10-Q 1 q1_10q.htm AT&T 2017 FORM 10-Q
 

 
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 March 31, 2017
 
or
 
 
 
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
       
For the transition period from          to

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                                                                                                                                              Yes [X]    No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
                                                                                                                                                                              Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 April 30, 2017, there were 6,148 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
 
   
March 31,
 
   
2017
   
2016
 
             
Operating Revenues
           
Service
 
$
36,456
   
$
37,101
 
Equipment
   
2,909
     
3,434
 
Total operating revenues
   
39,365
     
40,535
 
                 
Operating Expenses
               
Cost of services and sales
               
   Equipment
   
3,848
     
4,375
 
   Broadcast, programming and operations
   
4,974
     
4,629
 
   Other cost of services (exclusive of depreciation and
         amortization shown separately below)
   
9,065
     
9,396
 
Selling, general and administrative
   
8,487
     
8,441
 
Depreciation and amortization
   
6,127
     
6,563
 
Total operating expenses
   
32,501
     
33,404
 
Operating Income
   
6,864
     
7,131
 
Other Income (Expense)
               
Interest expense
   
(1,293
)
   
(1,207
)
Equity in net income (loss) of affiliates
   
(173
)
   
13
 
Other income (expense) – net
   
(20
)
   
70
 
Total other income (expense)
   
(1,486
)
   
(1,124
)
Income Before Income Taxes
   
5,378
     
6,007
 
Income tax expense
   
1,804
     
2,122
 
Net Income
   
3,574
     
3,885
 
Less: Net Income Attributable to Noncontrolling Interest
   
(105
)
   
(82
)
Net Income Attributable to AT&T
 
$
3,469
   
$
3,803
 
Basic Earnings Per Share Attributable to AT&T
 
$
0.56
   
$
0.62
 
Diluted Earnings Per Share Attributable to AT&T
 
$
0.56
   
$
0.61
 
Weighted Average Number of Common Shares Outstanding – Basic (in millions)
   
6,166
     
6,172
 
Weighted Average Number of Common Shares Outstanding with Dilution (in millions)
   
6,186
     
6,190
 
Dividends Declared Per Common Share
 
$
0.49
   
$
0.48
 
See Notes to Consolidated Financial Statements.
               
 
2

AT&T INC.
           
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
           
Dollars in millions
           
(Unaudited)
           
   
Three months ended
 
   
March 31,
 
   
2017
   
2016
 
Net income
 
$
3,574
   
$
3,885
 
Other comprehensive income (loss), net of tax:
               
    Foreign currency:
               
        Foreign currency translation adjustment (includes $6 and $0 attributable to
            noncontrolling interest), net of taxes of $391 and $(10)
   
372
     
(44
)
    Available-for-sale securities:
               
        Net unrealized gains (losses), net of taxes of $15 and $(15)
   
33
     
(26
)
        Reclassification adjustment included in net income, net of taxes of $3, and $(2)
   
5
     
(3
)
     Cash flow hedges:
               
        Net unrealized gains, net of taxes of $7 and $67
   
13
     
124
 
        Reclassification adjustment included in net income, net of taxes of $5 and $5
   
10
     
10
 
     Defined benefit postretirement plans:
               
        Amortization of net prior service credit included in net income, net of taxes of $(139)
            and $(131)
   
(228
)
   
(215
)
Other comprehensive income (loss)
   
205
     
(154
)
Total comprehensive income
   
3,779
     
3,731
 
Less: Total comprehensive income attributable to noncontrolling interest
   
(111
)
   
(82
)
Total Comprehensive Income Attributable to AT&T
 
$
3,668
   
$
3,649
 
See Notes to Consolidated Financial Statements.
               
