TIDM58KN
RNS Number : 0620Z
AT & T Inc.
28 August 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or emerging growth company. See
definition of "accelerated filer," "large accelerated filer,"
"smaller reporting company" and "emerging growth company" in Rule
12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by checkmark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At July 31, 2018, there were 7,262 million common shares
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
---------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
---------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
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
Outstanding - with Dilution (in
millions) 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.
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)
attributable to
noncontrolling interest),
net of taxes of
$(318), $115, $(143) and
$506 (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.
AT&T INC.
---------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
---------------------------------------------------------------------------------------------------------
December
June 30, 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
Additional paid-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.
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.
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
=================================================================== ================ ===========
Additional Paid-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.
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation These consolidated financial statements
include all adjustments that are necessary to present fairly the
results for the presented interim periods, consisting of normal
recurring accruals and other items. The consolidated financial
statements include the accounts of the Company and our
majority-owned subsidiaries and affiliates, including the operating
results of recently acquired Time Warner Inc. (referred to as "Time
Warner" or "WarnerMedia") as of June 15, 2018 (see Note 8).
All significant intercompany transactions are eliminated in the
consolidation process. Investments in less than majority-owned
subsidiaries and partnerships where we have significant influence
are accounted for under the equity method. Earnings from certain
investments accounted for using the equity method are included for
periods ended within up to one quarter of our period end. We also
record our proportionate share of our equity method investees'
other comprehensive income (OCI) items, including translation
adjustments.
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles (GAAP) requires management
to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes, including
estimates of probable losses and expenses. Actual results could
differ from those estimates. Certain amounts have been conformed to
the current period's presentation, including impacts for the
adoption of recent accounting standards and the realignment of
certain business units within our reportable segments (see Note
4).
Tax Reform The Tax Cuts and Jobs Act (the Act) was enacted on
December 22, 2017. The Act reduced the U.S. federal corporate
income tax rate from 35% to 21% and required companies to pay a
one-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 Adopted Accounting Standards
Revenue Recognition As of January 1, 2018, we adopted Financial
Accounting Standards Board (FASB) Accounting Standards Update (ASU)
No. 2014-09, "Revenue from Contracts with Customers (Topic 606),"
as modified (ASC 606), using the modified retrospective method,
which does not allow us to adjust prior periods. We applied the
rules to all open contracts existing as of January 1, 2018,
recording an increase of $2,342 to retained earnings for the
cumulative effect of the change, with an offsetting contract asset
of $1,737, deferred contract acquisition costs of $1,454, other
asset reductions of $239, other liability reductions of $212,
deferred income taxes of $787 and noncontrolling interest of $35.
(See Note 5)
Pension and Other Postretirement Benefits As of January 1, 2018,
we adopted, with retrospective application, ASU No. 2017-07,
"Compensation - Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost" (ASU 2017-07). 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 ASU 2017-07 (presentation of
benefit cost):
Pension and Postretirement Benefits
--------------------------------------------- -------------------------------------------
Historical Effect of
Adoption
Accounting of As
Method ASU 2017-07 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
=============================================== === ============ ========= ========
Cash Flows As of January 1, 2018, we adopted, with retrospective
application, ASU No. 2016-15, "Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments" (ASU
2016-15). Under ASU 2016-15, 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, ASU No. 2016-18, "Statement of Cash Flows (Topic 230)
- Restricted Cash," (ASU 2016-18). The primary impact of ASU
2016-18 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 ASU 2016-15 (cash receipts on
deferred purchase price) and ASU 2016-18 (restricted cash):
Cash Flows
-------------------------------------- -----------------------------------------------------
Historical Effect of Effect of
Adoption Adoption
Accounting of of As
Method ASU 2016-15 ASU 2016-18 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 ASU No.
2016-01, "Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial
Liabilities" (ASU 2016-01), 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 ASU 2016-01, with an
offset to accumulated other comprehensive income (accumulated
OCI).
New Accounting Standards and Accounting Standards Not Yet
Adopted
Leases In February 2016, the FASB issued ASU No. 2016-02,
"Leases (Topic 842)," as modified (ASC 842), which replaces
existing leasing rules with a comprehensive lease measurement and
recognition standard and expanded disclosure requirements. ASC 842
will require lessees to recognize most leases on their balance
sheets as liabilities, with corresponding "right-of-use" assets.
For income statement recognition purposes, leases will be
classified as either a finance or an operating lease without
relying upon the bright-line tests under current GAAP. In July
2018, the FASB amended ASC 842 to provide another transition
method, allowing a cumulative effect adjustment to the opening
balance of retained earnings during the period of adoption. Through
the same amendment, the FASB will allow lessors the option to make
a policy election to treat lease and nonlease components as a
single lease component under certain conditions. ASC 842 is
effective for annual reporting periods beginning after December 15,
2018, subject to early adoption.
Upon initial evaluation, we believe the key change upon adoption
will be the balance sheet recognition. The income statement
recognition of lease expense appears similar to our current
methodology. We are continuing to evaluate the magnitude and other
potential impacts to our financial statements.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and
diluted earnings per share for the three months and six months
ended June 30, 2018 and 2017, is shown in the table below:
Three months ended Six months ended
June 30, 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
================================================== ======== ======= ======= ======
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in
accumulated OCI are presented below. All amounts are net of tax and
exclude noncontrolling interest.
Net
Unrealized
Net Unrealized Gains
Foreign Gains (Losses) (Losses) Defined Accumulated
Currency on on Cash Benefit Other
Translation Available-for-Sale Flow Postretirement Comprehensive
Adjustment Securities Hedges Plans 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
========================== =========== === ================== === ========== === ============= === =============
Net
Unrealized
Net Unrealized Gains
Foreign Gains (Losses) (Losses) Defined Accumulated
Currency on on Cash Benefit Other
Translation Available-for-Sale Flow Postretirement Comprehensive
Adjustment Securities Hedges Plans 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
========================== =========== === ================== === ========== === ============= === =============
(Gains) losses are included in Other income (expense) - net in the
(1) consolidated statements of income.
(Gains) losses are included in Interest expense in the consolidated
(2) statements of income (see Note 7).
The amortization of prior service credits associated with postretirement
(3) benefits are included in Other income (expense) in the
consolidated statements of income (see Note 6).
With the adoption of ASU 2016-01, the unrealized (gains) losses on
(4) our equity investments are reclassified to retained earnings
(see Note 1).
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products
and services to different customer segments over various technology
platforms and/or in different geographies that are managed
accordingly. We analyze our segments based on Segment Contribution,
which consists of operating income, excluding acquisition-related
costs and other significant items (as discussed below), and equity
in net income (loss) of affiliates for investments managed within
each segment. We have five reportable segments: (1) Consumer
Mobility, (2) Business Solutions, (3) Entertainment Group, (4)
International, and (5) WarnerMedia.
We also evaluate segment performance based on EBITDA and/or
EBITDA margin, which is defined as Segment Contribution excluding
equity in net income (loss) of affiliates and depreciation and
amortization. We believe EBITDA to be a relevant and useful
measurement to our investors as it is part of our internal
management reporting and planning processes and it is an important
metric that management uses to evaluate segment operating
performance. EBITDA does not give effect to cash used for debt
service requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses. EBITDA
margin is EBITDA divided by total revenues.
To most effectively implement 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 is to report individual wireless
accounts with employer discounts in our Consumer Mobility segment,
instead of our Business Solutions segment. As a result of these
realignments, $19,686 of goodwill from the Business Solutions
segment was reallocated to the Consumer Mobility segment. Our
reported segment results include the impact for the adoption of
recent accounting standards, which affects the comparability
between 2018 and 2017 (see Note 5).
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 of pre-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 the 16-day period ended June 30,
2018, $98 of which was for pre-acquisition released
programming.
The Consumer Mobility segment provides nationwide wireless
service to consumers, wholesale and resale wireless subscribers
located in the United States or in U.S. territories. We provide
voice and data services, including high-speed internet over
wireless devices.
The Business Solutions segment provides services to business
customers, including multinational companies and governmental and
wholesale customers. We provide advanced IP-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.
The Entertainment 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.
The International segment provides entertainment services in
Latin America and wireless services in Mexico. Video entertainment
services are provided to primarily residential customers using
satellite technology. We utilize our regional and national networks
in Mexico to provide consumer and business customers with wireless
data and voice communication services. Our international
subsidiaries conduct business in their local currency, and
operating results are converted to U.S. dollars using official
exchange rates (operations in countries with highly inflationary
economies consider the U.S. dollar as the functional currency).
The WarnerMedia segment provides global media and entertainment
services through television networks and film, using its brands to
create, package and deliver high-quality content worldwide. The
segment consists of Turner, HBO and Warner Bros. businesses.
Corporate and Other items reconcile our segment results to
consolidated operating income and income before income taxes, and
include:
-- Corporate, which consists of: (1) operations that are no
longer integral to our operations or which we no longer actively
market, (2) corporate support functions and operations, (3) impacts
of corporate-wide decisions for which the individual operating
segments are not being evaluated, (4) the reclassification of the
amortization of prior service credits, which we continue to report
with segment operating expenses, to consolidated other income
(expense) - net and (5) the recharacterization of programming cost
amortization, which we continue to report with WarnerMedia segment
operating expense, to consolidated amortization expense.
-- Acquisition-related items which consists of items associated
with the merger and integration of acquired businesses, including
amortization of intangible assets.
-- Certain significant items which consists of (1) employee
separation charges associated with voluntary and/or strategic
offers, (2) losses resulting from abandonment or impairment of
assets and (3) other items for which the segments are not being
evaluated.
-- Eliminations, which remove transactions involving dealings
between AT&T companies, including content licensing with
WarnerMedia.
Interest expense and other income (expense) - net, are managed
only on a total company basis and are, accordingly, reflected only
in consolidated results.
Our domestic business strategies reflect bundled product
offerings that increasingly cut across product lines and utilize
our shared asset base. Therefore, asset information and capital
expenditures by segment are not presented. Depreciation is
allocated based on asset utilization by segment.
For the three months ended June 30, 2018
-------------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
---------------------- -------- ---------- -------- ------------ --------- ---------- ------------
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
-------------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
---------------------- -------- ---------- -------- ------------ --------- ---------- ------------
Consumer Mobility $ 29,855 $ 16,609 $ 13,246 $ 3,613 $ 9,633 $ - $ 9,633
Business Solutions 18,179 11,210 6,969 2,945 4,024 - 4,024
Entertainment Group 23,227 17,791 5,436 2,658 2,778 (11) 2,767
International 3,976 3,607 369 645 (276) 15 (261)
WarnerMedia 1,275 794 481 30 451 (6) 445
---------------------- -------- ---------- -------- ------------ --------- ---------- ------------
Segment Total 76,512 50,011 26,501 9,891 16,610 $ (2) $ 16,608
---------------------- -------- ---------- -------- ------------ --------- ---------- ------------
Corporate and Other
Corporate 653 1,395 (742) 141 (883)
Acquisition-related
items - 388 (388) 2,340 (2,728)
Certain significant
items - 332 (332) - (332)
Eliminations (141) (141) - - -
---------------------- -------- ---------- -------- ------------ ---------
AT&T Inc. $ 77,024 $ 51,985 $ 25,039 $ 12,372 $ 12,667
====================== ======== ========== ======== ============ =========
For the three months ended June 30, 2017
---------------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates 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
---------------------------------------------------------------------------------------------------------------------
Equity
in Net
Operations Income
and Depreciation Operating (Loss)
Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates 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
====================== ======== ========== ======== ============ =========
The following table is a reconciliation of Segment Contribution 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
========================================= ======== ======= ======== =======
NOTE 5. REVENUE RECOGNITION
As of January 1, 2018, we adopted FASB ASU 2014-09, "Revenue
from Contracts with Customers (Topic 606)," as modified (ASC 606).
