements. |
(UNAUDITED)
(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 30, 2018
For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
items.
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 paydecreases that are not considered meaningful are denoted with 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 six months of 2018. Our future results could include additional adjustments, and those adjustments could be material.
Customer Fulfillment Costs During the second quarter of 2018, we updated our analysis of economic lives of customer relationships. As of April 1, 2018, we extended the amortization period to 58 months to better reflect the estimated economic lives of our entertainment group customers. This change in accounting estimate decreased other cost of revenues and impacted net income $126, or $0.02 per diluted share, in the second quarter of 2018.
Recently dash.
Revenue Recognition and Other Changes
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 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 | ||||||||||||||||||||||||
Historical Accounting Method | Effect of Adoption of ASU 2017-07 | As Adjusted | ||||||||||||||||||||||
For the three months ended June 30, 2018 | ||||||||||||||||||||||||
Consolidated Statements of Income | ||||||||||||||||||||||||
Other cost of revenues | $ | 7,068 | $ | 564 | $ | 7,632 | ||||||||||||||||||
Selling, general and administrative expenses | 6,896 | 1,788 | 8,684 | |||||||||||||||||||||
Operating Income | 8,818 | (2,352 | ) | 6,466 | ||||||||||||||||||||
Other Income (Expense) – net | 1 | 2,352 | 2,353 | |||||||||||||||||||||
Net Income | 5,248 | - | 5,248 | |||||||||||||||||||||
For the three months ended June 30, 2017 | ||||||||||||||||||||||||
Consolidated Statements of Income | ||||||||||||||||||||||||
Other cost of revenues | $ | 9,218 | $ | 351 | $ | 9,569 | ||||||||||||||||||
Selling, general and administrative expenses | 8,113 | 446 | 8,559 | |||||||||||||||||||||
Operating Income | 7,323 | (797 | ) | 6,526 | ||||||||||||||||||||
Other Income (Expense) – net | 128 | 797 | 925 | |||||||||||||||||||||
Net Income | 4,014 | - | 4,014 | |||||||||||||||||||||
For the six months ended June 30, 2018 | ||||||||||||||||||||||||
Consolidated Statements of Income | ||||||||||||||||||||||||
Other cost of revenues | $ | 14,639 | $ | 925 | $ | 15,564 | ||||||||||||||||||
Selling, general and administrative expenses | 13,652 | 2,929 | 16,581 | |||||||||||||||||||||
Operating Income | 16,521 | (3,854 | ) | 12,667 | ||||||||||||||||||||
Other Income (Expense) – net | 201 | 3,854 | 4,055 | |||||||||||||||||||||
Net Income | 10,007 | - | 10,007 | |||||||||||||||||||||
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 | |||||||||||||||||||||
8
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Cash Flows As of January 1, 2018, we adopted, with retrospective application, 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 | ||||||||||||||||||||||||
Historical Accounting Method | Effect of Adoption of ASU 2016-15 | Effect of Adoption of ASU 2016-18 | As Adjusted | |||||||||||||||||||||
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 | ) | |||||||||||||
For the six months ended June 30, 2017 | ||||||||||||||||||||||||
Consolidated Statements of Cash Flows | ||||||||||||||||||||||||
Changes in other current assets | $ | 471 | $ | - | $ | (1 | ) | $ | 470 | |||||||||||||||
Equipment installment receivables and related sales | 907 | (382 | ) | - | 525 | |||||||||||||||||||
Other – net | (1,041 | ) | - | (107 | ) | (1,148 | ) | |||||||||||||||||
Cash Provided by (Used in) Operating Activities | 18,160 | (382 | ) | (108 | ) | 17,670 | ||||||||||||||||||
(Purchases) sales of securities – net | - | - | 169 | 169 | ||||||||||||||||||||
Cash collections of deferred purchase price | - | 382 | - | 382 | ||||||||||||||||||||
Cash (Used in) Provided by Investing Activities | (9,948 | ) | 382 | 169 | (9,397 | ) | ||||||||||||||||||
Change in cash and cash equivalents and restricted cash | $ | 19,829 | $ | - | $ | 61 | $ | 19,890 | ||||||||||||||||
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).
9
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
New Accounting Standards and Accounting Standards Not Yet Adopted
Leases In February 2016, the FASB issued 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.requirements (see Note 10). ASC 842 will requirerequires 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 beare classified as either a finance or an operating lease without relying upon bright-line tests.
Upon initial evaluation, we believe the key change upon adoption will beprior guidance. In addition, the balance sheet recognition. Theclassification requirements that existed in prior guidance for film production costs and programming inventory were eliminated. As of January 1, 2019, we reclassified $2,274 of our programming inventory costs from “Other current assets” to “Other Assets” in accordance with the guidance. This change in accounting does not materially impact our income statement recognitionstatement.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Numerators | ||||||||||||||||||||||||||||||||
Numerator for basic earnings per share: | ||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||
Dilutive potential common shares: | ||||||||||||||||||||||||||||||||
Share-based payment | 4 | 2 | 9 | 6 | ||||||||||||||||||||||||||||
Numerator for diluted earnings per share | $ | 5,136 | $ | 3,917 | $ | 9,803 | $ | 7,390 | ||||||||||||||||||||||||
Denominators (000,000) | ||||||||||||||||||||||||||||||||
Denominator for basic earnings per share: | ||||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding | 6,351 | 6,165 | 6,257 | 6,166 | ||||||||||||||||||||||||||||
Dilutive potential common shares: | ||||||||||||||||||||||||||||||||
Share-based payment (in shares) | 23 | 19 | 20 | 19 | ||||||||||||||||||||||||||||
Denominator for diluted earnings per share | 6,374 | 6,184 | 6,277 | 6,185 | ||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
10
Three months ended | |||||
March 31, | |||||
2019 | 2018 | ||||
Numerators | |||||
Numerator for basic earnings per share: | |||||
Net Income | $ | 4,348 | $ | 4,759 | |
Less: Net income attributable to noncontrolling interest | (252) | (97) | |||
Net Income attributable to AT&T | 4,096 | 4,662 | |||
Dilutive potential common shares: | |||||
Share-based payment | 6 | 5 | |||
Numerator for diluted earnings per share | $ | 4,102 | $ | 4,667 | |
Denominators (000,000) | |||||
Denominator for basic earnings per share: | |||||
Weighted average number of common shares outstanding | 7,313 | 6,161 | |||
Dilutive potential common shares: | |||||
Share-based payment (in shares) | 29 | 19 | |||
Denominator for diluted earnings per share | 7,342 | 6,180 | |||
Basic earnings per share attributable to AT&T | $ | 0.56 | $ | 0.75 | |
Diluted earnings per share attributable to AT&T | $ | 0.56 | $ | 0.75 |
AT&T INC.
JUNE 30, 2018
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 | |||||||||
|
|
|
12 |
11
AT&T INC.
JUNE 30, 2018
Xandr.
To most effectively implement our strategies for 2018, effective January 1, 2018, we retrospectively realigned certain responsibilities
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 (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 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 StatesU.S. or in U.S. territories. We provide voiceterritories and data services, including high-speed internet over wireless devices.
TheBusiness Solutionsbusinesses globally. This segment provides services to contains the following business customers, including multinational companiesunits:
● | Mobility provides nationwide wireless service and equipment. |
● | Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms. |
● | Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers. |
units:
● | Turner is comprised of the historic Turner division as well as the financial results of our RSNs. This business unit primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties. |
● | Home Box Office consists of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment. |
● | Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games. |
TheInternational segment
following business units:
● | Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean. |
● | Mexico provides wireless service and equipment to customers in Mexico. |
12
JUNE 30, 2018
Corporate, which consists of: (1) |
Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, including amortization of intangible assets. |
Certain significant items |
Eliminations and consolidations, which |
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.