 
3

AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
 
   
March 31,
   
December 31,
 
   
2017
   
2016
 
Assets
 
(Unaudited)
       
Current Assets
           
Cash and cash equivalents
 
$
14,884
   
$
5,788
 
Accounts receivable - net of allowances for doubtful accounts of $699 and $661
   
15,078
     
16,794
 
Prepaid expenses
   
1,418
     
1,555
 
Other current assets
   
14,347
     
14,232
 
Total current assets
   
45,727
     
38,369
 
Property, plant and equipment
   
319,108
     
319,648
 
   Less: accumulated depreciation and amortization
   
(193,816
)
   
(194,749
)
Property, Plant and Equipment – Net
   
125,292
     
124,899
 
Goodwill
   
105,593
     
105,207
 
Licenses
   
94,617
     
94,176
 
Customer Lists and Relationships – Net
   
13,366
     
14,243
 
Other Intangible Assets – Net
   
8,295
     
8,441
 
Investments in Equity Affiliates
   
1,551
     
1,674
 
Other Assets
   
17,462
     
16,812
 
Total Assets
 
$
411,903
   
$
403,821
 
                 
Liabilities and Stockholders' Equity
               
Current Liabilities
               
Debt maturing within one year
 
$
12,681
   
$
9,832
 
Accounts payable and accrued liabilities
   
27,120
     
31,138
 
Advanced billing and customer deposits
   
4,493
     
4,519
 
Accrued taxes
   
3,384
     
2,079
 
Dividends payable
   
3,012
     
3,008
 
Total current liabilities
   
50,690
     
50,576
 
Long-Term Debt
   
120,568
     
113,681
 
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
   
61,100
     
60,128
 
Postemployment benefit obligation
   
33,404
     
33,578
 
Other noncurrent liabilities
   
21,160
     
21,748
 
Total deferred credits and other noncurrent liabilities
   
115,664
     
115,454
 
                 
Stockholders' Equity
               
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2017 and
               
   December 31, 2016: issued 6,495,231,088 at March 31, 2017 and December 31, 2016)
   
6,495
     
6,495
 
Additional paid-in capital
   
89,411
     
89,604
 
Retained earnings
   
35,175
     
34,734
 
Treasury stock (347,741,277 at March 31, 2017 and 356,237,141
               
   at December 31, 2016, at cost)
   
(12,400
)
   
(12,659
)
Accumulated other comprehensive income
   
5,160
     
4,961
 
Noncontrolling interest
   
1,140
     
975
 
Total stockholders' equity
   
124,981
     
124,110
 
Total Liabilities and Stockholders' Equity
 
$
411,903
   
$
403,821
 
See Notes to Consolidated Financial Statements.
               
 
4

AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions
 
(Unaudited)
           
   
Three months ended
 
   
March 31,
 
   
2017
   
2016
 
Operating Activities
           
Net income
 
$
3,574
   
$
3,885
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
   
6,127
     
6,563
 
   Undistributed loss (earnings) from investments in equity affiliates
   
182
     
(13
)
   Provision for uncollectible accounts
   
393
     
374
 
   Deferred income tax expense
   
480
     
1,346
 
   Net loss (gain) from sale of investments, net of impairments
   
61
     
(44
)
Changes in operating assets and liabilities:
               
   Accounts receivable
   
445
     
43
 
   Other current assets
   
228
     
1,319
 
   Accounts payable and other accrued liabilities
   
(1,778
)
   
(3,990
)
   Equipment installment receivables and related sales
   
579
     
454
 
   Deferred fulfillment costs
   
(436
)
   
(542
)
Retirement benefit funding
   
(140
)
   
(140
)
Other - net
   
(497
)
   
(1,355
)
Total adjustments
   
5,644
     
4,015
 
Net Cash Provided by Operating Activities
   
9,218
     
7,900
 
                 
Investing Activities
               
Capital expenditures:
               
   Purchase of property and equipment
   
(5,784
)
   
(4,451
)
   Interest during construction
   
(231
)
   
(218
)
Acquisitions, net of cash acquired
   
(162
)
   
(165
)
Dispositions
   
6
     
81
 
Sale of securities, net
   
-
     
445
 
Net Cash Used in Investing Activities
   
(6,171
)
   
(4,308
)
                 
Financing Activities
               
Net change in short-term borrowings with original maturities of three months or less
   
(1
)
   
-
 
Issuance of long-term debt
   
12,440
     
5,978
 
Repayment of long-term debt
   
(3,053
)
   
(2,296
)
Purchase of treasury stock
   
(177
)
   
-
 
Issuance of treasury stock
   
21
     
89
 
Dividends paid
   
(3,009
)
   
(2,947
)
Other
   
(172
)
   
471
 
Net Cash Provided by Financing Activities
   
6,049
     
1,295
 
Net increase in cash and cash equivalents
   
9,096
     
4,887
 
Cash and cash equivalents beginning of year
   
5,788
     
5,121
 
Cash and Cash Equivalents End of Period
 
$
14,884
   
$
10,008
 
Cash paid (received) during the three months ended March 31 for:
               
   Interest
 
$
1,643
   
$
1,459
 
   Income taxes, net of refunds
 
$
(160
)
 
$
477
 
See Notes to Consolidated Financial Statements.
 