With our adoption of ASC 606, we made a policy election to record
certain regulatory fees, primarily Universal Service Fund (USF)
fees, on a net basis. See the Notes to the Consolidated Financial
Statements of our 2017 Annual Report on Form 10-K for additional
information regarding our policies prior to adoption of ASC
606.
When implementing ASC 606, we utilized the practical expedient
allowing us to reflect the aggregate effect of all contract
modifications occurring before the beginning of the earliest period
presented when allocating the transaction price to performance
obligations.
Service 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.
Our contracts allow for customers to frequently modify their
arrangement, without incurring penalties in many cases. When a
contract is modified, we evaluate the change in scope or price of
the contract to determine if the modification should be treated as
a new contract or if it should be considered a change of the
existing contract. We generally do not have significant impacts
from contract modifications.
Service-Only Contracts and Standalone Equipment Sales
Revenue is recognized as service is provided or when control has
transferred. For devices sold through indirect channels (e.g.,
national dealers), revenue is recognized when the dealer accepts
the device, not upon activation.
Arrangements with Multiple Performance Obligations
Revenue recognized from fixed term contracts that bundle
services and/or equipment are allocated based on the standalone
selling price of all required performance obligations of the
contract (i.e., each item included in the bundle). Promotional
discounts are attributed to each required component of the
arrangement, resulting in recognition over the contract term.
Standalone selling prices are determined by assessing prices paid
for service-only contracts (e.g., arrangements where customers
bring their own devices) and standalone device pricing.
We offer the majority of our customers the option to purchase
certain wireless devices in installments over a specified period of
time, and, in many cases, they may be eligible to trade in the
original equipment for a new device and have the remaining unpaid
balance paid or settled. For customers that elect these equipment
installment payment programs, at the point of sale, we recognize
revenue for the entire amount of revenue allocated to the customer
receivable net of fair value of the trade-in right guarantee. The
difference between the revenue recognized and the consideration
received is recorded as a note receivable when the devices are not
discounted and our right to consideration is unconditional. When
installment sales include promotional discounts (e.g., "buy one get
one free"), the difference between revenue recognized and
consideration received is recorded as a contract asset to be
amortized over the contract term.
Less commonly, we offer certain customers highly discounted
devices when they enter into a minimum service agreement term. For
these contracts, we recognize equipment revenue at the point of
sale based on a standalone selling price allocation. The difference
between the revenue recognized and the cash received is recorded as
a contract asset that will amortize over the contract term.
For contracts that require the use of certain equipment in order
to receive service (e.g., AT&T U-verse(R) 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).
Disaggregation of Revenue
The following tables set forth disaggregated reported revenue by category:
For the three months ended June 30, 2018
---------------------------------------------------------------------------------------------------------
Consumer Business Entertainment Corporate
Mobility Solutions Group International WarnerMedia and Other Total
-------------- -------- --------- ------------- ------------- ----------- --------- ------
Wireless
service $ 11,853 $ 1,829 $ - $ 417 $ - $ - $14,099
Video
entertainment - - 8,331 1,254 - - 9,585
Strategic
services - 3,039 - - - - 3,039
High-speed
internet - - 1,981 - - - 1,981
Legacy voice
and
data - 2,723 785 - - - 3,508
Content - - - - 487 - 487
Subscription - - - - 591 - 591
Advertising - - - - 208 - 208
Other media
revenues - - - - 51 (1) 50
Other service - 691 550 - - 320 1,561
Wireless
equipment 3,016 584 - 280 - - 3,880
Other equipment - 197 3 - - - 200
Eliminations - - - - (62) (141) (203)
--------------- -------- --------- ------------- ------------- ----------- --------- ------
Total Operating
Revenues $ 14,869 $ 9,063 $ 11,650 $ 1,951 $ 1,275 $ 178 $38,986
=============== ======== ========= ============= ============= =========== ========= ======
For the six months ended June 30, 2018
---------------------------------------------------------------------------------------------------------
Consumer Business Entertainment Corporate
Mobility Solutions Group International WarnerMedia 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
=============== ======== ========= ============= ============= =========== ========= ======
Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire customer contracts, including commissions on
service activations, for our wireless, business wireline and video
entertainment services, are deferred and amortized over the
contract period or expected customer relationship life, which
typically ranges from two to five years. Costs to fulfill customer
contracts are deferred and amortized over periods ranging generally
from four to five years, reflecting the estimated economic lives of
the respective customer relationships, subject to an assessment of
the recoverability of such costs. For contracts with an estimated
amortization period of less than one year, we expense incremental
costs immediately.
Our deferred customer contract acquisition costs and deferred
customer contract fulfillment costs balances were $2,764 and
$11,017 as of June 30, 2018, respectively, of which $1,250 and
$3,715 were included in Other current assets on our consolidated
balance sheets. For the six months ended June 30, 2018, we
amortized $595 and $1,889 of these costs, respectively.
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in
advance of our right to bill and receive consideration (i.e., we
must perform additional services or satisfy another performance
obligation in order to bill and receive consideration). The
contract asset will decrease as services are provided and billed.
When consideration is received in advance of the delivery of goods
or services, a contract liability is recorded. Reductions in the
contract liability will be recorded as we satisfy the performance
obligations.
The following table presents contract assets and liabilities and
revenue recorded at or for the period ended June 30, 2018:
June 30,
2018
------------------------------------------------------------ --------
Contract asset $ 1,906
Contract liability 6,853
Beginning of period contract liability recorded as customer
contract revenue during the period 3,839
============================================================= ========
Our consolidated balance sheet at June 30, 2018 included
approximately $1,257 for the current portion of our contract asset
in "Other current assets" and $5,723 for the current portion of our
contract liability in "Advanced billings and customer
deposits."
Remaining Performance Obligations
Remaining performance obligations represent services we are
required to provide to customers under bundled or discounted
arrangements, which are satisfied as services are provided over the
contract term. In determining the transaction price allocated, we
do not include non-recurring charges and estimates for usage, nor
do we consider arrangements with an original expected duration of
less than one year, which are primarily prepaid wireless, video and
residential internet agreements.
Remaining performance obligations associated with business
contracts reflect recurring charges billed, adjusted to reflect
estimates for sales incentives and revenue adjustments. Performance
obligations associated with wireless contracts are estimated using
a portfolio approach in which we review all relevant promotional
activities, calculating the remaining performance obligation using
the average service component for the portfolio and the average
device price. As of June 30, 2018, the aggregate amount of the
transaction price allocated to remaining performance obligations
was $41,838, of which we expect to recognize approximately 80% over
the next two years, with the balance recognized thereafter.
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.
The following table presents our reported results under ASC 606 and
our pro forma results using the historical
accounting method:
Historical
As Accounting
For the three months ended June 30, 2018 Reported Method
---------------------------------------------- --------- -----------
Consolidated Statements of Income:
Service Revenues $ 33,773 $ 35,163
Equipment Revenues 4,080 3,611
Media Revenues 1,133 1,135
Total Operating Revenues 38,986 39,909
Other cost of revenue 7,632 8,535
Selling, general and administrative expenses 8,684 9,267
Total Operating Expenses 32,520 34,006
Operating income 6,466 5,903
Income before income taxes 6,780 6,217
Income tax expense 1,532 1,394
Net income 5,248 4,823
Net income attributable to AT&T 5,132 4,713
Basic Earnings per Share Attributable to
AT&T $ 0.81 $ 0.74
Diluted Earnings per Share Attributable to
AT&T $ 0.81 $ 0.74
For the six months ended June 30, 2018
Consolidated Statements of Income:
Service Revenues $ 67,419 $ 70,232
Equipment Revenues 8,472 7,472
Media Revenues 1,133 1,135
Total Operating Revenues 77,024 78,839
Other cost of revenue 15,564 17,396
Selling, general and administrative expenses 16,581 17,764
Total Operating Expenses 64,357 67,372
Operating income 12,667 11,467
Income before income taxes 12,921 11,721
Income tax expense 2,914 2,620
Net income 10,007 9,101
Net income attributable to AT&T 9,794 8,900
Basic Earnings per Share Attributable to
AT&T $ 1.56 $ 1.42
Diluted Earnings per Share Attributable to
AT&T $ 1.56 $ 1.42
At June 30, 2018
Consolidated Balance Sheets:
Other current assets 14,305 11,961
Other Assets 23,941 21,983
Accounts payable and accrued liabilities 35,488 35,667
Advanced billings and customer deposits 5,914 5,978
Deferred income taxes 59,665 58,585
Other noncurrent liabilities 25,017 24,832
Retained earnings 56,555 53,313
Accumulated other comprehensive income 5,716 5,723
Noncontrolling interest 1,150 1,103
============================================== ========= ===========
NOTE 6. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory
pension plans. We also provide certain medical, dental, life
insurance and death benefits to certain retired employees under
various plans and accrue actuarially determined postretirement
benefit costs. Our objective in funding these plans, in combination
with the standards of the Employee Retirement Income Security Act
of 1974, as amended (ERISA), is to accumulate assets sufficient to
provide benefits described in the plans to employees upon their
retirement.
In 2013, we made a voluntary contribution of a preferred equity
interest in AT&T Mobility II LLC, the primary holding company
for our domestic wireless business, to the trust used to pay
pension benefits under our qualified pension plans. The preferred
equity interest had a value of $8,829 at June 30, 2018. The trust
is entitled to receive cumulative cash distributions of $560 per
annum, which are distributed quarterly by AT&T Mobility II LLC
to the trust, in equal amounts and accounted for as contributions.
We distributed $280 to the trust during the six months ended June
30, 2018. So long as we make the distributions, we will have no
limitations on our ability to declare a dividend or repurchase
shares. This preferred equity interest is a plan asset under ERISA
and is recognized as such in the plan's separate financial
statements. However, because the preferred equity interest is not
unconditionally transferable to an unrelated party, it is not
reflected in plan assets in our consolidated financial statements
and instead has been eliminated in consolidation.
We recognize actuarial gains and losses on pension and
postretirement plan assets in our consolidated results as a
component of other income (expense) - net at our annual measurement
date of December 31, unless earlier remeasurements are required.
During the first quarter of 2018, a substantive plan change
involving the frequency of future health reimbursement account
credit increases was communicated to our retirees. During the
second quarter of 2018, a written plan change involving the ability
of certain participants of the pension plan to receive their
benefit in a lump-sum amount upon retirement was communicated to
our employees. These plan changes resulted in additional prior
service credits recognized in other comprehensive income, reducing
our liability by $752, and increasing our liability by $50 in the
first and second quarters of 2018, respectively. Such credits
amortize through earnings over a period approximating the average
service period to full eligibility. These plan changes also
triggered a remeasurement of our postretirement and pension benefit
obligations, resulting in an actuarial gain of $930 in the first
quarter and $1,796 in the second quarter of 2018. As a result of
the plan changes and remeasurements, our pension and postretirement
benefit obligation decreased $1,746 and $1,682, respectively.
The following table details pension and postretirement benefit
costs included in the accompanying consolidated statements of
income. The service cost component of net periodic pension cost
(benefit) is recorded in operating expenses in the consolidated
statements of income while the remaining components are recorded in
other income (expense) - net. Service costs are eligible for
capitalization as part of internal construction projects, providing
a small reduction in the net expense recorded.
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.
We also provide senior- and middle-management employees with
nonqualified, unfunded supplemental retirement and savings plans.
For the second quarter ended 2018 and 2017, net supplemental
pension benefits costs not included in the table above were $21 and
$23. For the first six months of 2018 and 2017, net supplemental
pension benefit costs were $42 and $45.
NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a
three-tiered fair value hierarchy that gives highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy are described below:
Level 1 Inputs to the valuation methodology are unadjusted
quoted prices for identical assets or liabilities in active markets
that we have the ability to access.
Level 2 Inputs to the valuation methodology include:
-- Quoted prices for similar assets and liabilities in active markets.
-- Quoted prices for identical or similar assets or liabilities in inactive markets.
-- Inputs other than quoted market prices that are observable for the asset or liability.
-- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
-- Fair value is often based on developed models in which there
are few, if any, external observations.
The fair value measurements level of an asset or liability
within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement. Our
valuation techniques maximize the use of observable inputs and
minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair
value calculation that may not be indicative of future net
realizable value or reflective of future fair values. We believe
our valuation methods are appropriate and consistent with other
market participants. The use of different methodologies or
assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at
the reporting date. There have been no changes in the methodologies
used since December 31, 2017.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term
debt, including current maturities, and other financial
instruments, are summarized as follows:
June 30, 2018 December 31, 2017
------------------ ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------ -------- -------- ----------- --------
Notes and debentures(1) $180,209 $182,732 $ 162,526 $171,938
Commercial paper 8,139 8,139 - -
Bank borrowings 15 15 2 2
Investment securities(2) 3,511 3,511 2,447 2,447
========================================== ======= ======= ======= =======
(1) Includes credit agreement borrowings.
(2) Excludes investments accounted
for under the equity method.
The carrying amount of debt with an original maturity of less
than one year approximates market value. The fair value
measurements used for notes and debentures are considered Level 2
and are determined using various methods, including quoted prices
for identical or similar securities in both active and inactive
markets.
Following is the fair value leveling for investment securities
that are measured at fair value and derivatives as of June 30, 2018
and December 31, 2017. Derivatives designated as hedging
instruments are reflected as "Other assets," "Other noncurrent
liabilities" and, for a portion of interest rate swaps, "Other
current assets" on our consolidated balance sheets.
June 30, 2018
----------------------------------------
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)
Investment Securities
Our investment securities include both equity and debt
securities that are measured at fair value, as well as equity
securities without readily determinable fair values. A substantial
portion of the fair values of our investment securities are
estimated based on quoted market prices. Investments in equity
securities not traded on a national securities exchange are valued
at cost, less any impairment, and adjusted for changes resulting
from observable, orderly transactions for identical or similar
securities. Investments in debt securities not traded on a national
securities exchange are valued using pricing models, quoted prices
of securities with similar characteristics or discounted cash
flows.
Upon the adoption of ASU 2016-01, we reclassified $658 of such
unrealized gains and losses on equity securities to retained
earnings and beginning in 2018, gains and losses, both realized and
unrealized, on equity securities measured at fair value are
included in "Other income (expense) - net" in the consolidated
statements of income using the specific identification method.
The components comprising total gains and losses on equity securities
are as follows:
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 securities of $34 have maturities of less than one year,
$136 within one to three years, $117 within three to five years and
$603 for five or more years.
Our cash equivalents (money market securities), short-term
investments (certificate and time deposits) and nonrefundable
customer deposits are recorded at amortized cost, and the
respective carrying amounts approximate fair values. Short-term
investments and nonrefundable customer deposits are recorded in
"Other current assets" and our investment securities are recorded
in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market
risks, primarily interest rate risk and foreign currency exchange
risk. This includes the use of interest rate swaps, interest rate
locks, foreign exchange forward contracts and combined interest
rate foreign exchange contracts (cross-currency swaps). We do not
use derivatives for trading or speculative purposes. We record
derivatives on our consolidated balance sheets at fair value that
is derived from observable market data, including yield curves and
foreign exchange rates (all of our derivatives are Level 2). Cash
flows associated with derivative instruments are presented in the
same category on the consolidated statements of cash flows as the
item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest
rate swaps as fair value hedges. The purpose of these swaps is to
manage interest rate risk by managing our mix of fixed-rate and
floating-rate debt. These swaps involve the receipt of fixed-rate
amounts for floating interest rate payments over the life of the
swaps without exchange of the underlying principal amount. Accrued
and realized gains or losses from interest rate swaps impact
interest expense in the consolidated statements of income.
Unrealized gains on interest rate swaps are recorded at fair market
value as assets, and unrealized losses on interest rate swaps are
recorded at fair market value as liabilities. Changes in the fair
values of the interest rate swaps are exactly offset by changes in
the fair value of the underlying debt. Gains or losses realized
upon early termination of our fair value hedges are recognized in
interest expense. In the six months ended June 30, 2018 and June
30, 2017, no ineffectiveness was measured on interest rate swaps
designated as fair value hedges.
Cash Flow Hedging We designate our cross-currency swaps as cash
flow hedges. We have entered into multiple cross-currency swaps to
hedge our exposure to variability in expected future cash flows
that are attributable to foreign currency risk generated from the
issuance of our Euro, British pound sterling, Canadian dollar and
Swiss franc denominated debt. These agreements include initial and
final exchanges of principal from fixed foreign currency
denominated amounts to fixed U.S. dollar denominated amounts, to be
exchanged at a specified rate that is usually determined by the
market spot rate upon issuance. They also include an interest rate
swap of a fixed or floating foreign currency-denominated rate to a
fixed U.S. dollar denominated interest rate.
Unrealized gains on derivatives designated as cash flow hedges
are recorded at fair value as assets, and unrealized losses on
derivatives designated as cash flow hedges are recorded at fair
value as liabilities. For derivative instruments designated as cash
flow hedges, the effective portion is reported as a component of
accumulated OCI until reclassified into interest expense in the
same period the hedged transaction affects earnings. The gain or
loss on the ineffective portion is recognized as "Other income
(expense) - net" in the consolidated statements of income in each
period. We evaluate the effectiveness of our cross-currency swaps
each quarter. In the six months ended June 30, 2018 and June 30,
2017, no ineffectiveness was measured on cross-currency swaps
designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks to
partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during the
period leading up to the probable issuance of fixed-rate debt. We
designate our interest rate locks as cash flow hedges. Gains and
losses when we settle our interest rate locks are amortized into
income over the life of the related debt, except where a material
amount is deemed to be ineffective, which would be immediately
reclassified to "Other income (expense) - net" in the consolidated
statements of income. Over the next 12 months, we expect to
reclassify $60 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation
of highly probable foreign currency-denominated transactions. In
anticipation of these transactions, we often enter into foreign
exchange contracts to provide currency at a fixed rate. Gains and
losses at the time we settle or take delivery on our designated
foreign exchange contracts are amortized into income in the same
period the hedged transaction affects earnings, except where an
amount is deemed to be ineffective, which would be immediately
reclassified to "Other income (expense) - net" in the consolidated
statements of income. In the six months ended June 30, 2018 and
June 30, 2017, no ineffectiveness was measured on foreign exchange
contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into
agreements with our derivative counterparties establishing
collateral thresholds based on respective credit ratings and
netting agreements. At June 30, 2018, we had posted collateral of
$580 (a deposit asset) and held collateral of $687 (a receipt
liability). Under the agreements, if AT&T's credit rating had
been downgraded one rating level by Fitch Ratings, before the final
collateral exchange in June, we would have been required to post
additional collateral of $138. If DIRECTV Holdings LLC's credit
rating had been downgraded below BBB- (S&P), we would have been
required to post additional collateral of $199. At December 31,
2017, we had posted collateral of $495 (a deposit asset) and held
collateral of $968 (a receipt liability). We do not offset the fair
value of collateral, whether the right to reclaim cash collateral
(a receivable) or the obligation to return cash collateral (a
payable) exists, against the fair value of the derivative
instruments.
Following are the notional amounts of our outstanding derivative
positions:
December
June 30, 31,
2018 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
=========================== ====== ======
Following are the related hedged items affecting our financial position
and performance:
Effect of Derivatives on the Consolidated
Statements of Income
-------------------------------------------------------------- --- ------ ------- ------
Three months ended Six months ended
June 30, June 30,
Fair Value Hedging Relationships 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
================================================= === ====== === ====== ======= ======
In addition, the net swap settlements that accrued and settled
in the quarter ended June 30 were offset against interest
expense.
Three months ended Six months ended
June 30, June 30,
Cash Flow Hedging Relationships 2018 2017 2018 2017
------------------------------------------- ------------ -------- ---------- --------
Cross-currency swaps:
Gain (Loss) recognized in accumulated
OCI $ (533) $ (717) $ 321 $ (697)
Interest rate locks:
Gain (Loss) recognized in accumulated
OCI - (79) - (79)
Interest income (expense) reclassified
from
accumulated OCI into income (14) (14) (29) (29)
=========================================== ======== ======= ====== =======
NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Time Warner On June 14, 2018, we completed our acquisition of
Time Warner, a leader in media and entertainment whose major
businesses encompass an array of some of the most respected media
brands. The deal combines Time Warner's vast library of content and
ability to create new premium content for audiences around the
world with our extensive customer relationships and distribution,
one of the world's largest pay-TV subscriber bases and scale in TV,
mobile and broadband distribution. We expect that the transaction
will advance our direct-to-consumer efforts and provide us with the
ability to develop innovative new offerings.
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. On July 12, 2018, the U.S. Department of Justice (DOJ)
appealed the U.S. District Court's decision permitting the merger.
We believe the DOJ's appeal is without merit and we will continue
to vigorously defend our legal position in the appellate court.
Our second-quarter 2018 operating results include the results of
Time Warner following the acquisition date. The fair values of the
assets acquired and liabilities assumed were preliminarily
determined using the income, cost and market approaches. The fair
value measurements were primarily based on significant inputs that
are not observable in the market and thus represent a Level 3
measurement as defined in ASC 820, other than cash and long-term
debt acquired in the acquisition. The income approach was primarily
used to value the intangible assets, consisting primarily of
distribution network, released TV and film content, in-place
advertising network, trade names, and franchises. The income
approach estimates fair value for an asset based on the present
value of cash flow projected to be generated by the asset.
Projected cash flow is discounted at a required rate of return that
reflects the relative risk of achieving the cash flow and the time
value of money. The cost approach, which estimates value by
determining the current cost of replacing an asset with another of
equivalent economic utility, was used, as appropriate, for plant,
property and equipment. The cost to replace a given asset reflects
the estimated reproduction or replacement cost for the property,
less an allowance for loss in value due to depreciation. Our June
30, 2018, consolidated balance sheet includes the assets and
liabilities of Time Warner, which have been measured at fair
value.
Assets acquired
Cash $ 1,655
Accounts receivable 9,166
All other current assets 3,405
Noncurrent inventory and theatrical film and television
production costs 5,778
Property, plant and equipment 4,699
Intangible assets subject to amortization
Distribution network 17,480
Released television and film content 11,322
Trademarks and trade names 18,100
Other 10,290
Investments and other assets 9,669
Goodwill 38,102
------------------------------------------------------------------- -------
Total assets acquired 129,666
------------------------------------------------------------------- -------
Liabilities assumed
Current liabilities, excluding current portion of long-term
debt 8,513
Long-term debt 22,846
Other noncurrent liabilities 19,192
------------------------------------------------------------------- -------
Total liabilities assumed 50,551
------------------------------------------------------------------- -------
Net assets acquired 79,115
------------------------------------------------------------------- -------
Noncontrolling interest (1)
------------------------------------------------------------------- -------
Aggregate value of consideration paid $ 79,114
=================================================================== =======
These estimates are preliminary in nature and subject to
adjustments, which could be material. Any necessary adjustments
will be finalized within one year from the date of acquisition.