13
For the three months ended March 31, 2019 | ||||||||||||||||||||
Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) of Affiliates | Segment Contribution | ||||||||||||||
Communications | ||||||||||||||||||||
Mobility | $ | 17,567 | $ | 10,181 | $ | 7,386 | $ | 2,035 | $ | 5,351 | $ | - | $ | 5,351 | ||||||
Entertainment Group | 11,328 | 8,527 | 2,801 | 1,323 | 1,478 | - | 1,478 | |||||||||||||
Business Wireline | 6,498 | 4,040 | 2,458 | 1,235 | 1,223 | - | 1,223 | |||||||||||||
Total Communications | 35,393 | 22,748 | 12,645 | 4,593 | 8,052 | - | 8,052 | |||||||||||||
WarnerMedia | ||||||||||||||||||||
Turner | 3,443 | 2,136 | 1,307 | 60 | 1,247 | 25 | 1,272 | |||||||||||||
Home Box Office | 1,510 | 921 | 589 | 22 | 567 | 15 | 582 | |||||||||||||
Warner Bros. | 3,518 | 2,919 | 599 | 52 | 547 | 6 | 553 | |||||||||||||
Other | (92) | 17 | (109) | 9 | (118) | 21 | (97) | |||||||||||||
Total WarnerMedia | 8,379 | 5,993 | 2,386 | 143 | 2,243 | 67 | 2,310 | |||||||||||||
Latin America | ||||||||||||||||||||
Vrio | 1,067 | 866 | 201 | 169 | 32 | - | 32 | |||||||||||||
Mexico | 651 | 725 | (74) | 131 | (205) | - | (205) | |||||||||||||
Total Latin America | 1,718 | 1,591 | 127 | 300 | (173) | - | (173) | |||||||||||||
Xandr | 426 | 160 | 266 | 13 | 253 | - | 253 | |||||||||||||
Segment Total | 45,916 | 30,492 | 15,424 | 5,049 | 10,375 | $ | 67 | $ | 10,442 | |||||||||||
Corporate and Other | ||||||||||||||||||||
Corporate | 209 | 513 | (304) | 169 | (473) | |||||||||||||||
Acquisition-related items | (42) | 73 | (115) | 1,988 | (2,103) | |||||||||||||||
Certain significant items | - | 248 | (248) | - | (248) | |||||||||||||||
Eliminations and consolidations | (1,256) | (938) | (318) | - | (318) | |||||||||||||||
AT&T Inc. | $ | 44,827 | $ | 30,388 | $ | 14,439 | $ | 7,206 | $ | 7,233 |
AT&T INC. MARCH 31, 2019 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Dollars in millions except per share amounts For the three months ended March 31, 2018 | ||||||||||||||||||||
Revenues | Operations and Support Expenses | EBITDA | Depreciation and Amortization | Operating Income (Loss) | Equity in Net Income (Loss) of Affiliates | Segment Contribution | ||||||||||||||
Communications | ||||||||||||||||||||
Mobility | $ | 17,355 | $ | 10,102 | $ | 7,253 | $ | 2,095 | $ | 5,158 | $ | - | $ | 5,158 | ||||||
Entertainment Group | 11,431 | 8,811 | 2,620 | 1,310 | 1,310 | (1) | 1,309 | |||||||||||||
Business Wireline | 6,747 | 4,016 | 2,731 | 1,170 | 1,561 | (1) | 1,560 | |||||||||||||
Total Communications | 35,533 | 22,929 | 12,604 | 4,575 | 8,029 | (2) | 8,027 | |||||||||||||
WarnerMedia | ||||||||||||||||||||
Turner | 112 | 74 | 38 | 1 | 37 | 27 | 64 | |||||||||||||
Home Box Office | - | - | - | - | - | - | - | |||||||||||||
Warner Bros. | - | - | - | - | - | - | - | |||||||||||||
Other | - | 8 | (8) | - | (8) | (17) | (25) | |||||||||||||
Total WarnerMedia | 112 | 82 | 30 | 1 | 29 | 10 | 39 | |||||||||||||
Latin America | ||||||||||||||||||||
Vrio | 1,354 | 1,001 | 353 | 205 | 148 | - | 148 | |||||||||||||
Mexico | 671 | 803 | (132) | 127 | (259) | - | (259) | |||||||||||||
Total Latin America | 2,025 | 1,804 | 221 | 332 | (111) | - | (111) | |||||||||||||
Xandr | 337 | 50 | 287 | 1 | 286 | - | 286 | |||||||||||||
Segment Total | 38,007 | 24,865 | 13,142 | 4,909 | 8,233 | $ | 8 | $ | 8,241 | |||||||||||
Corporate and Other | ||||||||||||||||||||
Corporate | 333 | 735 | (402) | 23 | (425) | |||||||||||||||
Acquisition-related items | - | 67 | (67) | 1,062 | (1,129) | |||||||||||||||
Certain significant items | - | 180 | (180) | - | (180) | |||||||||||||||
Eliminations and consolidations | (302) | (4) | (298) | - | (298) | |||||||||||||||
AT&T Inc. | $ | 38,038 | $ | 25,843 | $ | 12,195 | $ | 5,994 | $ | 6,201 |
JUNE 30, 2018
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 | ||||||||||||||||||||||||||||||||||||||||||||||
14
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, 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 | ||||||||||||||||||||||||||||||||||||||||||||||
15
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
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.
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 | ||||||||||||||||||||
Three months ended March 31, | |||||
2019 | 2018 | ||||
Communications | $ | 8,052 | $ | 8,027 | |
WarnerMedia | 2,310 | 39 | |||
Latin America | (173) | (111) | |||
Xandr | 253 | 286 | |||
Segment Contribution | 10,442 | 8,241 | |||
Reconciling Items: | |||||
Corporate and Other | (473) | (425) | |||
Merger and integration items | (115) | (67) | |||
Amortization of intangibles acquired | (1,988) | (1,062) | |||
Employee separation charges | (248) | (51) | |||
Natural disaster items | - | (104) | |||
Foreign currency devaluation | - | (25) | |||
Segment equity in net income of affiliates | (67) | (8) | |||
Eliminations and consolidations | (318) | (298) | |||
AT&T Operating Income | 7,233 | 6,201 | |||
Interest Expense | 2,141 | 1,771 | |||
Equity in net income (loss) of affiliates | (7) | 9 | |||
Other income (expense) - net | 286 | 1,702 | |||
Income Before Income Taxes | $ | 5,371 | $ | 6,141 |
Intersegment Reconciliation | |||||
Three months ended March 31, | |||||
2019 | 2018 | ||||
Intersegment revenues | |||||
Communications | $ | - | $ | - | |
WarnerMedia | 858 | 31 | |||
Latin America | - | - | |||
Xandr | - | - | |||
Total Intersegment Revenues | 858 | 31 | |||
Consolidations | 398 | 271 | |||
Eliminations and consolidations | $ | 1,256 | $ | 302 |
As of January 1, 2018, we adopted FASB ASU
Revenue Categories | ||||||||||||||||||||||||||
The following tables set forth reported revenue by category: | ||||||||||||||||||||||||||
For the three months ended March 31, 2019 | ||||||||||||||||||||||||||
Service Revenues | ||||||||||||||||||||||||||
Wireless | Advanced Data | Legacy Voice & Data | Subscription | Content | Advertising | Other | Equipment | Total | ||||||||||||||||||
Communications | ||||||||||||||||||||||||||
Mobility | $ | 13,725 | $ | - | $ | - | $ | - | $ | - | $ | 67 | $ | - | $ | 3,775 | $ | 17,567 | ||||||||
Entertainment Group | - | 2,070 | 683 | 7,724 | - | 350 | 501 | - | 11,328 | |||||||||||||||||
Business Wireline | - | 3,186 | 2,404 | - | - | - | 749 | 159 | 6,498 | |||||||||||||||||
WarnerMedia | ||||||||||||||||||||||||||
Turner | - | - | - | 1,965 | 135 | 1,261 | 82 | - | 3,443 | |||||||||||||||||
Home Box Office | - | - | - | 1,334 | 173 | - | 3 | - | 1,510 | |||||||||||||||||
Warner Bros. | - | - | - | 21 | 3,332 | 10 | 155 | - | 3,518 | |||||||||||||||||
Eliminations and Other | - | - | - | 49 | (152) | 8 | 3 | - | (92) | |||||||||||||||||
Latin America | ||||||||||||||||||||||||||
Vrio | - | - | - | 1,067 | - | - | - | - | 1,067 | |||||||||||||||||
Mexico | 442 | - | - | - | - | - | - | 209 | 651 | |||||||||||||||||
Xandr | - | - | - | - | - | 426 | - | - | 426 | |||||||||||||||||
Corporate and Other | - | - | - | - | - | - | 167 | - | 167 | |||||||||||||||||
Eliminations and consolidations | - | - | - | - | (837) | (350) | (69) | - | (1,256) | |||||||||||||||||
Total Operating Revenues | $ | 14,167 | $ | 5,256 | $ | 3,087 | $ | 12,160 | $ | 2,651 | $ | 1,772 | $ | 1,591 | $ | 4,143 | $ | 44,827 |
For the three months ended March 31, 2018 | ||||||||||||||||||||||||||
Service Revenues | ||||||||||||||||||||||||||
Wireless | Advanced Data | Legacy Voice & Data | Subscription | Content | Advertising | Other | Equipment | Total | ||||||||||||||||||
Communications | ||||||||||||||||||||||||||
Mobility | $ | 13,362 | $ | - | $ | - | $ | - | $ | - | $ | 41 | $ | - | $ | 3,952 | $ | 17,355 | ||||||||
Entertainment Group | - | 1,878 | 806 | 7,891 | - | 334 | 519 | 3 | 11,431 | |||||||||||||||||
Business Wireline | - | 3,043 | 2,865 | - | - | - | 669 | 170 | 6,747 | |||||||||||||||||
WarnerMedia | ||||||||||||||||||||||||||
Turner | - | - | - | 98 | - | 14 | - | - | 112 | |||||||||||||||||
Home Box Office | - | - | - | - | - | - | - | - | - | |||||||||||||||||
Warner Bros. | - | - | - | - | - | - | - | - | - | |||||||||||||||||
Eliminations and Other | - | - | - | - | - | - | - | - | - | |||||||||||||||||
Latin America | ||||||||||||||||||||||||||
Vrio | - | - | - | 1,354 | - | - | - | - | 1,354 | |||||||||||||||||
Mexico | 404 | - | - | - | - | - | - | 267 | 671 | |||||||||||||||||
Xandr | - | - | - | - | - | 337 | - | - | 337 | |||||||||||||||||
Corporate and Other | - | - | - | - | - | - | 333 | - | 333 | |||||||||||||||||
Eliminations and consolidations | - | - | - | - | - | (334) | 32 | - | (302) | |||||||||||||||||
Total Operating Revenues | $ | 13,766 | $ | 4,921 | $ | 3,671 | $ | 9,343 | $ | - | $ | 392 | $ | 1,553 | $ | 4,392 | $ | 38,038 |
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 and Equipment Revenues
Our products and services are offered to customers in service-only contracts and in contracts that bundle equipment used to access the services and/or with other service offerings. 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 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
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 SalesRevenue 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 ObligationsRevenue recognized from fixed term contracts that bundle services and/or equipment are allocated based on the standalone selling price of all required performance obligations of the contract (i.e., each item included in the bundle). Promotional discounts are attributed to each required component of the arrangement, resulting in recognition over the contract term. Standalone selling prices are determined by assessing prices paid for service-only contracts (e.g., arrangements where customers bring their own devices) and standalone device pricing.We offer the majority of our customers the option to purchase certain wireless devices in installments over a specified period of time, and, in many cases, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. For customers that elect these equipment installment payment programs, at the point of sale, we recognize revenue for the entire amount of revenue allocated to the customer receivable net of fair value of the
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 contracts that require the use of certain equipment in order to receive service (e.g., AT&TU-verse® and DIRECTV linear video services), we allocate the total transaction price to service if the equipment does not meet the criteria to be a distinct performance obligation.