 
5

AT&T INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
Dollars and shares in millions except per share amounts
 
(Unaudited)
 
   
March 31, 2017
 
   
Shares
   
Amount
 
Common Stock
           
Balance at beginning of year
   
6,495
   
$
6,495
 
Issuance of stock
   
-
     
-
 
Balance at end of period
   
6,495
   
$
6,495
 
                 
Additional Paid-In Capital
               
Balance at beginning of year
         
$
89,604
 
Issuance of treasury stock
           
4
 
Share-based payments
           
(197
)
Balance at end of period
         
$
89,411
 
                 
Retained Earnings
               
Balance at beginning of year
         
$
34,734
 
Net income attributable to AT&T ($0.56 per diluted share)
           
3,469
 
Dividends to stockholders ($0.49 per share)
           
(3,030
)
Other
           
2
 
Balance at end of period
         
$
35,175
 
                 
Treasury Stock
               
Balance at beginning of year
   
(356
)
 
$
(12,659
)
Repurchase and acquisition of common stock
   
(5
)
   
(200
)
Issuance of treasury stock
   
13
     
459
 
Balance at end of period
   
(348
)
 
$
(12,400
)
                 
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
               
Balance at beginning of year
         
$
4,961
 
Other comprehensive income attributable to AT&T
           
199
 
Balance at end of period
         
$
5,160
 
                 
Noncontrolling Interest
               
Balance at beginning of year
         
$
975
 
Net income attributable to noncontrolling interest
           
105
 
Distributions
           
(77
)
Acquisition of noncontrolling interest
           
131
 
Translation adjustments attributable to noncontrolling interest, net of taxes
           
6
 
Balance at end of period
         
$
1,140
 
                 
Total Stockholders' Equity at beginning of year
         
$
124,110
 
Total Stockholders' Equity at end of period
         
$
124,981
 
See Notes to Consolidated Financial Statements.
               
 
6

AT&T INC.
MARCH 31, 2017
 
For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. The results for the interim periods are not necessarily indicative of those for the full year.

In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
 
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.

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 cumulative 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 reclassified to conform to the current period's presentation.
 
Recently Adopted Accounting Standards
Income Taxes  As of January 1, 2017, we adopted Accounting Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU 2016-16), with modified retrospective application, resulting in our recognition of an immaterial adjustment to retained earnings. Under ASU 2016-16, we recognize the income tax effects of the intercompany sales or transfers of assets other than inventory (e.g., intellectual property or property, plant and equipment) during the period of intercompany sale or transfer instead of the period of either the sale or transfer to a third party or recognition of depreciation or impairment.
 
New Accounting Standards
Pension and Other Postretirement Benefits  In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07), which changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue to present service costs within our operating expenses but present amortization of prior service credits and other components of our net periodic benefit cost in "other income (expense)" in our consolidated statements of income. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017. See Note 5 for our components of net periodic benefit cost.

Revenue Recognition  In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASC 606), and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASC 606, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard using the "modified retrospective method." Under that method, we will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous accounting standards.
 
7

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016, is shown in the table below:

   
Three months ended
 
   
March 31,
 
   
2017
   
2016
 
Numerators
           
Numerator for basic earnings per share:
           
   Net Income
 
$
3,574
   
$
3,885
 
   Less: Net income attributable to noncontrolling interest
   
(105
)
   
(82
)
   Net Income attributable to AT&T
   
3,469
     
3,803
 
   Dilutive potential common shares:
               
      Share-based payment
   
4
     
4
 
Numerator for diluted earnings per share
 
$
3,473
   
$
3,807
 
Denominators (000,000)
               
Denominator for basic earnings per share:
               
   Weighted average number of common shares outstanding
   
6,166
     
6,172
 
   Dilutive potential common shares:
               
      Share-based payment (in shares)
   
20
     
18
 
Denominator for diluted earnings per share
   
6,186
     
6,190
 
Basic earnings per share attributable to AT&T
 
$
0.56
   
$
0.62
 
Diluted earnings per share attributable to AT&T
 
$
0.56
   
$
0.61
 
 
8

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.
 