Substantially all the receivables acquired are expected to be
collectible. We have not identified any material unrecorded
pre-acquisition contingencies where the related asset, liability or
impairment is probable and the amount can be reasonably estimated.
Goodwill is calculated as the difference between the acquisition
date fair value of the consideration transferred and the fair value
of the net assets acquired, and represents the future economic
benefits that we expect to achieve as a result of the acquisition.
Prior to the finalization of the purchase price allocation, if
information becomes available that would indicate it is probable
that such events had occurred and the amounts can be reasonably
estimated, such items will be included in the final purchase price
allocation and may change goodwill. Purchased goodwill is not
expected to be deductible for tax purposes. As we finalize the
valuation of assets acquired and liabilities assumed, we will
determine to which reporting units any changes in goodwill should
be recorded.
Excluded from the table above are commitments of approximately
$35,000 for future purchases primarily related to network
programming obligations, including contracts to license sports
programming.
Due to the 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.
Held-for-Sale
In June 2018, we entered into an agreement to sell 31 of our
data centers to Brookfield Infrastructure Partners (Brookfield) for
$1,100. We expect the transaction to close within the next six to
eight months, subject to customary closing conditions.
We applied held-for-sale treatment to the assets associated with
the data centers to be sold, which primarily consist of net
property, plant and equipment of approximately $279 and goodwill of
$236. These assets are included in "Other current assets," on our
June 30, 2018 consolidated balance sheet.
NOTE 9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless
devices in installments over a specified period of time and, in
many cases, once certain conditions are met, they may be eligible
to trade in the original equipment for a new device and have the
remaining unpaid balance paid or settled. As of June 30, 2018 and
December 31, 2017, gross equipment installment receivables of
$5,853 and $6,079 were included on our consolidated balance sheets,
of which $3,781 and $3,340 are notes receivable that are included
in "Accounts receivable - net."
In 2014, we entered into an uncommitted agreement pertaining to
the sale of equipment installment receivables and related security
with Citibank and various other relationship banks as purchasers
(collectively, the Purchasers). Under this agreement, we transfer
certain receivables to the Purchasers for cash and additional
consideration upon settlement of the receivables, referred to as
the deferred purchase price. Since 2014, we have made beneficial
modifications to the agreement. During 2017, we modified the
agreement and entered into a second uncommitted agreement with the
Purchasers such that we receive more upfront cash consideration at
the time the receivables are transferred to the Purchasers.
Additionally, in the event a customer trades in a device prior to
the end of the installment contract period, we agree to make a
payment to the Purchasers equal to any outstanding remaining
installment receivable balance. Accordingly, we record a guarantee
obligation to the Purchasers for this estimated amount at the time
the receivables are transferred. Under the terms of the agreement,
we continue to bill and collect the payments from our customers on
behalf of the Purchasers. As of 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 sold(1) 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
============================= === ============== === ============== === ============= =============
Receivables net of allowance, imputed interest and trade-in right
(1) guarantees.
The deferred purchase price and guarantee obligation are
initially recorded at estimated fair value and subsequently carried
at the lower of cost or net realizable value. The estimation of
their fair values is based on remaining installment payments
expected to be collected and the expected timing and value of
device trade-ins. The estimated value of the device trade-ins
considers prices offered to us by independent third parties that
contemplate changes in value after the launch of a device model.
The fair value measurements used for the deferred purchase price
and the guarantee obligation are considered Level 3 under the Fair
Value Measurement and Disclosure framework (see Note 7).
The following table shows the equipment installment receivables,
previously sold to the Purchasers, which we repurchased in exchange
for the associated deferred purchase price and cash during the
three months and six months ended June 30, 2018 and 2017:
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
repurchases(1) $ 88 $ 36 $ 88 $ 74
==================== ==== =================== ==== ============ === ================== === ===========
These gains (losses) are included in "Selling, general and administrative"
(1) in the consolidated statements of income.
At June 30, 2018 and December 31, 2017, our deferred purchase
price receivable was $1,686 and $2,749, respectively, of which $813
and $1,781 are included in "Other current assets" on our
consolidated balance sheets, with the remainder in "Other Assets."
The guarantee obligation at June 30, 2018 and December 31, 2017 was
$362 and $204, respectively, of which $111 and $55 are included in
"Accounts payable and accrued liabilities" on our consolidated
balance sheets, with the remainder in "Other noncurrent
liabilities." Our maximum exposure to loss as a result of selling
these equipment installment receivables is limited to the total
amount of our deferred purchase price and guarantee obligation.
The sales of equipment installment receivables did not have a
material impact on our consolidated statements of income or to
"Total Assets" reported on our consolidated balance sheets. We
reflect cash receipts on owned equipment installment receivables as
cash flows from operations in our consolidated statements of cash
flows. With the retrospective adoption of ASU 2016-15 in 2018 (see
Note 1), cash receipts on the deferred purchase price are now
classified as cash flows from investing activities instead of cash
flows from operating activities for all periods presented.
The outstanding portfolio of installment receivables
derecognized from our consolidated balance sheets, but which we
continue to service, was $7,564 and $7,446 at June 30, 2018 and
December 31, 2017.
NOTE 10. INVENTORIES AND THEATRICAL FILM AND TELEVISION
PRODUCTION COSTS
Film and television production costs are stated at the lower of
cost, less accumulated amortization, or fair value and include the
unamortized cost of completed theatrical films and television
episodes, theatrical films and television series in production and
undeveloped film and television rights. The amount of capitalized
film and television production costs recognized as broadcast,
programming and operations expenses for a given period is
determined using the film forecast computation method.
The following table summarizes inventories and theatrical film
and television production costs as of June 30, 2018:
June 30,
2018
---------------------------------------------------- --------- --------------------------------------------------
Inventories:
Programming costs, less amortization(1) $ 4,252
Other inventory, primarily DVD and Blu-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 and pre-production 171
Television production costs:(2)
Released, less amortization 168
Completed and not released 534
In production 1,556
Development and pre-production 23
----------------------------------------------------- --------- --------------------------------------------------
Total theatrical film and television production costs 3,756
----------------------------------------------------- --------- --------------------------------------------------
Total noncurrent inventories and theatrical film and
television
production costs $ 5,849
===================================================== ========= ==================================================
Includes the costs of certain programming rights, primarily
sports,
(1) for which payments have been made prior to
the related rights being received.
Does not include $11,150 of acquired film and television
library intangible
(2) assets as of June 30, 2018, which are included
in "Other Intangible Assets - Net" on our consolidated balance sheet.
NOTE 11. ADDITIONAL FINANCIAL INFORMATION
Cash and Cash Flow
We typically maintain our restricted cash balances for purchases
and sales of certain investment securities and funding of certain
deferred compensation benefit payments. The following summarizes
cash and cash equivalents and restricted cash balances contained on
our consolidated balance sheets:
June 30, December 31,
---------------- ---------------
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:
-- For the purpose of providing financing in connection with our
Time Warner acquisition, we drew the following on our lines of
credit: $16,175 with JPMorgan Chase Bank, N.A., $2,500 with BNP
Paribas and $2,250 with Bank of Nova Scotia.
-- Issuance of approximately $1,500 three-year floating rate
note and other borrowings totaling $2,100.
-- Borrowings of approximately $7,900 of debt under our commercial paper program.
-- Net borrowings of approximately $1,000 by subsidiaries in Latin America.
-- Redemptions totaling approximately $4,550 for AT&T notes
that matured prior to June 30, 2018.
-- Redemption of $21,235 of AT&T notes issued in
anticipation of the Time Warner acquisition that were subject to
mandatory redemption.
-- With the acquisition of Time Warner, we acquired $22,846 of
debt, of which we repaid $2,000 for amounts outstanding under term
credit agreements, $600 of notes and $765 of commercial paper
borrowings.
RESULTS OF OPERATIONS
AT&T is a holding company whose subsidiaries and affiliates
operate worldwide in the telecommunications, media and technology
industries. You should read this discussion in conjunction with the
consolidated financial statements and accompanying notes ("Notes").
We completed the acquisition of Time Warner Inc. (referred to as
"Time Warner" or "WarnerMedia") on June 14, 2018, and have included
WarnerMedia results for the 16-day period ended June 30, 2018. In
accordance with U.S. generally accepted accounting principles
(GAAP), operating results from WarnerMedia prior to the acquisition
are excluded.
Consolidated Results In the first quarter of 2018, we adopted
new revenue accounting rules that significantly affect the
comparability of our consolidated and segment operating results
(see Note 5). As a supplement to our discussion of operating
results, comparable financial results presented under the
historical method of accounting are available in "Supplemental
Results Under Historical Accounting Method." Our financial results
in the second quarter and for the first six months of 2018,
including impacts from new revenue accounting rules, and 2017 are
summarized as follows:
Second Quarter Six-Month Period
------------------------- -------------------------
Percent Percent
2018 2017 Change 2018 2017 Change
-------------------------------- ------- ------- ------- ------- ------- -------
Operating Revenues
Service $33,773 $36,538 (7.6)% $67,419 $72,994 (7.6)%
Equipment 4,080 3,299 23.7 8,472 6,208 36.5
Media 1,133 - - 1,133 - -
-------------------------------- ------ ------ ------ ------
Total Operating Revenues 38,986 39,837 (2.1) 77,024 79,202 (2.7)
-------------------------------- ------ ------ ------ ------
Operating expenses
Cost of revenues
Equipment 4,377 4,138 5.8 9,225 7,986 15.5
Broadcast, programming
and
operations 5,449 4,898 11.2 10,615 9,872 7.5
Other cost of revenues 7,632 9,569 (20.2) 15,564 18,857 (17.5)
Selling, general and
administrative 8,684 8,559 1.5 16,581 17,331 (4.3)
Depreciation and amortization 6,378 6,147 3.8 12,372 12,274 0.8
-------------------------------- ------ ------ ------ ------
Total Operating Expenses 32,520 33,311 (2.4) 64,357 66,320 (3.0)
-------------------------------- ------ ------ ------ ------
Operating Income 6,466 6,526 (0.9) 12,667 12,882 (1.7)
Income Before Income
Taxes 6,780 6,070 11.7 12,921 11,448 12.9
Net Income 5,248 4,014 30.7 10,007 7,588 31.9
Net Income Attributable
to AT&T $ 5,132 $ 3,915 31.1% $ 9,794 $ 7,384 32.6%
================================ ====== ====== ======= ====== ====== =======
Overview
Operating revenues decreased $851, or 2.1%, in the second
quarter and $2,178, or 2.7%, for the first six months of 2018.
Service revenues 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.
Equipment revenues 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.
Media revenues for the second quarter and first six months were
$1,133 and in each case are attributable to the 16-day period since
acquiring WarnerMedia.
Operating expenses decreased $791, or 2.4%, in the second
quarter and $1,963, or 3.0%, for the first six months of 2018.
Equipment expenses increased $239, or 5.8%, in the second
quarter and $1,239, or 15.5%, for the first six months of 2018. The
increases during the second quarter and the first six months were
driven by an increase in the sale of higher-priced devices.
Broadcast, programming and operations expenses increased $551,
or 11.2%, in the second quarter and $743, or 7.5%, for the first
six months of 2018. Expense increases during the second quarter and
first six months were due to annual content cost increases and
additional programming costs, including programming and production
costs associated with WarnerMedia for the 16-day period since
acquisition.
Other cost of revenues expenses 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 cost management and
utilization of automation and digitalization where appropriate.