Media Revenues
Media revenues are primarily derived 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).
17
AT&T INC.
JUNE 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:
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 | ||||||||||||||||||||||||||||||||||||||||||
18
AT&T INC.
JUNE 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
March 31, | December 31, | |||||
2019 | 2018 | |||||
Contract asset | $ | 2,198 | $ | 1,896 | ||
Contract liability | 6,899 | 6,856 |
| ||||
| ||||
| ||||
during 2019 was $4,379.
20
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The aggregate amount of transaction price allocated to remaining performance obligations included $13,623 related to WarnerMedia operations, which relates 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.
Comparative Results
Prior to 2018, revenue recognized from contracts that bundle services and equipment was limited to the lesser of the amount allocated based on the relative selling price of the equipment and service already delivered or the consideration received from the customer for the equipment and service already delivered. Our prior accounting also separately recognized regulatory fees as operating revenue when received and as an expense when incurred. Sales commissions were previously expensed as incurred.
21
AT&T INC.
JUNE 30, 2018
As Reported Consolidated Statements of Income: Service Revenues Equipment Revenues Media Revenues Total Operating Revenues Other cost of revenue Selling, general and administrative expenses Total Operating Expenses Operating income Income before income taxes Income tax expense Net income Net income attributable to AT&T Basic Earnings per Share Attributable to AT&T Diluted Earnings per Share Attributable to AT&T For the six months ended June 30, 2018 Consolidated Statements of Income: Service Revenues Equipment Revenues Media Revenues Total Operating Revenues Other cost of revenue Selling, general and administrative expenses Total Operating Expenses Operating income Income before income taxes Income tax expense Net income Net income attributable to AT&T Basic Earnings per Share Attributable to AT&T Diluted Earnings per Share Attributable to AT&T At June 30, 2018 Consolidated Balance Sheets: Other current assets Other Assets Accounts payable and accrued liabilities Advanced billings and customer deposits Deferred income taxes Other noncurrent liabilities Retained earnings Accumulated other comprehensive income Noncontrolling interestThe following table presents our reported results under ASC 606 and our pro forma results using the historical accounting method:For the three months ended June 30, 2018 Historical
Accounting
Method $ 33,773 $ 35,163 4,080 3,611 1,133 1,135 38,986 39,909 7,632 8,535 8,684 9,267 32,520 34,006 6,466 5,903 6,780 6,217 1,532 1,394 5,248 4,823 5,132 4,713 $ 0.81 $ 0.74 $ 0.81 $ 0.74 $ 67,419 $ 70,232 8,472 7,472 1,133 1,135 77,024 78,839 15,564 17,396 16,581 17,764 64,357 67,372 12,667 11,467 12,921 11,721 2,914 2,620 10,007 9,101 9,794 8,900 $ 1.56 $ 1.42 $ 1.56 $ 1.42 14,305 11,961 23,941 21,983 35,488 35,667 5,914 5,978 59,665 58,585 25,017 24,832 56,555 53,313 5,716 5,723 1,150 1,103 22
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
In 2013,
lump-sum amount.
23
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Three months ended | |||||
March 31, | |||||
2019 | 2018 | ||||
Pension cost: | |||||
Service cost – benefits earned during the period | $ | 240 | $ | 291 | |
Interest cost on projected benefit obligation | 549 | 487 | |||
Expected return on assets | (851) | (760) | |||
Amortization of prior service credit | (33) | (30) | |||
Actuarial (gain) loss | 432 | - | |||
Net pension (credit) cost | $ | 337 | $ | (12) | |
Postretirement cost: | |||||
Service cost – benefits earned during the period | $ | 18 | $ | 29 | |
Interest cost on accumulated postretirement benefit obligation | 186 | 191 | |||
Expected return on assets | (56) | (77) | |||
Amortization of prior service credit | (426) | (397) | |||
Actuarial (gain) loss | - | (930) | |||
Net postretirement (credit) cost | $ | (278) | $ | (1,184) | |
Combined net pension and postretirement (credit) cost | $ | 59 | $ | (1,196) |
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) | ||||||||
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.
millions except per share amounts
24
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
| ||
|
inputs.
2018.
June 30, 2018 | December 31, 2017 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Notes and debentures1 | $ | 180,209 | $ | 182,732 | $ | 162,526 | $ | 171,938 | ||||||||
Commercial paper | 8,139 | 8,139 | - | - | ||||||||||||
Bank borrowings | 15 | 15 | 2 | 2 | ||||||||||||
Investment securities2 | 3,511 | 3,511 | 2,447 | 2,447 | ||||||||||||
1Includes credit agreement borrowings.
2 Excludes investments accounted for under the equity method.
March 31, 2019 | December 31, 2018 | |||||||||||
Carrying | Fair | Carrying | Fair | |||||||||
Amount | Value | Amount | Value | |||||||||
Notes and debentures1 | $ | 170,532 | $ | 179,576 | $ | 171,529 | $ | 172,287 | ||||
Commercial paper | 2,957 | 2,957 | 3,048 | 3,048 | ||||||||
Bank borrowings | 4 | 4 | 4 | 4 | ||||||||
Investment securities2 | 3,606 | 3,606 | 3,409 | 3,409 | ||||||||
1 | Includes credit agreement borrowings. | |||||||||||
2 | Excludes investments accounted for under the equity method. |
25
AT&T INC.