 
Foreign Currency Translation Adjustment
 
Net Unrealized Gains (Losses) on Available-for-Sale Securities
 
Net Unrealized Gains (Losses) on Cash Flow Hedges
 
Defined Benefit Postretirement Plans
 
Accumulated Other Comprehensive Income
Balance as of December 31, 2016
$
(1,995)
 
$
541
 
$
744
 
$
5,671
 
$
4,961
Other comprehensive income
   (loss) before reclassifications
 
366
   
33
   
13
   
-
   
412
Amounts reclassified
   from accumulated OCI
 
-
1
 
 
5
1
 
 
10
2
 
 
(228)
3
 
 
(213)
Net other comprehensive
   income (loss)
 
366
   
38
   
23
   
(228)
   
199
Balance as of March 31, 2017
$
(1,629)
 
$
579
 
$
767
 
$
5,443
 
$
5,160
                               
 
Foreign Currency Translation Adjustment
 
Net Unrealized Gains (Losses) on Available-for-Sale Securities
 
Net Unrealized Gains (Losses) on Cash Flow Hedges
 
Defined Benefit Postretirement Plans
 
Accumulated Other Comprehensive Income
Balance as of December 31, 2015
$
(1,198)
 
$
484
 
$
16
 
$
6,032
 
$
5,334
Other comprehensive income
   (loss) before reclassifications
 
(44)
   
(26)
   
124
   
-
   
54
Amounts reclassified
   from accumulated OCI
 
-
1
 
 
(3)
1
 
 
10
2
 
 
(215)
3
 
 
(208)
Net other comprehensive
   income (loss)
 
(44)
   
(29)
   
134
   
(215)
   
(154)
Balance as of March 31, 2016
$
(1,242)
 
$
455
 
$
150
 
$
5,817
 
$
5,180
 1 
 (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
 2 
 (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
 3 
 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction
 
 labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income
 
 (see Note 5).
 
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 four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

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.
 
9

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete 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. We utilize our copper and IP-based wired network and/or our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our network to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.

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.

In reconciling items to consolidated operating income and income before income taxes, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.

Certain operating items are not allocated to our business segments, and those include:
·
Acquisition-related items which consists of (1) items associated with the merger and integration of acquired businesses and (2) the noncash amortization of intangible assets acquired in acquisitions.
·
Certain significant items which consists of (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3) losses resulting from abandonment or impairment of assets and (4) other items for which the segments are not being evaluated.

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

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as our satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and, therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.

10

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
For the three months ended March 31, 2017
 
   
Revenues
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
 
Business Solutions
 
$
16,848
   
$
10,176
   
$
6,672
   
$
2,312
   
$
4,360
   
$
-
   
$
4,360
 
Entertainment Group
   
12,623
     
9,601
     
3,022
     
1,419
     
1,603
     
(6
)
   
1,597
 
Consumer Mobility
   
7,740
     
4,528
     
3,212
     
873
     
2,339
     
-
     
2,339
 
International
   
1,929
     
1,759
     
170
     
290
     
(120
)
   
20
     
(100
)
Segment Total
   
39,140
     
26,064
     
13,076
     
4,894
     
8,182
   
$
14
   
$
8,196
 
Corporate and Other
   
225
     
221
     
4
     
31
     
(27
)
               
Acquisition-related items
   
-
     
207
     
(207
)
   
1,202
     
(1,409
)
               
Certain significant items
   
-
     
(118
)
   
118
     
-
     
118
                 
AT&T Inc.
 