Selling, general and administrative expenses increased $125, or
1.5%, in the second quarter and decreased $750, or 4.3%, for the
first six months of 2018. The increase in the second quarter was
primarily attributable to expenses from WarnerMedia, including
acquisition-related expenses due to the closing of the Time Warner
transaction. Also contributing to the second quarter increase were
higher employee separation costs. Offsetting some of the increases
during the second quarter, and contributing to the overall decrease
during the first six months, was the effect of new accounting
standards, which resulted in commissions being deferred and
amortized over the contract period or expected customer life, in
addition to expense reductions due to our disciplined cost
management. Partially offsetting the decrease during the first six
months were higher costs due to natural disasters and, in the
comparable period of 2017, gains on wireless spectrum
transactions.
Depreciation and amortization expense increased $231, or 3.8%,
in the second quarter and $98, or 0.8%, for the first six months of
2018. Depreciation expense increased $123, or 2.5%, in the second
quarter and $130, or 1.3%, for the first six months of 2018. The
increases were primarily due to 16-days of WarnerMedia results as
well as ongoing capital spending for network upgrades and expansion
offset by lower expense resulting from our fourth-quarter 2017
abandonment of certain copper network assets.
Amortization expense increased $108, or 9.2%, in the second
quarter and decreased $32, or 1.3%, for the first six months of
2018. The increase in the second quarter was due to the
amortization of intangibles associated with the previously
mentioned acquisition. For the six-month period, the decrease was
due to amortization of intangibles for customer lists associated
with prior acquisitions mostly offset by the WarnerMedia
acquisition.
Operating income decreased $60, or 0.9%, in the second quarter
and decreased $215, or 1.7%, for the first six months of 2018. Our
operating income margin in the second quarter increased from 16.4%
in 2017 to 16.6% in 2018, and for the first six months increased
from 16.3% in 2017 to 16.4% in 2018.
Interest expense increased $628, or 45.0%, in the second quarter
and $1,106, or 41.1%, for the first six months of 2018. The
increase was primarily due to higher debt balances related to our
acquisition of Time Warner, including interest expense on Time
Warner notes for 16-days, and an increase in average interest rates
when compared to the prior year.
Equity in net income (loss) of affiliates decreased $30 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 net losses from investments acquired
through our purchase of Time Warner. The increase in the first six
months of 2018 was predominantly due to losses in the first quarter
of 2017 from our legacy publishing business, which was sold in June
2017.
Other income (expense) - net increased $1,428 in the second
quarter and $2,642 for the first six months. The increases were
primarily due to actuarial gains of $1,796 and $2,726, resulting
from remeasurement of our pension and postretirement benefit
obligations and increased interest income of $94 and $258,
partially offset by premiums on the redemption of debt of $226 in
the second quarter of 2018.
Income taxes decreased $524, or 25.5%, in the second quarter of
2018 and decreased $946, or 24.5%, for the first six months of
2018. Our effective tax rate was 22.6% in the second quarter and
for the first six months of 2018, as compared to 33.9% for the
second quarter and 33.7% for the first six months of 2017. The
stand-alone effective tax rate of WarnerMedia was 20.3% for the
16-day period ended June 30, 2018. The decreases in income tax
expense and our effective tax rates for the second quarter and the
first six months of 2018 were primarily due to the December 2017
enactment of U.S. corporate tax reform, which reduced the federal
tax rate from 35% to 21%. Partially offsetting the decreased tax
rates was higher earnings in the second quarter and first six
months of 2018. We continue to expect our effective tax rate for
2018, including WarnerMedia, to be approximately 23%.
Selected Financial and Operating Data
--------------------------------------------- ------- -------
June 30,
Subscribers and connections in (000s) 2018 2017
--------------------------------------------- ------- -------
Domestic wireless subscribers 146,889 136,102
Mexican wireless subscribers 16,398 13,082
--------------------------------------------- ------- -------
North American wireless subscribers 163,287 149,184
============================================= ======= =======
North American branded subscribers 109,806 104,022
North American branded net additions 2,138 1,639
Domestic satellite video subscribers 19,984 20,856
AT&T U-verse(R) (U-verse) video subscribers 3,680 3,853
DIRECTV NOW video subscribers 1,809 491
Latin America satellite video subscribers(1) 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 ratio(2) 50.8% 53.3%
Net debt ratio(3) 47.2% 43.8%
Ratio of earnings to fixed charges(4) 3.64 3.84
Number of AT&T employees 273,210 260,480
============================================= ======= =======
(1) Excludes subscribers of our International segment equity
investments in SKY Mexico, in which we own a 41.3% stake. At March
31, 2018, SKY Mexico had 8.0 million subscribers.
(2) Debt ratios are calculated by dividing total debt (debt
maturing within one year plus long-term debt) by total capital
(total debt plus total stockholders' equity) and do not consider
cash available to pay down debt. See our "Liquidity and Capital
Resources" section for discussion.
(3) Net debt ratios are calculated by dividing total debt (debt
maturing within one year plus long-term debt) less cash available
by total capital (total debt plus total stockholders' equity).
(4) See Exhibit 12.
Segment Results
Our segments are strategic business units that offer different
products and services over various technology platforms and/or in
different geographies that are managed accordingly. Our segment
results presented in Note 4 and discussed below for each segment
follow our internal management reporting. We analyze our segments
based on Segment Contribution, which consists of operating income,
excluding acquisition-related costs and other significant items,
and equity in net income (loss) of affiliates for investments
managed within each segment. We have five reportable segments: (1)
Consumer Mobility, (2) Business Solutions, (3) Entertainment Group
(4) International, and (5) WarnerMedia.
We also evaluate segment performance based on EBITDA and/or
EBITDA margin, which is defined as Segment Contribution, excluding
equity in net income (loss) of affiliates and depreciation and
amortization. We believe EBITDA to be a relevant and useful
measurement to our investors as it is part of our internal
management reporting and planning processes and it is an important
metric that management uses to evaluate operating performance.
EBITDA does not give effect to cash used for debt service
requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses. EBITDA
margin is EBITDA divided by total revenues.
To most effectively implement our strategies for 2018, effective
January 1, 2018, we retrospectively realigned certain
responsibilities and operations within our reportable segments. The
most significant of these changes was to report individual wireless
accounts with employer discounts in our Consumer Mobility segment,
instead of our Business Solutions segment.
With our acquisition of WarnerMedia, programming released on or
before the June 14, 2018 acquisition date was recorded at fair
value as an intangible asset. For consolidated reporting, all
amortization of pre-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 the 16-day period ended June 30, 2018, $98 of
which was for pre-acquisition released programming.
The Consumer Mobility segment provides nationwide wireless
service to consumers, wholesale and resale wireless subscribers
located in the United States or in U.S. territories. We provide
voice and data services, including high-speed internet over
wireless devices.
The Business Solutions segment provides services to business
customers, including multinational companies and governmental and
wholesale customers. We provide advanced IP-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.
The Entertainment 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.
The International segment provides entertainment services in
Latin America and wireless services in Mexico. Video entertainment
services are provided to primarily residential customers using
satellite technology. We utilize our regional and national networks
in Mexico to provide consumer and business customers with wireless
data and voice communication services. Our international
subsidiaries conduct business in their local currency, and
operating results are converted to U.S. dollars using official
exchange rates. Our International segment is subject to foreign
currency fluctuations (operations in countries with highly
inflationary economies consider the U.S. dollar as the functional
currency).
The WarnerMedia segment 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.
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
----------------------- -----------------------
Percent Percent
2018 2017 Change 2018 2017 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
------------------------------------------ ----------------------------------------
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 Change
---------------------- ---------- ---------- ------------------ ---------- ---------- ----------------
Consumer Mobility Net
Additions
(1)
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%
====================== ========== ========== ============ === ========== ========== ========== ===
Excludes migrations between AT&T segments and/or subscriber categories
(1) and acquisition-related additions during the period.
Operating Revenues decreased $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.
Service revenue 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 PREPAID(SM) 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 support expenses 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.
Business Solutions
Segment Results
---------------------------------- ----- ----- ------ ------ ------ ------
Second Quarter Six-Month Period
---------------------- ------------------------
Percent Percent
2018 2017 Change 2018 2017 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 devices(1,2) 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%
================================= =================================== ====== ====== ======
Beginning in the third quarter of 2017, we began reporting prepaid
(1) Internet of Things (IoT) connections, which primarily consist of
connected cars, as a component of prepaid subscribers instead of
connected devices.
Includes data-centric devices such as session-based tablets and
(2) automobile systems. Excludes postpaid tablets.
Second Quarter Six-Month Period
------------------------------------------------ -----------------------------------
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 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
devices(3) 2,982 2,256 32.2 5,710 4,828 18.3
------------------- ------------ ------------ --------- ---------
Business Wireless
Net Subscriber
Additions 3,208 2,423 32.4 6,100 5,088 19.9
=================== ============ ============ ========= =========
Business IP
Broadband Net
Additions (4) 12 -% (8) 16 -%
=================== ============ ============ ============== === ========= ========= =========
Excludes migrations between AT&T segments and/or subscriber categories
(1) and acquisition-related additions during the period.
Beginning in the third quarter of 2017, we began reporting prepaid
(2) IoT connections, which primarily consist of connected cars, as a
component of prepaid subscribers instead of connected devices.
Includes data-centric devices such as session-based tablets, monitoring
(3) devices and automobile systems. Excludes postpaid tablets.
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% of non-wireless
(or fixed) revenues and wireless equipment revenue.
Wireless service revenues 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 services revenues 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 service revenues 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 advanced IP-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.
Operations and support expenses 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.
Depreciation expense 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
------------------------ ------------------------
Percent Percent
2018 2017 Change 2018 2017 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)%
================================== ====== ====== ====== ====== ====== ======
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 NOW(1) 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)%
===================== ================= ================= ================== =====
Consistent with industry practice, DIRECTV NOW includes over-the-top
(1) connections that are on a free-trial.
Second Quarter Six-Month Period
------------------------------------------ --------------------------------------
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 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)%
==================== ========== ========== ============ === ========= ========= ===========
(1) Includes disconnections for customers that migrated to DIRECTV NOW.
Consistent with industry practice, DIRECTV NOW includes over-the-top
(2) connections that are on a free-trial.
Operating revenues decreased $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 and U-verse subscribers. In November
2016, we launched DIRECTV NOW, our video streaming option that does
not require either satellite or U-verse service (commonly called
over-the-top video service).
Video entertainment revenues 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.
Our over-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 priced over-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.
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 our all-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 service revenues 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 advanced IP-based
offerings or to competitors, and the impact of netting USF
fees.
Operations and support expenses 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.
International
Segment Results
---------------------------------- ----- ----- ------ ----- ----- ------
Second Quarter Six-Month Period
---------------------- ----------------------
Percent Percent
2018 2017 Change 2018 2017 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 Subscribers(1) 13,713 13,622 0.7%
=============================================================== ============= ====== ====== ======
Excludes subscribers of our International segment equity investment
(1) in SKY Mexico, in which we own a 41.3% stake. SKY Mexico
had 8.0 million subscribers at March 31, 2018 and December 31, 2017.
Second Quarter Six-Month Period
----------------------------------------- -----------------------------------------
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 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
Net Subscriber
Additions 756 476 58.8 1,299 1,109 17.1
================== ========== ========== =========== ===========
Latin America
Satellite
Net Additions
------------------ ---------- ---------- ----------- -----------
Latin America
Satellite
Net Subscriber
Additions
(1) 140 (56) -% 125 35 -%
================== ========== ========== ========== ==== =========== =========== ========= ===
Excludes SKY Mexico net subscriber losses of 92 and 18 for the quarter
(1) ended March 31, 2018 and 2017, respectively.
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.
Depreciation expense 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.
WarnerMedia
Segment Results for the period from June
15, 2018 to June 30, 2018
----------------------------------------------------------- ---- --------- --- ----
Second Quarter Six-Month Period
----------------------- ---- -------------------------- ----
Percent Percent
2018 2017 Change 2018 2017 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 the 16-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:
-- Turner, consisting principally of cable networks and digital media properties.