JUNE 30, 2018
June 30, 2018 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Equity Securities | ||||||||||||||||
Domestic equities | $ | 1,252 | $ | - | $ | - | $ | 1,252 | ||||||||
International equities | 304 | - | - | 304 | ||||||||||||
Fixed income equities | 149 | - | - | 149 | ||||||||||||
Available-for-Sale Debt Securities | - | 890 | - | 890 | ||||||||||||
Asset Derivatives | ||||||||||||||||
Cross-currency swaps | - | 1,216 | - | 1,216 | ||||||||||||
Foreign exchange contracts | - | 55 | - | 55 | ||||||||||||
Liability Derivatives | ||||||||||||||||
Interest rate swaps | - | (89) | - | (89) | ||||||||||||
Cross-currency swaps | - | (1,506) | - | (1,506) | ||||||||||||
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) | ||||||||||||
March 31, 2019 | ||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||
Equity Securities | ||||||||||||
Domestic equities | $ | 1,092 | $ | - | $ | - | $ | 1,092 | ||||
International equities | 263 | - | - | 263 | ||||||||
Fixed income equities | 208 | - | - | 208 | ||||||||
Available-for-Sale Debt Securities | - | 989 | - | 989 | ||||||||
Asset Derivatives | ||||||||||||
Interest rate swaps | - | 2 | - | 2 | ||||||||
Cross-currency swaps | - | 427 | - | 427 | ||||||||
Foreign exchange contracts | - | 87 | - | 87 | ||||||||
Liability Derivatives | ||||||||||||
Interest rate swaps | - | (13) | - | (13) | ||||||||
Cross-currency swaps | - | (2,697) | - | (2,697) | ||||||||
Foreign exchange contracts | - | (6) | - | (6) |
December 31, 2018 | ||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||
Equity Securities | ||||||||||||
Domestic equities | $ | 1,061 | $ | - | $ | - | $ | 1,061 | ||||
International equities | 256 | - | - | 256 | ||||||||
Fixed income equities | 172 | - | - | 172 | ||||||||
Available-for-Sale Debt Securities | - | 870 | - | 870 | ||||||||
Asset Derivatives | ||||||||||||
Cross-currency swaps | - | 472 | - | 472 | ||||||||
Foreign exchange contracts | - | 87 | - | 87 | ||||||||
Liability Derivatives | ||||||||||||
Interest rate swaps | - | (39) | - | (39) | ||||||||
Cross-currency swaps | - | (2,563) | - | (2,563) | ||||||||
Foreign exchange contracts | - | (2) | - | (2) |
Upon the adoption of ASU
26
AT&T INC.
JUNE 30, 2018
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Total gains (losses) recognized on equity securities | $ | 21 | $ | 14 | $ | 8 | $ | 103 | ||||||||
Gains (Losses) recognized on equity securities sold | (3 | ) | - | 49 | 11 | |||||||||||
Unrealized gains (losses) recognized on equity securities held at end of period | 24 | 14 | (41 | ) | 92 | |||||||||||
Debt
Three months ended | |||||
March 31, | |||||
2019 | 2018 | ||||
Total gains (losses) recognized on equity securities | $ | 160 | $ | (13) | |
Gains (Losses) recognized on equity securities sold | 86 | 52 | |||
Unrealized gains (losses) recognized on equity securities held at end of period | 74 | (65) |
years: $667.
hedges
.27
AT&T INC.
JUNE 30, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
balance sheet.
June 30, 2018 | December 31, 2017 | |||||||
Interest rate swaps | $ | 7,333 | $ | 9,833 | ||||
Cross-currency swaps | 36,092 | 38,694 | ||||||
Foreign exchange contracts | 2,399 | - | ||||||
Total | $ | 45,824 | $ | 48,527 | ||||
March 31, | December 31, | ||||
2019 | 2018 | ||||
Interest rate swaps | $ | 1,633 | $ | 3,483 | |
Cross-currency swaps | 42,192 | 42,192 | |||
Foreign exchange contracts | 1,238 | 2,094 | |||
Total | $ | 45,063 | $ | 47,769 |
Effect of Derivatives on the Consolidated Statements of Income |
| |||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Fair Value Hedging Relationships | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Interest rate swaps (Interest expense): | ||||||||||||||||
Gain (Loss) on interest rate swaps | $ | (9) | $ | (23) | $ | (62) | $ | (48) | ||||||||
Gain (Loss) on long-term debt | 9 | 23 | 62 | 48 | ||||||||||||
Effect of Derivatives on the Consolidated Statements of Income | |||||
Three months ended | |||||
March 31, | |||||
Fair Value Hedging Relationships | 2019 | 2018 | |||
Interest rate swaps (Interest expense): | |||||
Gain (Loss) on interest rate swaps | $ | 24 | $ | (53) | |
Gain (Loss) on long-term debt | (24) | 53 |
28
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) | ||||||||||||
Three months ended | |||||
March 31, | |||||
Cash Flow Hedging Relationships | 2019 | 2018 | |||
Cross-currency swaps: | |||||
Gain (Loss) recognized in accumulated OCI | $ | 168 | $ | 854 | |
Foreign exchange contracts: | |||||
Gain (Loss) recognized in accumulated OCI | (7) | - | |||
Other income (expense) - net reclassified from accumulated OCI into income | 3 | - | |||
Interest rate locks: | |||||
Interest income (expense) reclassified from accumulated OCI into income | (16) | (15) |
Under
Our second-quarter 2018 operating results include the results of$79,358, excluding Time Warner following the acquisition date.Warner’s net debt at acquisition. 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, “Fair Value Measurement,” other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content,in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a 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 June 30, 2018, consolidated balance sheet includes the assets and liabilities of Time Warner, which have been measured at fair value.
29
JUNE 30, 2018
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
Assets acquired | |||
Cash | $ | 1,889 | |
Accounts receivable | 9,052 | ||
All other current assets | 2,913 | ||
Noncurrent inventory and theatrical film and television production costs | 5,591 | ||
Property, plant and equipment | 4,785 | ||
Intangible assets subject to amortization | |||
Distribution network | 18,040 | ||
Released television and film content | 10,806 | ||
Trademarks and trade names | 18,081 | ||
Other | 10,300 | ||
Investments and other assets | 9,449 | ||
Goodwill | 38,569 | ||
Total assets acquired | 129,475 | ||
Liabilities assumed | |||
Current liabilities, excluding current portion of long-term debt | 8,303 | ||
Debt maturing within one year | 4,471 | ||
Long-term debt | 18,394 | ||
Other noncurrent liabilities | 18,948 | ||
Total liabilities assumed | 50,116 | ||
Net assets acquired | 79,359 | ||
Noncontrolling interest | (1) | ||
Aggregate value of consideration paid | $ | 79,358 |
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 proximity of the closing of this acquisition to the end of the quarter, we were not able to provide the requisite combined pro forma financial information.
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, subject to customary closing conditions.
We applied
30
AT&T INC.
JUNE 30, 2018
Three months ended | ||||||
March 31, | ||||||
2019 | 2018 | |||||
Gross receivables sold | $ | 4,101 | $ | 3,010 | ||
Net receivables sold1 | 3,909 | 2,795 | ||||
Cash proceeds received | 3,675 | 2,395 | ||||
Deferred purchase price recorded | 309 | 519 | ||||
Guarantee obligation recorded | 138 | 123 | ||||
1 | Receivables net of allowance, imputed interest and trade-in right guarantees. |
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 certaina portion of these receivables to the Purchasersin exchange for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, inIn the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the Purchasersfinancial institutions equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. As of June 30, 2018, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $5,723.
The following table sets forth a summary of equipment installment receivables sold during the three and six months ended June 30, 2018 and 2017:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Gross receivables sold | $ | 1,906 | $ | 1,752 | $ | 4,916 | $ | 4,598 | ||||||||
Net receivables sold1 | 1,811 | 1,599 | 4,606 | 4,220 | ||||||||||||
Cash proceeds received | 1,532 | 1,415 | 3,927 | 2,847 | ||||||||||||
Deferred purchase price recorded | 307 | 293 | 826 | 1,482 | ||||||||||||
Guarantee obligation recorded | 72 | 74 | 195 | 74 | ||||||||||||
|
1 Receivables net of allowance, imputed interest andtrade-in right guarantees.
31
JUNE 30, 2018
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Fair value of repurchased receivables | $ | 1,481 | $ | 337 | $ | 1,481 | $ | 714 | ||||||||
Carrying value of deferred purchase price | 1,393 | 301 | 1,393 | 640 | ||||||||||||
Gain (loss) on repurchases1 | $ | 88 | $ | 36 | $ | 88 | $ | 74 | ||||||||
|
1 These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income.
2018:
Three months ended | ||||||
March 31, | ||||||
2019 | 2018 | |||||
Fair value of repurchased receivables | $ | 423 | $ | - | ||
Carrying value of deferred purchase price | 407 | - | ||||
Gain (loss) on repurchases1 | $ | 16 | $ | - | ||
1 | These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income. |
The outstanding portfolio of installment receivables derecognized from our consolidated balance sheets, but which we continue to service, was $7,564 and $7,446 at June 30, 2018 and December 31, 2017.