$
39,365
   
$
26,374
   
$
12,991
   
$
6,127
   
$
6,864
                 

For the three months ended March 31, 2016
 
   
Revenues
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
 
Business Solutions
 
$
17,609
   
$
10,802
   
$
6,807
   
$
2,508
   
$
4,299
   
$
-
   
$
4,299
 
Entertainment Group
   
12,658
     
9,578
     
3,080
     
1,488
     
1,592
     
3
     
1,595
 
Consumer Mobility
   
8,328
     
4,912
     
3,416
     
922
     
2,494
     
-
     
2,494
 
International
   
1,667
     
1,588
     
79
     
277
     
(198
)
   
14
     
(184
)
Segment Total
   
40,262
     
26,880
     
13,382
     
5,195
     
8,187
   
$
17
   
$
8,204
 
Corporate and Other
   
273
     
377
     
(104
)
   
17
     
(121
)
               
Acquisition-related items
   
-
     
295
     
(295
)
   
1,351
     
(1,646
)
               
Certain significant items
   
-
     
(711
)
   
711
     
-
     
711
                 
AT&T Inc.
 
$
40,535
   
$
26,841
   
$
13,694
   
$
6,563
   
$
7,131
                 
 
11

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income.
 
             
   
First Quarter
 
   
2017
   
2016
 
Business Solutions
 
$
4,360
   
$
4,299
 
Entertainment Group
   
1,597
     
1,595
 
Consumer Mobility
   
2,339
     
2,494
 
International
   
(100
)
   
(184
)
Segment Contribution
   
8,196
     
8,204
 
Reconciling Items:
               
  Corporate and Other
   
(27
)
   
(121
)
  Merger and integration charges
   
(207
)
   
(295
)
  Amortization of intangibles acquired
   
(1,202
)
   
(1,351
)
  Employee separation costs
   
-
     
(25
)
  Gain on wireless spectrum transactions
   
118
     
736
 
  Segment equity in net (income) loss of affiliates
   
(14
)
   
(17
)
AT&T Operating Income
   
6,864
     
7,131
 
Interest expense
   
1,293
     
1,207
 
Equity in net income (loss) of affiliates
   
(173
)
   
13
 
Other income (expense) - net
   
(20
)
   
70
 
Income Before Income Taxes
 
$
5,378
   
$
6,007
 
 
NOTE 5. 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 $8,426 at March 31, 2017. 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 $140 to the trust during the three months ended March 31, 2017. 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 operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included with Corporate and Other (see Note 4).
 
12

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
   
Three months ended
 
   
March 31,
 
   
2017
   
2016
 
Pension cost:
           
   Service cost – benefits earned during the period
 
$
282
   
$
278
 
   Interest cost on projected benefit obligation
   
484
     
495
 
   Expected return on assets
   
(783
)
   
(778
)
   Amortization of prior service credit
   
(31
)
   
(26
)
   Net pension (credit) cost
 
$
(48
)
 
$
(31
)
                 
Postretirement cost:
               
   Service cost – benefits earned during the period
 
$
41
   
$
48
 
   Interest cost on accumulated postretirement benefit obligation
   
222
     
243
 
   Expected return on assets
   
(80
)
   
(89
)
   Amortization of prior service credit
   
(336
)
   
(319
)
   Net postretirement (credit) cost
 
$
(153
)
 
$
(117
)
                 
   Combined net pension and postretirement (credit) cost
 
$
(201
)
 
$
(148
)

The decrease in the combined net pension and postretirement costs in the first quarter reflects higher amortization of prior service credits due to plan changes, including changes to future costs for continued retiree healthcare coverage. The reduction also reflects decreasing corporate bond rates, which contributed to lower interest costs.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended 2017 and 2016, net supplemental pension benefits costs not included in the table above were $22 and $23.

NOTE 6. 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.
 
13

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2016.

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:

 
March 31, 2017
 
December 31, 2016
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Notes and debentures 1
 
$
132,379
   
$
138,944
   
$
122,381
   
$
128,726
 
Bank borrowings
   
3
     
3
     
4
     
4
 
Investment securities
   
2,640
     
2,640
     
2,587
     
2,587
 
1 Includes credit agreement borrowings.
                               

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 available-for-sale securities and derivatives as of March 31, 2017 and December 31, 2016:

   
March 31, 2017
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-Sale Securities
                       
   Domestic equities
 
$
1,253
   
$
-
   
$
-
   
$
1,253
 
   International equities
   
639
     
-
     
-
     
639
 
   Fixed income bonds
   
-
     
501
     
-
     
501
 
Asset Derivatives1
                               
   Interest rate swaps
   
-
     
62
     
-
     
62
 
   Cross-currency swaps
   
-
     
235
     
-
     
235
 
Liability Derivatives1
                               
   Interest rate swaps
   
-
     
(20
)
   
-
     
(20
)
   Cross-currency swaps
   
-
     
(3,635
)
   
-
     
(3,635
)
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.  
 