-- HBO consisting principally of premium pay television and OTT services.
-- Warner Bros., consisting principally of television, feature
film, home video and game production and distribution.
WarnerMedia
Segment Results for the period from June 15,
2018 to June 30, 2018
--------------------------------------------------------------- ---- --------- --- ----
Second Quarter Six-Month Period
-------------------------- ---- -------------------------- ----
Percent Percent
2018 2017 Change 2018 2017 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 the 16-day period ended June
30, 2018.
Content revenues 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 the 16-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.
Advertising revenues 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 the 16-day period ended June
30, 2018.
Supplemental Operating Information
As a supplemental discussion of our operating results, for
comparison purposes, we are providing a view of our combined
domestic wireless operations (AT&T Mobility). See "Discussion
and Reconciliation of Non-GAAP 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
----------------------- -----------------------
Percent Percent
2018 2017 Change 2018 2017 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
(in 000s) 2018 2017 Change
--------------------------- ------ ----------
Wireless Subscribers (1)
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
Prepaid(3) 16,217 14,187 14.3
--------------------------- ------
Branded 93,589 91,189 2.6
Reseller 8,582 10,255 (16.3)
Connected devices (2,
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%
======
(1) Represents 100% of AT&T Mobility wireless subscribers.
Includes data-centric devices such as session-based tablets, monitoring
(2) devices and primarily wholesale automobile systems. Excludes
postpaid tablets.
Beginning in the third quarter of 2017, we began reporting prepaid
(3) IoT connections, which primarily consist of connected cars, as a
component of prepaid subscribers.
Second Quarter Six-Month Period
--------------------------
Percent Percent
(in 000s) 2018 2017 Change 2018 2017 Change
--------------------------- ---------- ----------
Wireless Net Additions
(1)
Postpaid(5) 73 143 (49.0) % 122 (51) -%
Prepaid(4) 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 devices(2,
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 Churn(3) 1.50% 1.57% (7) BP 1.57% 1.64% (7) BP
Postpaid Churn(3) 1.02% 1.01% 1 BP 1.04% 1.07% (3) BP
Postpaid Phone Only
Churn(3,5) 0.82% 0.79% 3 BP 0.83% 0.84% (1) BP
(1) Excludes acquisition-related additions during the period.
Includes data-centric devices such as session-based tablets, monitoring
(2) devices and primarily wholesale automobile systems. Excludes
postpaid tablets. See (5) below.
Calculated by dividing the aggregate number of wireless subscribers
(3) 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.
Beginning in the third quarter of 2017, we began reporting prepaid
(4) IoT connections, which primarily consist of connected cars, as a
component of prepaid subscribers, resulting in 97 and 146 additional
prepaid net adds in the second quarter and first six months of 2018.
Postpaid phone net adds were 46 and (89) in the second quarter and
(5) 24 and (437) for the first six months of 2018 and 2017, respectively.
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
As the wireless industry has matured, future wireless growth
will increasingly depend on our ability to offer innovative
services, plans and devices and to provide these services in
bundled product offerings with our video and broadband services.
Subscribers that purchase two or more services from us have
significantly lower churn than subscribers that purchase only one
service. To support higher mobile video and data usage, our
priority is to best utilize a wireless network that has sufficient
spectrum and capacity to support these innovations on as broad a
geographic basis as possible. To attract and retain subscribers in
a mature and highly competitive market, we have launched a wide
variety of plans, including unlimited and bundled services, as well
as equipment installment programs.
ARPU
Postpaid phone-only ARPU was $54.18 for the second quarter and
$53.63 for the first six months of 2018, compared to $58.30 and
$58.20 in 2017, primarily reflecting lower revenues recognized
under new revenue accounting standards. ARPU 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.
Connected Devices
Connected devices includes data-centric devices such as
session-based tablets, monitoring devices and primarily wholesale
automobile systems. Connected device subscribers increased 7.2%
during the second quarter when compared to March 31, 2018 and 29.0%
when compared to June 30, 2017. During the second quarter and first
six months of 2018, we added approximately 1.9 million and 3.6
million wholesale connected cars through agreements with various
carmakers, and experienced strong growth in other IoT connections
as well. We believe that these connected car agreements give us the
opportunity to create future retail relationships with the car
owners.
Supplemental Results Under Historical Accounting Method
As a supplemental discussion of our operating results, we are
providing results under the comparative historical accounting
method prior to our adoption of ASC 606 for the three-months ended
June 30, 2018.
Second Quarter
Promotions Commission Historical
Reported & Other USF Deferrals 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
Consumer Mobility
Supplemental Segment Results
------ -------- -------- ------ -----
Second Quarter
Historical
Reported Accounting Method Percent
2018 Impact 2018 2017 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
Business Solutions
Supplemental Segment Results
------ -------- -------- ----- -------
Second Quarter
Historical
Reported Accounting Method Percent
2018 Impact 2018 2017 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
Entertainment Group
Supplemental Segment Results
-------- --- ------- -------- ------ -------
Second Quarter
Historical
Reported Accounting Method Percent
2018 Impact 2018 2017 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
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
OTHER BUSINESS MATTERS
Time Warner On June 14, 2018, we completed our acquisition of
Time Warner, a leader in media and entertainment whose major
businesses encompass an array of some of the most respected media
brands. The deal combines Time Warner's vast library of content and
ability to create new premium content for audiences around the
world with our extensive customer relationships and distribution,
one of the world's largest pay-TV subscriber bases and scale in TV,
mobile and broadband distribution. We expect that the transaction
will advance our direct-to-consumer efforts and provide us with the
ability to develop innovative new content offerings.
Under the merger agreement, each share of Time Warner stock was
exchanged for $53.75 cash plus 1.437 shares of our common stock.
After adjustment for shares issued to trusts consolidated by
AT&T, share-based payment arrangements and fractional shares,
which were settled in cash, AT&T issued 1,125,517,510 shares to
Time Warner shareholders, giving them an approximate 16% stake in
the combined company. Based on our $32.52 per share closing stock
price on June 14, 2018, we paid Time Warner shareholders $36,599 in
AT&T stock and $42,100 in cash. Total consideration, including
share-based payment arrangements and other adjustments totaled
$79,114. On July 12, 2018, the U.S. Department of Justice (DOJ)
appealed the U.S. District Court's decision permitting the merger.
We believe the DOJ's appeal is without merit and we will continue
to vigorously defend our legal position in the appellate court.
Litigation Challenging DIRECTV's NFL SUNDAY TICKET More than two
dozen putative class actions were filed in the U.S. District Courts
for the Central District of California and the Southern District of
New York against DIRECTV and the National Football League (NFL).
These cases were brought by residential and commercial DIRECTV
subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs
allege that (i) the 32 NFL teams have unlawfully agreed not to
compete with each other in the market for nationally televised NFL
football games and instead have "pooled" their broadcasts and
assigned to the NFL the exclusive right to market them; and (ii)
the NFL and DIRECTV have entered into an unlawful exclusive
distribution agreement that allows DIRECTV to charge
"supra-competitive" prices for the NFL SUNDAY TICKET package. The
complaints seek unspecified treble damages and attorneys' fees
along with injunctive relief. The first complaint, Abrahamian v.
National Football League, Inc., et al., was served in June 2015. In
December 2015, the Judicial Panel on Multidistrict Litigation
transferred the cases outside the Central District of California to
that court for consolidation and management of pre-trial
proceedings. 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 DIRECTV In 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 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 its en 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 except Roberts v.
AT&T Mobility LLC, which is ongoing.
Labor Contracts A contract covering approximately 9,500
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 covering approximately 3,600 traditional
wireline employees in our legacy AT&T Corp. business also
expired in April 2018. Those employees are also working under the
terms of their prior contract, including benefits, while
negotiations continue. Work stoppages or labor disruptions may
occur in the absence of new contracts or other agreements being
reached.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United
States are subject to federal and state regulatory authorities.
AT&T subsidiaries operating outside the United States are
subject to the jurisdiction of national and supranational
regulatory authorities in the markets where service is
provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress
established a national policy framework intended to bring the
benefits of competition and investment in advanced
telecommunications facilities and services to all Americans by
opening all telecommunications markets to competition and reducing
or eliminating regulatory burdens that harm consumer welfare. Since
the Telecom Act was passed, the Federal Communications Commission
(FCC) and some state regulatory commissions have maintained or
expanded certain regulatory requirements that were imposed decades
ago on our traditional wireline subsidiaries when they operated as
legal monopolies. The new leadership at the FCC is charting a more
predictable and balanced regulatory course that will encourage
long-term investment and benefit consumers. Based on its public
statements, we expect the FCC to continue to eliminate antiquated,
unnecessary regulations and streamline processes. In addition, we
are pursuing, at both the state and federal levels, additional
legislative and regulatory measures to reduce regulatory burdens
that are no longer appropriate in a competitive telecommunications
market and that inhibit our ability to compete more effectively and
offer services wanted and needed by our customers, including
initiatives to transition services from traditional networks to all
IP-based networks. At the same time, we also seek to ensure that
legacy regulations are not further extended to broadband or
wireless services, which are subject to vigorous competition.
In April 2017, the FCC adopted an order that maintains light
touch pricing regulation of packet-based services, extends such
light touch pricing regulation to high-speed Time Division
Multiplex (TDM) transport services and to most of our TDM channel
termination services, based on a competitive market test for such
services. For those services that do not qualify for light touch
regulation, the order allows companies to offer volume and term
discounts, as well as contract tariffs. Several parties appealed
the FCC's decision. These appeals were consolidated in the U.S.
Court of Appeals for the Eighth Circuit, where they remain
pending.
In October 2016, a sharply divided FCC adopted new rules
governing the use of customer information by providers of broadband
internet access service. Those rules were more restrictive in
certain respects than those governing other participants in the
internet economy, including so-called "edge" providers such as
Google and Facebook. In April 2017, the President signed a
resolution passed by Congress repealing the new rules under the
Congressional Review Act, which prohibits the issuance of a new
rule that is substantially the same as a rule repealed under its
provisions, or the reissuance of the repealed rule, unless the new
or reissued rule is specifically authorized by a subsequent act of
Congress.
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 to opt-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 a 2-1 vote, and petitions for rehearing en banc were
denied in May 2017. Petitions for a writ of Certiorari at the U.S.
Supreme Court remain pending. Meanwhile, in December 2017, the FCC
reversed its 2015 decision by reclassifying fixed and mobile
consumer broadband services as information services and repealing
most of the rules that were adopted in 2015. In lieu of broad
conduct prohibitions, the order requires internet service providers
to disclose information about their network practices and terms of
service, including whether they block or throttle internet traffic
or offer paid prioritization. Several parties, including several
state Attorneys General, net neutrality advocacy groups and others,
have appealed the FCC's December 2017 decision. Those appeals,
which initially were consolidated in the U.S. Court of Appeals for
the Ninth Circuit, were transferred at the request of the parties
to the D.C. Circuit. In addition, 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 result in further
litigation. We will continue to support congressional action to
codify a set of standard consumer rules for the internet.
We provide satellite video service through our subsidiary
DIRECTV, whose satellites are licensed by the FCC. The
Communications Act of 1934 and other related acts give the FCC
broad authority to regulate the U.S. operations of DIRECTV. In
addition, states representing a majority of our local service
access lines have adopted legislation that enables us to provide
IP-based service through a single statewide or state-approved
franchise (as opposed to the need to acquire hundreds or even
thousands of municipal-approved franchises) to offer a competitive
video product. We also are supporting efforts to update and improve
regulatory treatment for our services. Regulatory reform and
passage of legislation is uncertain and depends on many
factors.