32
Three months ended | ||
March 31, 2019 | ||
Operating lease cost | $ | 1,242 |
Finance lease cost: | ||
Amortization of right-of-use assets | $ | 66 |
Interest on lease obligation | 42 | |
Total finance lease cost | $ | 108 |
JUNE 30, 2018
NOTE 10. INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS
Film and television production costs
At March 31, 2019 | |||
Operating Leases | |||
Operating lease right-of-use assets | $ | 20,235 | |
Accounts payable and accrued liabilities | $ | 3,072 | |
Operating lease obligation | 18,253 | ||
Total operating lease obligation | $ | 21,325 | |
Finance Leases | |||
Property, plant and equipment, at cost | $ | 3,377 | |
Accumulated depreciation and amortization | (1,173) | ||
Property, plant and equipment, net | $ | 2,204 | |
Current portion of long-term debt | $ | 135 | |
Long-term debt | 1,852 | ||
Total finance lease obligation | $ | 1,987 | |
Weighted-Average Remaining Lease Term | |||
Operating leases | 7.9 | yrs | |
Finance leases | 10.9 | yrs | |
Weighted-Average Discount Rate | |||
Operating leases | 4.7 | % | |
Finance leases | 8.6 | % |
The following table summarizes inventories and theatrical film and television production costs as of June 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 | ||
follows:
28 |
33
AT&T INC.
JUNE 30, 2018
Flows
June 30, | December 31, | |||||||||||||||||||
Cash and Cash Equivalents and Restricted Cash | 2018 | 2017 | 2017 | 2016 | ||||||||||||||||
Cash and cash equivalents | $ | 13,523 | $ | 25,617 | $ | 50,498 | $ | 5,788 | ||||||||||||
Restricted cash in Other current assets | 12 | 6 | 6 | 7 | ||||||||||||||||
Restricted cash in Other Assets | 218 | 202 | 428 | 140 | ||||||||||||||||
Cash and cash equivalents and restricted cash | $ | 13,753 | $ | 25,825 | $ | 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 | |||||||||||||||||
Debt Transactions
As of June 30, 2018, our total long-term debt obligations totaled $190,167. During the first six months we completed the following debt activity:
|
|
|
|
|
|
|
34
March 31, | December 31, | |||||||||||
Cash and Cash Equivalents and Restricted Cash | 2019 | 2018 | 2018 | 2017 | ||||||||
Cash and cash equivalents | $ | 6,516 | $ | 48,872 | $ | 5,204 | $ | 50,498 | ||||
Restricted cash in Other current assets | 20 | 8 | 61 | 6 | ||||||||
Restricted cash in Other Assets | 94 | 345 | 135 | 428 | ||||||||
Cash and cash equivalents and restricted cash | $ | 6,630 | $ | 49,225 | $ | 5,400 | $ | 50,932 |
Three months ended | |||||
March 31, | |||||
Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | 2019 | 2018 | |||
Operating cash flows from operating leases | $ | 1,332 | $ | 1,207 |
Three months ended | ||||||
March 31, | ||||||
Cash Paid (Received) During the Period for: | 2019 | 2018 | ||||
Interest | $ | 2,507 | $ | 2,408 | ||
Income taxes, net of refunds | (379) | (1,089) |
JUNE 30, 2018
RESULTS OF OPERATIONS
Consolidated ResultsIn the first quarter of 2018, we adopted new revenue accounting rules that significantly affect the comparability of
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating Revenues | |||||||
Communications | $ | 35,393 | $ | 35,533 | (0.4) | % | |
WarnerMedia | 8,379 | 112 | - | ||||
Latin America | 1,718 | 2,025 | (15.2) | ||||
Xandr | 426 | 337 | 26.4 | ||||
Corporate and other | 167 | 333 | (49.8) | ||||
Eliminations and consolidation | (1,256) | (302) | - | ||||
AT&T Operating Revenues | 44,827 | 38,038 | 17.8 | ||||
Operating Contribution | |||||||
Communications | 8,052 | 8,027 | 0.3 | ||||
WarnerMedia | 2,310 | 39 | - | ||||
Latin America | (173) | (111) | (55.9) | ||||
Xandr | 253 | 286 | (11.5) | ||||
Segment Operating Contribution | $ | 10,442 | $ | 8,241 | 26.7 | % |
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%, 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 wireline 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 due to the adoption of new revenue accounting standards that contributed to higher revenue allocations from bundled contracts and the sale of higher-priced devices.
35
Mobility provides nationwide wireless service and equipment. |
Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms. |
Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers. |
JUNE 30, 2018
Media revenues for
Turner is comprised of the historic Turner division as well as the financial results of our AT&T's Regional Sports Networks (RSNs). This business unit primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties. |
Home Box Office consists of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment. |
Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games. |
Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean. |
Mexico provides wireless service and equipment to customers in Mexico. |
Operatingexpenses decreased $791, or 2.4%,summarized in the second quarterfollowing discussions. Additional analysis is discussed in our “Segment Results” section. Percentage increases and $1,963, or 3.0%, fordecreases that are not considered meaningful are denoted with a dash. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating Revenues | |||||||
Service | $ | 40,684 | $ | 33,646 | 20.9 | % | |
Equipment | 4,143 | 4,392 | (5.7) | ||||
Total Operating Revenues | 44,827 | 38,038 | 17.8 | ||||
Operating expenses | |||||||
Operations and support | 30,388 | 25,843 | 17.6 | ||||
Depreciation and amortization | 7,206 | 5,994 | 20.2 | ||||
Total Operating Expenses | 37,594 | 31,837 | 18.1 | ||||
Operating Income | 7,233 | 6,201 | 16.6 | ||||
Interest expense | 2,141 | 1,771 | 20.9 | ||||
Equity in net income (loss) of affiliates | (7) | 9 | - | ||||
Other income (expense) – net | 286 | 1,702 | (83.2) | ||||
Income Before Income Taxes | 5,371 | 6,141 | (12.5) | ||||
Net Income | 4,348 | 4,759 | (8.6) | ||||
Net Income Attributable to AT&T | $ | 4,096 | $ | 4,662 | (12.1) | % |
Equipment2019. The increase was primarily due to our 2018 acquisition of Time Warner. Partially offsetting these increases in revenues were declines in our Latin America segment and Communications segment, driven by lower legacy services, video and wireless equipment revenues. Revenues were also negatively impacted by foreign exchange pressure.
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 werewas primarily due to annual content cost increasesour 2018 acquisition of Time Warner, partially offset by lower equipment costs in our Communications and additional programming costs, including programmingLatin America segments and production costs associated with WarnerMedia for the16-day period since acquisition.
Other cost of revenuesexpenses decreased $1,937, or 20.2%, 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 reflect our adoption of new accounting rules, which included our policy election to record USF fees net. Also contributing to the decreases were lower expenses due to our continued focus on cost managementmanagement.
Selling, general and administrativeexpensesamortization
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, or 1.3%, for the first six months of 2018. The increases were primarily due to16-days of WarnerMedia resultsacquisition 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.
expansion.
Operatingincomedecreased $60, or 0.9%,increased in the secondfirst quarter and decreased $215, or 1.7%, for the first six months of 2018.2019. Our operating income margin in the secondfirst quarter increased from 16.4% in 2017 to 16.6% in 2018, and for the first six months increaseddecreased from 16.3% in 20172018 to 16.4%16.1% in 2018.
2019.
Equity in net income (loss) of affiliates decreased $30in the first quarter of 2019, primarily due to basis amortization of Time Warner investments, which were acquired in the second quarter of 2018 and increased $152, or 95.6%, for the first six months of 2018. Results for the second quarter and the first six months of 2018 include
36
COMMUNICATIONS SEGMENT | First Quarter | ||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Segment Operating Revenues | |||||||
Mobility | $ | 17,567 | $ | 17,355 | 1.2 | % | |
Entertainment Group | 11,328 | 11,431 | (0.9) | ||||
Business Wireline | 6,498 | 6,747 | (3.7) | ||||
Total Segment Operating Revenues | 35,393 | 35,533 | (0.4) | ||||
Segment Operating Contribution | |||||||
Mobility | 5,351 | 5,158 | 3.7 | ||||
Entertainment Group | 1,478 | 1,309 | 12.9 | ||||
Business Wireline | 1,223 | 1,560 | (21.6) | ||||
Total Segment Operating Contribution | $ | 8,052 | $ | 8,027 | 0.3 | % |
JUNE 30,
Selected Subscribers and Connections | |||
First Quarter | |||
(000s) | 2019 | 2018 | |
Total domestic broadband connections | 15,737 | 15,775 | |
Network access lines in service | 9,576 | 11,288 | |
U-verse VoIP connections | 4,935 | 5,585 |
to 22.8% in 2019.