14

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
   
December 31, 2016
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Available-for-Sale Securities
                       
   Domestic equities
 
$
1,215
   
$
-
   
$
-
   
$
1,215
 
   International equities
   
594
     
-
     
-
     
594
 
   Fixed income bonds
   
-
     
508
     
-
     
508
 
Asset Derivatives1
                               
   Interest rate swaps
   
-
     
79
     
-
     
79
 
   Cross-currency swaps
   
-
     
89
     
-
     
89
 
Liability Derivatives1
                               
   Interest rate swaps
   
-
     
(14
)
   
-
     
(14
)
   Cross-currency swaps
   
-
     
(3,867
)
   
-
     
(3,867
)
Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.  

Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $236 have maturities of less than one year, $58 within one to three years, $47 within three to five years and $160 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 three months ended March 31, 2017 and March 31, 2016, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
15

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
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 three months ended March 31, 2017 and March 31, 2016, 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 $59 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 three months ended March 31, 2017 and March 31, 2016, 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 March 31, 2017, we had posted collateral of $2,846 (a deposit asset) and held no collateral. Under the agreements, if AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to post additional collateral of $123. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P), we would have been required to post additional collateral of $246. At December 31, 2016, we had posted collateral of $3,242 (a deposit asset) and held no collateral. 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:

 
March 31,
 
December 31,
 
 
2017
 
2016
 
Interest rate swaps
 
$
10,450
   
$
9,650
 
Cross-currency swaps
   
29,642
     
29,642
 
Total
 
$
40,092
   
$
39,292
 
 
16

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Following are the related hedged items affecting our financial position and performance:
 
             
Effect of Derivatives on the Consolidated Statements of Income
           
Fair Value Hedging Relationships
Three months ended
 
March 31,
 
2017
 
2016
 
Interest rate swaps (Interest expense):
           
     Gain (Loss) on interest rate swaps
 
$
(25
)
 
$
66
 
     Gain (Loss) on long-term debt
   
25
     
(66
)

In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were offset against interest expense.

Three months ended
 
March 31,
 
Cash Flow Hedging Relationships
2017
 
2016
 
Cross-currency swaps:
           
     Gain (Loss) recognized in accumulated OCI
 
$
20
   
$
191
 
Interest rate locks:
               
     Interest income (expense) reclassified from accumulated OCI into income
   
(15
)
   
(15
)

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Subsequent and Pending Acquisitions
Time Warner Inc.  On October 22, 2016, we entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at December 31, 2016, the total transaction value is approximately $108,200. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash.

Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world's largest pay-TV subscriber bases and leading scale in TV, mobile and broadband distribution.

The Merger Agreement was approved by Time Warner shareholders on February 15, 2017 and remains subject to review by the U.S. Department of Justice. The Federal Communications Commission (FCC) has stated that it does not believe it will need to review the deal as no licenses are involved. It is also a condition to closing that necessary consents from foreign governmental entities must be obtained. The transaction is expected to close before year-end 2017. If the Merger is terminated as a result of reaching the termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would be obligated to pay Time Warner $500.
 
17

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Auction 1000 On April 13, 2017, the FCC announced that we were the successful bidder for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017.

Other Events
FirstNet  On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.
 
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of March 31, 2017 and December 31, 2016, gross equipment installment receivables of $4,119 and $5,665 were included on our consolidated balance sheets, of which $2,346 and $3,425 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 transferred certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. Since inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $3,740.

The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31, 2017 and 2016:

 
Three months ended
 
 
March 31,
 
 
2017
 
2016
 
Gross receivables sold
 
$
2,846
   
$
2,482
 
Net receivables sold 1
   
2,621
     
2,256
 
Cash proceeds received
   
1,432
     
1,521
 
Deferred purchase price recorded
   
1,189
     
719
 
1 Receivables net of allowance, imputed interest and trade-in right guarantees. 

The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the lower of cost or net realizable value. 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 are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
 
18

AT&T INC.
MARCH 31, 2017
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price during the three months ended March 31, 2017 and 2016:

 
Three months ended
 
 
March 31,
 
 
2017
 
2016
 
Fair value of repurchased receivables
 
$
377
   
$
532
 
Carrying value of deferred purchase price
   
339
     
539
 
Gain (loss) on repurchases 1
 
$
38
   
$
(7
)
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income. 