We provide wireless services in robustly competitive markets,
but are subject to substantial governmental regulation. Wireless
communications providers must obtain licenses from the FCC to
provide communications services at specified spectrum frequencies
within specified geographic areas and must comply with the FCC
rules and policies governing the use of the spectrum. While
wireless communications providers' prices and offerings are
generally not subject to state or local regulation, states
sometimes attempt to regulate or legislate various aspects of
wireless services, such as in the areas of consumer protection and
the deployment of cell sites and equipment. The anticipated
industry-wide deployment of 5G technology, which is needed to
satisfy extensive demand for video and internet access, will
involve significant deployment of "small cell" equipment and
therefore increase the need for local permitting processes that
allow for the placement of small cell equipment on reasonable
timelines and terms. Federal regulations also can delay and impede
broadband services, including small cell equipment. In March 2018,
the FCC adopted an order to streamline the wireless infrastructure
review process in order to facilitate deployment of next-generation
wireless facilities. Among other actions, the order excludes most
small cell facilities from federal review under the National
Environmental Policy Act and the National Historic Preservation
Act, while clarifying and streamlining the process for tribal
participation in historic preservation reviews where such review is
still required. In addition, to date, 21 states have adopted
legislation to facilitate small cell deployment.
Also facilitating the deployment of next-generation wireless
facilities, in May 2014, the FCC issued an order revising its
policies governing mobile spectrum holdings. The FCC rejected the
imposition of caps on the amount of spectrum any carrier could
acquire, retaining its case-by-case review policy. Moreover, it
increased the amount of spectrum that could be acquired before
exceeding an aggregation "screen" that would automatically trigger
closer scrutiny of a proposed transaction. On the other hand, it
indicated that it will separately consider an acquisition of "low
band" spectrum that exceeds one-third of the available low band
spectrum as presumptively harmful to competition. The spectrum
screen (including the low band screen) recently increased by 23
MHz. On balance, the order and the spectrum screen should allow
AT&T to obtain additional spectrum to meet our customers'
needs.
As the wireless industry has matured, future wireless growth
will increasingly depend on our ability to offer innovative
services, plans and devices and to provide these services in
bundled product offerings to best utilize a wireless network that
has sufficient spectrum and capacity to support these innovations
on as broad a geographic basis as possible. We continue to invest
significant capital in expanding our network capacity, as well as
to secure and utilize spectrum that meets our long-term needs. To
that end, we have:
-- Submitted winning bids for 251 Advanced Wireless Services
(AWS) spectrum licenses for a near-nationwide contiguous block of
high-quality spectrum in the AWS-3 Auction.
-- Redeployed spectrum previously used for basic 2G services to
support more advanced mobile internet services on our 3G and 4G
networks.
-- Secured the First Responder Network Authority (FirstNet)
contract, which provides us with access to 20 MHz of nationwide low
band spectrum.
-- Invested in 5G and millimeter-wave technologies with our
acquisition of Fiber-Tower Corporation, which holds significant
amounts of spectrum in the millimeter wave bands (28 GHz and 39
GHz) that the FCC recently reallocated for mobile broadband
services. These bands will help to accelerate our entry into 5G
services.
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.
LIQUIDITY AND CAPITAL RESOURCES
With the completion of the Time Warner transaction, we had
$13,523 in cash and cash equivalents available at June 30, 2018.
Cash and cash equivalents included cash of $3,457 and money market
funds and other cash equivalents of $10,066. Approximately $1,226
of our cash and cash equivalents resided in foreign jurisdictions
and were in foreign currencies, some of which may be subject to
restrictions on repatriation.
Cash and cash equivalents decreased $36,975 since December 31,
2017. In the first six months of 2018, cash inflows were primarily
provided by the cash receipts from operations, including cash from
our sale and transfer of certain wireless equipment installment
receivables and other customer receivables to third parties,
issuance of commercial paper and long-term debt and collateral
received from banks and other participants in our derivative
arrangements. These inflows were offset by cash used to meet the
needs of the business, including, but not limited to, the
acquisition of Time Warner and wireless spectrum, payment of
operating expenses, funding capital expenditures, debt repayments,
and dividends to stockholders.
We actively manage the timing of our vendor payments to optimize
the use of our cash. Among other things, we seek to have vendor
payments made on 90-day or greater terms, while providing vendors
with access to bank facilities that permit earlier payments at the
vendors' cost. For example, for payments to a key supplier, we have
arrangements that allow us to extend payment terms between
approximately 40 to 60 days at an additional cost to us. We believe
these arrangements provide benefits to us relative to alternative
financing arrangements. During the second quarter of 2018 and for
the six months then ended, the net impact of these cash management
activities on our cash flows provided by operating activities was
not material.
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.
The majority of our capital expenditures are spent on our
networks, including product development and related support
systems. Capital expenditures, excluding interest during
construction, increased $209 in the first six months. We do not
report capital expenditures at the segment level. During 2018,
approximately $800 of assets for FirstNet build have been placed
into service with a net cash impact of $100. Total reimbursements
from the government for FirstNet during the first six months of
2018 were $336.
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 entered 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.
The amount of capital expenditures is influenced by demand for
services and products, capacity needs and network enhancements. We
are also focused on ensuring DIRECTV merger commitments are met. As
of June 30, 2018, we market our fiber-to-the-premises network to
9.2 million customer locations and are on track to meet our FCC
commitment of 12.5 million locations by mid-2019.
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.
Cash Provided by or Used in Financing Activities
For the first six months of 2018, cash used in financing
activities totaled $3,720 and included net proceeds of $26,478,
primarily resulting from drawing $20,925 on our Term Loan Credit
Agreements in connection with our acquisition of Time Warner. Net
proceeds for the first six months of 2018 also include a $1,500
three-year floating rate note and $2,000 of notes issued by our
subsidiary, Vrio Corp. (Vrio), see discussion below.
During the first six months of 2018, we redeemed $29,447 of
debt. Approximately $21,236 were notes subject to mandatory
redemption if we did not complete our acquisition of Time Warner by
April 22, 2018. The remaining amount primarily consisted of the
following redemptions:
-- $2,500 of 5.500% notes due 2018.
-- $750 of 1.750% notes due 2018.
-- $300 of 6.450% notes due 2018.
-- $1,000 of 5.600% notes due 2018.
-- $1,000 of notes issued by our subsidiary, Vrio.
-- $2,000 repayment of amounts outstanding under WarnerMedia's Term Credit Agreement.
-- $600 of 6.875% WarnerMedia notes due 2018.
Our weighted average interest rate of our entire long-term debt
portfolio, including the impact of derivatives, was approximately
4.3% as of June 30, 2018 and 4.4% as of December 31, 2017. We had
$180,209 of total notes and debentures outstanding at June 30,
2018, which included Euro, British pound sterling, Swiss franc,
Brazilian real, Mexican peso and Canadian dollar denominated debt
that totaled approximately $36,146.
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:
-- $1,108 maturing between 2018 and 2019 with an interest rate ranging from 1.250% to 2.100%.
-- $6,906 maturing between 2020 and 2024 with an interest rate ranging from 1.950% to 9.150%.
-- $5,898 maturing between 2025 and 2034 with an interest rate ranging from 2.950% to 7.700%.
-- $4,964 maturing between 2035 and 2045 with an interest rate ranging from 4.650% to 8.300%.
At June 30, 2018, we had $21,672 of debt maturing within one
year, including $8,139 of commercial paper borrowing and $13,323 of
long-term debt issuances. Debt maturing within one year includes
the following notes that may be put back to us by the holders:
-- $1,000 of annual put reset securities issued by BellSouth
that may be put back to us each April until maturity in 2021.
-- An accreting zero-coupon note that may be redeemed each May
until maturity in 2022. In May 2017, $1 was redeemed by the holder
for $1. If the remainder of the zero-coupon note (issued for
principal of $500 in 2007 and partially exchanged in the 2017 debt
exchange offers) is held to maturity, the redemption amount will be
$592.
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:
-- April 5, 2018 issuance of $650 of 6.25% notes due 2023 and
$350 of 6.875% notes due 2028. These notes were redeemed following
our April 2018 withdrawal of the planned IPO of Vrio.
-- April 11, 2018 borrowing of approximately $1,000 of debt
denominated in Brazilian reais that matures in 2023. The floating
rate for the facility is based upon the Brazil interbank deposit
rate annualized (DI Rate), plus 175 basis points.
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 EUR2,250 ($2,637 U.S. dollar
equivalent) floating rate global notes due 2020.
At June 30, 2018, we had approximately 376 million shares
remaining from share repurchase authorizations approved by the
Board of Directors in 2013 and 2014. During the first six months of
2018, we repurchased approximately 13 million shares under these
authorizations.
We paid dividends of $6,144 during the first six months of 2018,
compared with $6,021 for the first six months of 2017, primarily
reflecting the increase in the quarterly dividend approved by our
Board of Directors in December 2017. Dividends declared by our
Board of Directors totaled $1.00 per share in the first six months
of 2018 and $0.98 per share for the first six months of 2017. Our
dividend policy considers the expectations and requirements of
stockholders, capital funding requirements of AT&T and
long-term growth opportunities. It is our intent to provide the
financial flexibility to allow our Board of Directors to consider
dividend growth and to recommend an increase in dividends to be
paid in future periods. All dividends remain subject to declaration
by our Board of Directors.
Credit Facilities
The following summary of our various credit and loan agreements
does not purport to be complete and is qualified in its entirety by
reference to each agreement filed as exhibits to our Annual Report
on Form 10-K.
We use credit facilities as a tool in managing our liquidity
status. At June 30, 2018, we had no amounts outstanding on our
five-year $12,000 revolving credit agreement.
In September 2017, we entered into a $2,250 syndicated term loan
credit agreement containing (i) a three-year $750 term loan
facility (the "Tranche A Facility"), (ii) a four-year $750 term
loan facility (the "Tranche B Facility") and (iii) a five-year $750
term loan facility (the "Tranche C Facility"), with certain
investment and commercial banks and The Bank of Nova Scotia, as
administrative agent. We drew on the Tranche A Facility, the
Tranche B Facility and the Tranche C Facility during the first
quarter of 2018, with $2,250 in advances outstanding as of June 30,
2018.
We also utilize other external financing sources, which include
various credit arrangements supported by government agencies to
support network equipment purchases, as well as a commercial paper
program.
In anticipation of the Time Warner acquisition, we entered into
a $10,000 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.
Each of our credit and loan agreements contains covenants that
are customary for an issuer with an investment grade senior debt
credit rating as well as a net debt-to-EBITDA financial ratio
covenant requiring AT&T to maintain, as of the last day of each
fiscal quarter, a ratio of not more than 3.5-to-1. As of June 30,
2018, we were in compliance with the covenants for our credit
facilities.
Collateral Arrangements
During the first six months of 2018, we posted $365 of
additional cash collateral, on a net basis, from banks and other
participants in our derivative arrangements. Cash postings under
these arrangements vary with changes in credit ratings and netting
agreements. (See Note 7)
Other
Our total capital consists of debt (long-term debt and debt
maturing within one year) and stockholders' equity. Our capital
structure does not include debt issued by our equity method
investments. At June 30, 2018, our debt ratio was 50.8%, compared
to 53.3% at June 30, 2017 and 53.6% at December 31, 2017. Our net
debt ratio was 47.2% at June 30, 2018, compared to 43.8% at June
30, 2017 and 37.2% at December 31, 2017. The debt ratio is affected
by the same factors that affect total capital, and reflects our
recent debt issuances and repayments.
During the first 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.