Communications Business Unit Discussion | |||||||
Mobility Results | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating revenues | |||||||
Service | $ | 13,792 | $ | 13,403 | 2.9 | % | |
Equipment | 3,775 | 3,952 | (4.5) | ||||
Total Operating Revenues | 17,567 | 17,355 | 1.2 | ||||
Operating expenses | |||||||
Operations and support | 10,181 | 10,102 | 0.8 | ||||
Depreciation and amortization | 2,035 | 2,095 | (2.9) | ||||
Total Operating Expenses | 12,216 | 12,197 | 0.2 | ||||
Operating Income | 5,351 | 5,158 | 3.7 | ||||
Equity in Net Income (Loss) of Affiliates | - | - | - | ||||
Operating Contribution | $ | 5,351 | $ | 5,158 | 3.7 | % |
Other income (expense) – net
First Quarter | Percent | |||||||
(in 000s) | 2019 | 2018 | Change | |||||
Wireless Subscribers | ||||||||
Postpaid smartphones | 60,597 | 60,002 | 1.0 | % | ||||
Postpaid feature phones and data-centric devices | 15,953 | 17,429 | (8.5) | |||||
Postpaid | 76,550 | 77,431 | (1.1) | |||||
Prepaid | 17,180 | 15,671 | 9.6 | |||||
Reseller | 7,574 | 9,002 | (15.9) | |||||
Connected devices1 | 54,428 | 41,728 | 30.4 | |||||
Total Wireless Subscribers | 155,732 | 143,832 | 8.3 | |||||
Wireless Net Additions2 | ||||||||
Postpaid | (204) | 49 | - | |||||
Prepaid | 96 | 241 | (60.2) | |||||
Reseller | (253) | (388) | 34.8 | |||||
Connected devices1 | 3,088 | 2,728 | 13.2 | |||||
Wireless Net Subscriber Additions | 2,727 | 2,630 | 3.7 | |||||
Postpaid Phone Subscribers | 63,438 | 63,657 | (0.3) | |||||
Postpaid Phone Net Additions | 80 | (60) | - | % | ||||
Postpaid Churn3 | 1.17 | 1.06 | 11 | BP | ||||
Postpaid Phone-Only Churn 3 | 0.93 | 0.84 | 9 | BP | ||||
1 | Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes | |||||||
postpaid tablets. | ||||||||
2 | Excludes acquisition-related additions during the period. | |||||||
3 | Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number | |||||||
of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for | ||||||||
each month of that period. |
Income taxesdecreased $524, or 25.5%,subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn and postpaid phone-only churn was higher in the secondfirst quarter of 2018 anddue to continued competitive pricing in the industry.
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 | ||||||
|
|
|
|
37
JUNE 30, 2018
Segment Results
We also evaluate segment performance based on EBITDA and/or EBITDA margin whichin the first quarter increased from 41.8% in 2018 to 42.0% in 2019. EBITDA is defined as Segment Contribution,operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
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.
38
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
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 Revenuesdecreased $222, or 1.5%, in the second quarter and $42, or 0.1%, for the first six months of 2018. The decreases were due to lower service revenues resulting from customers choosing unlimited plans and the impact of newly adopted accounting rules, which include our policy election to record USF fees on a net basis. Lower service revenues were partially offset by higher equipment revenues.
39
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
Servicerevenue decreased $614, or 4.9%, in the second quarter and $1,467, or 5.9%, for the first six 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 a year, service revenues on a comparable basis should increase for the remainder of 2018.
Equipment revenue increased $392, or 14.9%, in the second quarter and $1,425, or 28.7%, for the first six months of 2018. The increases in equipment revenues resulted from the sale of higher-priced devices as well as the adoption of new accounting standards 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.
Operations and supportexpenses decreased $551, or 6.4%, in the second quarter and $587, or 3.4%, 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 expenses, such as compensation and benefits.
Decreased operations and support expenses were primarily due to our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to the decrease were 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 second quarter and $181, or 5.3%, for the first six 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 second quarter and $364, or 3.9%, for the first six months of 2018. Our Consumer Mobility segment operating income margin in the second quarter increased from 31.4% in 2017 to 33.5% 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 | ||||||||||||||||||
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|
| ||||||||||||||||||||||
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 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Operating Revenues | 17,282 | 17,455 | (1.0 | ) | 34,637 | 34,552 | 0.2 | |||||||||||||||||
|
| |||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Operations and support | 9,663 | 10,091 | (4.2 | ) | 19,765 | 19,976 | (1.1) | |||||||||||||||||
|
| |||||||||||||||||||||||
EBITDA | 7,619 | 7,364 | 3.5 | 14,872 | 14,576 | 2.0 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Depreciation and amortization | 2,113 | 1,988 | 6.3 | 4,208 | 3,980 | 5.7 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total Operating Expenses | 11,776 | 12,079 | (2.5 | ) | 23,973 | 23,956 | 0.1 | |||||||||||||||||
|
| |||||||||||||||||||||||
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 | ||||||||||||||||||
|
|
|
|
|
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 six months increased from 30.7% in 2017 to 30.8% in 2018. AT&T Mobility’s second-quarter EBITDA margin increased from 42.2% in 2017 to 44.1% in 2018 and for the first six 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% in 2017 to 55.7% in 2018 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.
Subscriber Relationships
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. ARPU
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 June 30, 2018, approximately 94% of our postpaid phone subscriber base used smartphones, compared to 92% at June 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 allow 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 programs 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 plans or Bring Your Own Device (BYOD). While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.
52
Entertainment Group Results | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating revenues | |||||||
Video entertainment | $ | 8,074 | $ | 8,225 | (1.8) | % | |
High-speed internet | 2,070 | 1,878 | 10.2 | ||||
Legacy voice and data services | 683 | 806 | (15.3) | ||||
Other service and equipment | 501 | 522 | (4.0) | ||||
Total Operating Revenues | 11,328 | 11,431 | (0.9) | ||||
Operating expenses | |||||||
Operations and support | 8,527 | 8,811 | (3.2) | ||||
Depreciation and amortization | 1,323 | 1,310 | 1.0 | ||||
Total Operating Expenses | 9,850 | 10,121 | (2.7) | ||||
Operating Income | 1,478 | 1,310 | 12.8 | ||||
Equity in Net Income (Loss) of Affiliates | - | (1) | - | ||||
Operating Contribution | $ | 1,478 | $ | 1,309 | 12.9 | % |
JUNE 30, 2018
Supplemental Results Under Historical Accounting Method
As
First Quarter | Percent Change | ||||||
(in 000s) | 2019 | 2018 | |||||
Video Connections | |||||||
Premium TV1 | 22,359 | 23,902 | (6.5) | % | |||
DIRECTV NOW2 | 1,508 | 1,467 | 2.8 | ||||
Total Video Connections | 23,867 | 25,369 | (5.9) | ||||
Broadband Connections | |||||||
IP1 | 13,822 | 13,616 | 1.5 | ||||
DSL | 632 | 816 | (22.5) | ||||
Total Broadband Connections | 14,454 | 14,432 | 0.2 | ||||
Retail Consumer Switched Access Lines | 3,787 | 4,535 | (16.5) | ||||
U-verse Consumer VoIP Connections | 4,393 | 5,105 | (13.9) | ||||
Total Retail Consumer Voice Connections | 8,180 | 9,640 | (15.1) | ||||
Video Net Additions | |||||||
Premium TV1, 3 | (544) | (187) | - | ||||
DIRECTV NOW2 | (83) | 312 | - | ||||
Net Video Additions | (627) | 125 | - | ||||
Broadband Net Additions | |||||||
IP1 | 93 | 154 | (39.6) | ||||
DSL | (48) | (72) | 33.3 | ||||
Net Broadband Additions | 45 | 82 | (45.1) | ||||
Fiber Broadband Connections (included in IP) | 3,060 | 1,955 | 56.5 | ||||
Fiber Broadband Net Additions (included in IP) | 297 | 226 | 31.4 | % | |||
1 | 2019 includes the impact of aligning our subscriber billing practice with the industry and AT&T Mobility to extend customer business | ||||||
disconnection period to the end of the billing cycle, resulting in an increase of 117 net video and 38 net broadband subscribers at March | |||||||
31, 2019. | |||||||
2 | Consistent with industry practice, DIRECTV NOW includes connections that are on a free-trial. | ||||||
3 | Includes disconnections for customers that migrated to DIRECTV NOW. |
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 | ||||||||||||||
53
JUNE 30, 2018
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
Business Wireline Results | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating revenues | |||||||
Strategic and managed services | $ | 3,792 | $ | 3,595 | 5.5 | % | |
�� Legacy voice and data services | 2,404 | 2,865 | (16.1) | ||||
Other service and equipment | 302 | 287 | 5.2 | ||||
Total Operating Revenues | 6,498 | 6,747 | (3.7) | ||||
Operating expenses | |||||||
Operations and support | 4,040 | 4,016 | 0.6 | ||||
Depreciation and amortization | 1,235 | 1,170 | 5.6 | ||||
Total Operating Expenses | 5,275 | 5,186 | 1.7 | ||||
Operating Income | 1,223 | 1,561 | (21.7) | ||||
Equity in Net Income (Loss) of Affiliates | - | (1) | - | ||||
Operating Contribution | $ | 1,223 | $ | 1,560 | (21.6) | % |
JUNE 30, 2018
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
WARNERMEDIA SEGMENT | First Quarter | ||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Segment Operating Revenues | |||||||
Turner | $ | 3,443 | $ | 112 | - | % | |
Home Box Office | 1,510 | - | - | ||||
Warner Bros. | 3,518 | - | - | ||||
Eliminations & Other | (92) | - | - | ||||
Total Segment Operating Revenues | 8,379 | 112 | - | ||||
Segment Operating Contribution | |||||||
Turner | 1,272 | 64 | - | ||||
Home Box Office | 582 | - | - | ||||
Warner Bros. | 553 | - | - | ||||
Eliminations & Other | (97) | (25) | - | ||||
Total Segment Operating Contribution | $ | 2,310 | $ | 39 | - | % |
JUNE 30, 2018
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
WarnerMedia Business Unit Discussion | |||||||
Turner Results | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating revenues | |||||||
Subscription | $ | 1,965 | $ | 98 | - | % | |
Advertising | 1,261 | 14 | - | ||||
Content and other | 217 | - | - | ||||
Total Operating Revenues | 3,443 | 112 | - | ||||
Operating expenses | |||||||
Operations and support | 2,136 | 74 | - | ||||
Depreciation and amortization | 60 | 1 | - | ||||
Total Operating Expenses | 2,196 | 75 | - | ||||
Operating Income | 1,247 | 37 | - | ||||
Equity in Net Income of Affiliates | 25 | 27 | (7.4) | ||||
Operating Contribution | $ | 1,272 | $ | 64 | - | % |
Home Box Office Results | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating revenues | |||||||
Subscription | $ | 1,334 | $ | - | - | % | |
Content and other | 176 | - | - | ||||
Total Operating Revenues | 1,510 | - | - | ||||
Operating expenses | |||||||
Operations and support | 921 | - | - | ||||
Depreciation and amortization | 22 | - | - | ||||
Total Operating Expenses | 943 | - | - | ||||
Operating Income | 567 | - | - | ||||
Equity in Net Income of Affiliates | 15 | - | - | ||||
Operating Contribution | $ | 582 | $ | - | - | % |
JUNE 30, 2018
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
Warner Bros. Results | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating revenues | |||||||
Theatrical product | $ | 1,506 | $ | - | - | % | |
Television product | 1,613 | - | - | ||||
Games and other | 399 | - | - | ||||
Total Operating Revenues | 3,518 | - | - | ||||
Operating expenses | |||||||
Operations and support | 2,919 | - | - | ||||
Depreciation and amortization | 52 | - | - | ||||
Total Operating Expenses | 2,971 | - | - | ||||
Operating Income | 547 | - | - | ||||
Equity in Net Income of Affiliates | 6 | - | - | ||||
Operating Contribution | $ | 553 | $ | - | - | % |
LATIN AMERICA SEGMENT | First Quarter | ||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Segment Operating Revenues | |||||||
Vrio | $ | 1,067 | $ | 1,354 | (21.2) | % | |
Mexico | 651 | 671 | (3.0) | ||||
Total Segment Operating Revenues | 1,718 | 2,025 | (15.2) | ||||
Segment Operating Contribution | |||||||
Vrio | 32 | 148 | (78.4) | ||||
Mexico | (205) | (259) | 20.8 | ||||
Total Segment Operating Contribution | $ | (173) | $ | (111) | (55.9) | % |
JUNE 30, 2018
Latin America Business Unit Discussion | |||||||
Vrio Results | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating revenues | $ | 1,067 | $ | 1,354 | (21.2) | % | |
Operating expenses | |||||||
Operations and support | 866 | 1,001 | (13.5) | ||||
Depreciation and amortization | 169 | 205 | (17.6) | ||||
Total Operating Expenses | 1,035 | 1,206 | (14.2) | ||||
Operating Income | 32 | 148 | (78.4) | ||||
Operating Contribution | $ | 32 | $ | 148 | (78.4) | % |
First Quarter | ||||||||
Percent | ||||||||
(in 000s) | 2019 | 2018 | Change | |||||
Vrio Video Subscribers1,2 | 13,584 | 13,573 | 0.1 | % | ||||
Vrio Video Net Subscriber Additions3 | (32) | (15) | - | % | ||||
1 | Excludes subscribers of our equity investment in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 7.6 million | |||||||
subscribers at December 31, 2018 and 7.9 million subscribers at March 31, 2018. | ||||||||
2 | 2019 excludes the impact of 222 subscriber disconnections resulting from conforming our video credit policy across the region, which is | |||||||
reflected in beginning of period subscribers. | ||||||||
3 | Excludes SKY Mexico net subscriber losses of 199 and 92 for the quarter ended December 31, 2018 and March 31, 2018, respectively. |
AT&T INC. MARCH 31, 2019 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued Dollars, subscribers and connections in millions, except per share and per subscriber amounts | |||||||
First Quarter | |||||||
2019 | 2018 | Percent Change | |||||
Operating revenues | |||||||
Service | $ | 442 | $ | 404 | 9.4 | % | |
Equipment | 209 | 267 | (21.7) | ||||
Total Operating Revenues | 651 | 671 | (3.0) | ||||
Operating expenses | |||||||
Operations and support | 725 | 803 | (9.7) | ||||
Depreciation and amortization | 131 | 127 | 3.1 | ||||
Total Operating Expenses | 856 | 930 | (8.0) | ||||
Operating Income (Loss) | (205) | (259) | 20.8 | ||||
Operating Contribution | $ | (205) | $ | (259) | 20.8 | % |
First Quarter | ||||||||
Percent | ||||||||
(in 000s) | 2019 | 2018 | Change | |||||
Mexico Wireless Subscribers1 | ||||||||
Postpaid | 5,642 | 5,607 | 0.6 | % | ||||
Prepaid | 11,779 | 9,857 | 19.5 | |||||
Reseller | 301 | 178 | 69.1 | |||||
Total Mexico Wireless Subscribers | 17,722 | 15,642 | 13.3 | % | ||||
Mexico Wireless Net Additions | ||||||||
Postpaid | (69) | 109 | - | % | ||||
Prepaid | 114 | 459 | (75.2) | |||||
Reseller | 48 | (25) | - | |||||
Mexico Wireless Net Subscriber Additions | 93 | 543 | (82.9) | % | ||||
1 | 2019 excludes the impact of 692 subscriber disconnections resulting from the churn of customers related to sales by certain third-party | |||||||
distributors and the sunset of 2G services in Mexico, which are reflected in beginning of period subscribers. |
XANDR SEGMENT | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating revenues | $ | 426 | $ | 337 | 26.4 | % | |
Operating expenses | |||||||
Operations and support | 160 | 50 | - | ||||
Depreciation and amortization | 13 | 1 | - | ||||
Total Operating Expenses | 173 | 51 | - | ||||
Operating Income | 253 | 286 | (11.5) | ||||
Equity in Net Income of Affiliates | - | - | - | ||||
Operating Contribution | $ | 253 | $ | 286 | (11.5) | % |
Total Advertising Revenues | |||||||
First Quarter | |||||||
Percent | |||||||
2019 | 2018 | Change | |||||
Operating Revenues | |||||||
WarnerMedia | $ | 1,279 | $ | 14 | - | % | |
Communications | 417 | 375 | 11.2 | ||||
Xandr | 426 | 337 | 26.4 | ||||
Eliminations | (350) | (334) | (4.8) | ||||
Total Advertising Revenues | $ | 1,772 | $ | 392 | - | % |
Business Solutions Results | |||||||
First Quarter | |||||||
2019 | 2018 | Percent Change | |||||
Operating revenues | |||||||
Wireless service | $ | 1,913 | $ | 1,791 | 6.8 | % | |
Strategic and managed services | 3,792 | 3,595 | 5.5 | ||||
Legacy voice and data services | 2,404 | 2,865 | (16.1) | ||||
Other service and equipment | 302 | 287 | 5.2 | ||||
Wireless equipment | 596 | 578 | 3.1 | ||||
Total Operating Revenues | 9,007 | 9,116 | (1.2) | ||||
Operating expenses | |||||||
Operations and support | 5,640 | 5,594 | 0.8 | ||||
Depreciation and amortization | 1,541 | 1,458 | 5.7 | ||||
Total Operating Expenses | 7,181 | 7,052 | 1.8 | ||||
Operating Income | 1,826 | 2,064 | (11.5) | ||||
Equity in Net Income of Affiliates | - | (1) | - | ||||
Operating Contribution | $ | 1,826 | $ | 2,063 | (11.5) | % |
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. OnIn July 12, 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. We believeOn February 26, 2019, the D.C. Circuit unanimously affirmed our win.