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURES
We believe the following measures are relevant and useful
information to investors as it is used by management as a method of
comparing performance with that of many of our competitors. These
supplemental measures should be considered in addition to, but not
as a substitute of, our consolidated and segment financial
information.
Supplemental Operational Measures
We provide a supplemental discussion of our domestic wireless
operations that is calculated by combining our Consumer Mobility
and Business Solutions segments, and then adjusting to remove
non-wireless operations. The following table presents a
reconciliation of our supplemental AT&T Mobility results.
Three Months Ended
June 30, 2018 June 30, 2017
Consumer Business AT&T Consumer Business AT&T
Mobility Solutions Adjustments(1) Mobility Mobility Solutions Adjustments(1) 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
========= ======== =========
(1) Business wireline operations reported in Business Solutions segment.
Six Months Ended
June 30, 2018 June 30, 2017
Consumer Business AT&T Consumer Business AT&T
Mobility Solutions Adjustments(1) Mobility Mobility Solutions Adjustments(1) 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
========= ======== =========
(1) Business wireline operations reported in Business Solutions segment.
At June 30, 2018, we had interest rate swaps with a notional
value of $7,333 and a fair value of $(89).
We have fixed-to-fixed and floating-to-fixed cross-currency
swaps on foreign currency-denominated debt instruments with a U.S.
dollar notional value of $36,092 to hedge our exposure to changes
in foreign currency exchange rates. These derivatives have been
designated at inception and qualify as cash flow hedges with a net
fair value of $(290) at June 30, 2018.
We have foreign exchange contracts with a U.S. dollar notional
value of $2,399 to provide currency at a fixed rate to hedge a
portion of the exchange risk involved in foreign
currency-denominated transactions. These foreign exchange contracts
are amortized into income in the same period the hedged transaction
affects earnings and qualify as cash flow hedges with a net fair
value of $55 at June 30, 2018.
We have designated EUR700 million aggregate principal amount of
debt as a hedge of the variability of some of the Euro-denominated
net investments of WarnerMedia. The gain or loss on the debt that
is designated as, and is effective as, an economic hedge of the net
investment in a foreign operation is recorded as a currency
translation adjustment within accumulated other comprehensive
income, net on the consolidated balance sheet.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed by
the registrant is recorded, processed, summarized, accumulated and
communicated to its management, including its principal executive
and principal financial officers, to allow timely decisions
regarding required disclosure, and reported within the time periods
specified in the Securities and Exchange Commission's rules and
forms. The chief executive officer and chief financial officer have
performed an evaluation of the effectiveness of the design and
operation of the registrant's disclosure controls and procedures as
of June 30, 2018. Based on that evaluation, the chief executive
officer and chief financial officer concluded that the registrant's
disclosure controls and procedures were effective as of June 30,
2018.
Information set forth in this report contains forward-looking
statements that are subject to risks and uncertainties, and actual
results could differ materially. Many of these factors are
discussed in more detail in the "Risk Factors" section. We claim
the protection of the safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of
1995.
The following factors could cause our future results to differ
materially from those expressed in the forward-looking
statements:
-- Adverse economic and/or capital access changes in the markets
served by us or in countries in which we have significant
investments, including the impact on customer demand and our
ability and our suppliers' ability to access financial markets at
favorable rates and terms.
-- Changes in available technology and the effects of such
changes, including product substitutions and deployment costs.
-- Increases in our benefit plans' costs, including increases
due to adverse changes in the United States and foreign securities
markets, resulting in worse-than-assumed investment returns and
discount rates; adverse changes in mortality assumptions; adverse
medical cost trends; and unfavorable or delayed implementation or
repeal of healthcare legislation, regulations or related court
decisions.
-- The final outcome of FCC and other federal, state or foreign
government agency proceedings (including judicial review, if any,
of such proceedings) involving issues that are important to our
business, including, without limitation, special access and
business data services; intercarrier compensation; interconnection
obligations; pending Notices of Apparent Liability; the transition
from legacy technologies to IP-based infrastructure, including the
withdrawal of legacy TDM-based services; universal service;
broadband deployment; wireless equipment siting regulations; E911
services; competition policy; privacy; net neutrality; unbundled
network elements and other wholesale obligations; multi-channel
video programming distributor services and equipment; availability
of new spectrum, on fair and balanced terms; and wireless and
satellite license awards and renewals.
-- The final outcome of state and federal legislative efforts
involving issues that are important to our business, including
deregulation of IP-based services, relief from Carrier of Last
Resort obligations and elimination of state commission review of
the withdrawal of services.
-- Enactment of additional state, local, federal and/or foreign
regulatory and tax laws and regulations, or changes to existing
standards and actions by tax agencies and judicial authorities
including the resolution of disputes with any taxing jurisdictions,
pertaining to our subsidiaries and foreign investments, including
laws and regulations that reduce our incentive to invest in our
networks, resulting in lower revenue growth and/or higher operating
costs.
-- U.S. and foreign laws and regulations regarding privacy,
personal data protection and user consent are complex and rapidly
evolving and could result in impact to our business plans,
increased costs, or claims against us that may harm our
reputation.
-- Our ability to absorb revenue losses caused by increasing
competition, including offerings that use alternative technologies
or delivery methods (e.g., cable, wireless, VoIP and over-the-top
video service), subscriber reluctance to purchase new wireless
handsets, and our ability to maintain capital expenditures.
-- The extent of competition including from governmental
networks and other providers and the resulting pressure on customer
totals and segment operating margins.
-- Our ability to develop attractive and profitable
product/service offerings to offset increasing competition and
increasing fragmentation of customer viewing habits.
-- The ability of our competitors to offer product/service
offerings at lower prices due to lower cost structures and
regulatory and legislative actions adverse to us, including
non-regulation of comparable alternative technologies (e.g., VoIP
and data usage).
-- The continued development and delivery of attractive and
profitable video and broadband offerings; the extent to which
regulatory and build-out requirements apply to our offerings; our
ability to match speeds offered by our competitors and the
availability, cost and/or reliability of the various technologies
and/or content required to provide such offerings.
-- Our continued ability to maintain margins, attract and offer
a diverse portfolio of video, wireless service and devices and
device financing plans.
-- Our ability to generate advertising revenue from attractive
video content, especially from WarnerMedia, in the face of
unpredictable and rapidly evolving public viewing habits.
-- The availability and cost of additional wireless spectrum and
regulations and conditions relating to spectrum use, licensing,
obtaining additional spectrum, technical standards and deployment
and usage, including network management rules.
-- Our ability to manage growth in wireless video and data
services, including network quality and acquisition of adequate
spectrum at reasonable costs and terms.
-- The outcome of pending, threatened or potential litigation
(which includes arbitrations), including, without limitation,
patent and product safety claims by or against third parties.
-- The impact from major equipment failures on our networks,
including satellites operated by DIRECTV; the effect of security
breaches related to the network or customer information; our
inability to obtain handsets, equipment/software or have handsets,
equipment/software serviced in a timely and cost-effective manner
from suppliers; and in the case of satellites launched, timely
provisioning of services from vendors; or severe weather
conditions, natural disasters, pandemics, energy shortages, wars or
terrorist attacks.
-- The issuance by the Financial Accounting Standards Board or
other accounting oversight bodies of new accounting standards or
changes to existing standards.
-- The U.S. Department of Justice prevailing on its appeal of
the court decision permitting our acquisition of Time Warner
Inc.
-- Our ability to successfully integrate the former Time Warner
Inc. operations, including the ability to manage various businesses
in widely dispersed business locations and with decentralized
management.
-- Our ability to take advantage of the desire of advertisers to
change traditional video advertising models.
-- Our ability to adequately fund our wireless operations,
including payment for additional spectrum, network upgrades and
technological advancements.
-- Our increased exposure to foreign economies, including
foreign exchange fluctuations as well as regulatory and political
uncertainty.
-- Changes in our corporate strategies, such as changing
network-related requirements or acquisitions and dispositions,
which may require significant amounts of cash or stock, to respond
to competition and regulatory, legislative and technological
developments.
-- The uncertainty surrounding further congressional action to
address spending reductions, which may result in a significant
decrease in government spending and reluctance of businesses and
consumers to spend in general.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that
may materially affect our business. We use this section to update
this discussion to reflect material developments since our Form
10-K was filed.
Our ability to successfully integrate our June 2018 acquisition
of Time Warner, including the risk that the costs savings and
revenue synergies from the acquisition may not be fully realized or
may take longer to realize than expected; our costs in financing
the acquisition and potential adverse effects on our share price
and dividend amount due to the issuance of additional shares; the
addition of Time Warner's existing debt to our balance sheet;
disruption from the acquisition making it more difficult to
maintain relationships with customers, employees or suppliers; and
competition and its effect on pricing, spending, third-party
relationships and revenues.
We completed our acquisition of Time Warner in June 2018. We
believe that the acquisition will give us the scale, resources and
ability to deploy video content more efficiently to more customers
than otherwise possible and to provide very attractive integrated
offerings of video, broadband and wireless services; compete more
effectively against other video providers as well as other
technology, media and communications companies; create premium
advertising opportunities, and produce cost and revenue synergies.
We must integrate a large number of operational and administrative
systems, which may involve significant management time and create
uncertainty for employees, customers and suppliers. The integration
process may also result in significant expenses and charges against
earnings, both cash and noncash. This acquisition also has
increased the amount of debt on our balance sheet leading to
additional interest expense and, due to the additional shares
issued, will result in additional cash being required for any
dividends declared. Both of these factors could put pressure on our
financial flexibility to continue capital investments, develop new
services and declare future dividends. In addition, events outside
our control, including changes in regulation and laws as well as
economic trends, could adversely affect our ability to realize the
expected benefits from this acquisition. Following the closing, the
U.S. Department of Justice filed an appeal of the court decision
allowing us to complete the acquisition; we believe the lower court
decision will be upheld.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
(c) A summary of our repurchases of common stock during the second
quarter of 2018 is as follows:
(a) (b) (c) (d)
Maximum Number
(or Approximate
Total Number Dollar Value)
of Shares (or of Shares (or
Total Number Units) Purchased Units) That May
of Shares (or Average Price as Part of Publicly Yet Be Purchased
Units) Purchased Paid Per Share Announced Plans Under The Plans
Period (1, 2, 3) (or Unit) or Programs(1) or Programs
April 1, 2018
-
April 30, 2018 6,318,863 $ 32.99 6,317,000 381,979,000
May 1, 2018 -
May 31, 2018 6,319,909 33.37 6,317,000 375,662,000
June 1, 2018 -
June 30, 2018 738,393 33.23 - 375,662,000
---
Total 13,377,165 $ 33.18 12,634,000
===
In March 2014, our Board of Directors approved an additional authorization
(1) to repurchase up to 300 million shares of our common
stock. In March 2013, our Board of Directors authorized the repurchase
of up to an additional 300 million shares of our common stock.
The authorizations have no expiration date.
Of the shares repurchased, 10,957 shares were acquired through the
(2) withholding of taxes on the vesting of restricted stock
and performance shares or on the exercise price of options.
Of the shares repurchased, 732,208 shares were acquired through reimbursements
(3) from AT&T maintained Voluntary Employee Benefit
Association (VEBA) trusts.
Item 6. Exhibits
The following exhibits are filed or incorporated
by reference as a part of this report:
Exhibit
Number Exhibit Description
10-a AT&T Health Plan
10-b Agreement between Robert Quinn and AT&T Inc.
Computation of Ratios of Earnings to Fixed
12 Charges
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive
Officer
31.2 Certification of Principal Financial
Officer
32 Section 1350 Certifications
101 XBRL Instance Document
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AT&T Inc.
August 2, 2018 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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