Litigation Challenging DIRECTV’s NFL SUNDAY TICKETMore than two dozen putative class actions were filed in the U.S. District Courts for the Central Districtabsence 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 eachnew contracts or 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. 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 occur in 2019.
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.
Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC’s allegations concern the application of AT&T’s Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer’s billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media
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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, 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. 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 Contractsagreements being reached. A contract now covering approximately 9,5008,000 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 3,6003,000 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
millions, except per share and per subscriber amounts
In April 2017,
In October 2016, a sharply divided FCC adopted new rules governing the use of customer informationfollowing discussion by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, includingreportable segment.
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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 act 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.
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 todecision and the D.C. Circuit. In addition, althoughCircuit heard oral argument on the appeals on February 1, 2019. Although the FCC order expressly preempted inconsistent state or local measures, a number of states are considering or have adopted legislation that would reimpose the very rules the FCC repealed, and in some cases, establish additional requirements that go beyond the FCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively reimpose 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. The California and Vermont suits have been stayed pursuant to agreements by those states not to enforce their laws pending resolution of appeals of the FCC’s December 2017 order. 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
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 FCCnew rules and policies 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 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,internet economy, including so-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.
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Item 2. Management’s Discussion we introduced the nation’s first commercial mobile 5G service. We currently have mobile 5G in parts of 19 U.S. cities and Analysis of Financial Condition and Results of Operations - Continued
Dollarswill have launched mobile 5G service in millions except per share and per subscriber amounts
Also facilitatingat least 22 major cities by 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-thirdend of the available low band spectrum as presumptively harmfulyear. We expect to competition. The spectrum screen (including the low band screen) recently increasedhave mobile 5G service nationwide to more than 200 million people by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our customers’ needs.
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:
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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 uneconomic for carriers to offer broadband. This is the first time the FCC will award universal service funding through an auction.
early 2020.
With the completion of the Time Warner transaction, we
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JUNE 30, 2018
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 six months of 2018, cash provided by operating activities was $19,176, compared to $17,670 for the first six 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 six months of 2018, cash used in investing activities totaled $52,635, and consisted primarily of $40,715 for acquisition costs related to Time Warner and other acquisitions and $10,959 for capital expenditures, excluding interest during construction.
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 six months of 2018, vendor financing payments related to capital investments were approximately $257. During the first six months, we enteredquarter, approximately $300 of assets related to the FirstNet build were placed into $188 of new vendor financing commitments, with $825 of vendor financing payables included in on our June 30, 2018 consolidated balance sheet, of which $340 are due within one year and the remainder are due between two and five years.
service.
In 2018, we expect Capital investment, which consists of capital expenditures plus vendor financing payments, of approximately $25,000, $22,000 net of expected FirstNet reimbursements and vendor financing.
following issuances:
● | January draw of $2,850 on an 11-month syndicated term loan agreement. |
● | January borrowings of $725 supported by government agencies to support network equipment purchases. |
● | January draw of $750 on a private financing agreement. |
● | February issuance of $3,000 of 4.350% global notes due 2029. |
● | February issuance of $2,000 of 4.850% global notes due 2039. |
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● | $750 of January borrowings under a private financing agreement. |
● | $ |
● | $400 of floating rate notes due 2019. |
● | $890 of 5.200% notes due 2020. |
● | $1,120 of 5.000% notes due 2021. |
● | $1,000 of 4.700% Warner Media, LLC notes due 2021. |
● | $1,000 of 4.750% Warner Media, LLC notes due 2021. |
● | $38 of 4.600% DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. notes due 2021. |
● | $40 of 5.000% DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. notes due 2021. |
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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
As a result of the Time Warner acquisition, we acquired debt with a fair value of $22,846 at the time of acquisition, of which $18,876 at face value remained on our balance sheet as of June 30, 2018. The face value of the remaining debt acquired is summarized primarily as follows:
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● | $1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021. |
● | An accretingzero-coupon note that may be redeemed each May until maturity in 2022. |
Vrio, a consolidated holding company for our Latin American digital entertainment services units, DIRECTV Latin American and SKY Brasil, subsidiaries of Vrio, entered into the following long-term debt issuances:
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On July 25, 2018 we issued $750 of 5.625% global notes due 2067. 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) floating rate global notes due 2020.
agreement (the “Amended and Restated Credit Agreement”) and concurrently entered into a new five-year agreement (the “Five Year Credit Agreement”) such that we now have two $7,500 revolving credit agreements totaling $15,000. The Amended and Restated Credit Agreement terminates on December 11, 2021 and the Five Year Credit Agreement terminates on December 11, 2023. No amounts were outstanding under either agreement as of March 31, 2019.
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JUNE 30,As of December 31, 2018,
Item 2. Management’s Discussion $2,625 was outstanding of Tranche A advances. We paid $2,625 of the Tranche A advances on February 20, 2019, and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
terminated the facility.
In anticipation of the Time Warner acquisition, we entered into a $10,000 term loan agreement (“Term Loan”). In February 2018, we amended the Term Loan to extend the commitment termination date to December 31, 2018 and increased the commitments to $16,175 from $10,000. We drew on the Term Loan for the acquisition during the second quarter of 2018, with $16,175 outstanding as of June 30, 2018.
On 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 of June 30, 2018.
On June 26, 2018, we repaid and 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 of commercial paper outstanding, all of which was repaid by July 23, 2018.
During the first six months of 2018, we received $4,212 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 as of June 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. We distributed $280 to the trust during the first six 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.
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Supplemental Operational Measures
Three 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 | $ | 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.
65
First Quarter | |||||||||||||||||
March 31, 2019 | March 31, 2018 | ||||||||||||||||
Mobility | Business Wireline | Adjustments1 | Business Solutions | Mobility | Business Wireline | Adjustments1 | Business Solutions | ||||||||||
Operating Revenues | |||||||||||||||||
Wireless service | $ | 13,792 | $ | - | $ | (11,879) | $ | 1,913 | $ | 13,403 | $ | - | $ | (11,612) | $ | 1,791 | |
Strategic and managed services | - | 3,792 | - | 3,792 | - | 3,595 | - | 3,595 | |||||||||
Legacy voice and data services | - | 2,404 | - | 2,404 | - | 2,865 | - | 2,865 | |||||||||
Other service and equipment | - | 302 | - | 302 | - | 287 | - | 287 | |||||||||
Wireless equipment | 3,775 | - | (3,179) | 596 | 3,952 | - | (3,374) | 578 | |||||||||
Total Operating Revenues | 17,567 | 6,498 | (15,058) | 9,007 | 17,355 | 6,747 | (14,986) | 9,116 | |||||||||
Operating Expenses | |||||||||||||||||
Operations and support | 10,181 | 4,040 | (8,581) | 5,640 | 10,102 | 4,016 | (8,524) | 5,594 | |||||||||
EBITDA | 7,386 | 2,458 | (6,477) | 3,367 | 7,253 | 2,731 | (6,462) | 3,522 | |||||||||
Depreciation and amortization | 2,035 | 1,235 | (1,729) | 1,541 | 2,095 | 1,170 | (1,807) | 1,458 | |||||||||
Total Operating Expense | 12,216 | 5,275 | (10,310) | 7,181 | 12,197 | 5,186 | (10,331) | 7,052 | |||||||||
Operating Income | 5,351 | 1,223 | (4,748) | 1,826 | 5,158 | 1,561 | (4,655) | 2,064 | |||||||||
Equity in net income (loss) of affiliates | - | - | - | - | - | (1) | - | (1) | |||||||||
Operating Contribution | $ | 5,351 | $ | 1,223 | $ | (4,748) | $ | 1,826 | $ | 5,158 | $ | 1,560 | $ | (4,655) | $ | 2,063 | |
1Non-business wireless reported in the Communications segment under the Mobility business unit. |
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
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.
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March 31, 2019.
March 31, 2019.
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● | 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) and legislative efforts involving issues that are important to our business, including, without limitation, special access and business data 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 |
● |
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, includingnon-regulation of comparable alternative technologies (e.g., VoIP and data usage). |
● | The continued development and delivery of attractive and profitable wireless, video and broadband |
● |
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 |
● | Our ability to manage growth in wireless |
● | The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties. |
● | The impact from major equipment or software failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions including flooding and hurricanes, natural disasters including earthquakes and forest fires, pandemics, energy shortages, wars or terrorist attacks. |
● | The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards. |
● |
Our ability to successfully integrate |
● | Our ability to take advantage of the desire of advertisers to change traditional video advertising models. |
● |
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. |
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Our ability to successfully integrate our June 2018 acquisition of Time Warner, including For 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.
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PART II – OTHER INFORMATION - CONTINUED
Dollars in millions except per share amounts
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(c) A summary of our repurchases of common stock during the
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The authorizations have no expiration date.
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