At March 31, 2017 and December 31, 2016, our deferred purchase price receivable was $3,813 and $3,090, respectively, of which $2,049 and $1,606 are included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.

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 the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.

Derecognized Installment Receivables
The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no longer considered our assets.

   
2017
 
Outstanding derecognized receivables at January 1,
 
$
7,232
 
Gross receivables sold
   
2,846
 
Collections on cash purchase price
   
(1,128
)
Collections on deferred purchase price
   
(185
)
Fees
   
(23
)
Trade ins and other
   
(73
)
Fair value of repurchased receivables
   
(377
)
Outstanding derecognized receivables at March 31,
 
$
8,292
 
 
19

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
 
RESULTS OF OPERATIONS

AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements.

Consolidated Results  Our financial results in the first quarter of 2017 and 2016 are summarized as follows:

   
First Quarter
 
   
2017
   
2016
   
Percent Change
 
 
Operating Revenues
                 
   Service
 
$
36,456
   
$
37,101
     
(1.7
)%
   Equipment
   
2,909
     
3,434
     
(15.3
)
Total Operating Revenues
   
39,365
     
40,535
     
(2.9
)
                         
Operating expenses
                       
   Cost of services and sales
                       
      Equipment
   
3,848
     
4,375
     
(12.0
)
      Broadcast, programming and operations
   
4,974
     
4,629
     
7.5
 
      Other cost of services
   
9,065
     
9,396
     
(3.5
)
   Selling, general and administrative
   
8,487
     
8,441
     
0.5
 
   Depreciation and amortization
   
6,127
     
6,563
     
(6.6
)
Total Operating Expenses
   
32,501
     
33,404
     
(2.7
)
Operating Income
   
6,864
     
7,131
     
(3.7
)
Income Before Income Taxes
   
5,378
     
6,007
     
(10.5
)
Net Income
   
3,574
     
3,885
     
(8.0
)
Net Income Attributable to AT&T
 
$
3,469
   
$
3,803
     
(8.8
)%

Overview

Operating revenues decreased $1,170, or 2.9%, in the first quarter of 2017.
Service revenues decreased $645, or 1.7%, in the first quarter of 2017. The decrease was primarily due to continued declines in legacy wireline voice and data products and lower wireless service revenues reflecting adoption of unlimited and Mobile Share plans. These were partially offset by increased revenues from video and strategic business services.

Equipment revenues decreased $525, or 15.3%, in the first quarter of 2017. The decrease was primarily due to lower wireless handset sales, driven by a low rate of customer device upgrades and strong Bring Your Own Device (BYOD) participation. Equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.

Operating expenses decreased $903, or 2.7%, in the first quarter of 2017.
Equipment expenses decreased $527, or 12.0%, in the first quarter of 2017. The decrease was driven by a decline in devices sold reflecting a change in customer buying habits.

Broadcast, programming and operations expenses increased $345, or 7.5%, in the first quarter of 2017, reflecting annual content cost increases.
 
20

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Other cost of services expenses decreased $331, or 3.5%, in the first quarter of 2017. The decrease reflects our continued cost structure management and utilizing automation and digitalization where appropriate. Federal Universal Service Fund (USF) rates and fees were also lower when compared to the prior year. These expense declines were partially offset by higher handset insurance costs.

Selling, general and administrative expenses increased $46, or 0.5%, in the first quarter of 2017. Expenses include an increase of approximately $618 resulting from lower gains on wireless spectrum transactions in the first quarter of 2017 than in the comparable period of 2016. Offsetting this increase were lower advertising costs, decreased expenses for merger and integration-related activities and reductions from our disciplined cost management.

Depreciation and amortization expense decreased $436, or 6.6%, in the first quarter of 2017. Depreciation expense decreased $288, or 5.5%, in the first quarter. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease. This decrease was partially offset by increases resulting from ongoing capital spending for upgrades and expansion.

Amortization expense decreased $148, or 11.0%, in the first quarter of 2017 due to lower amortization of intangibles for the customer lists associated with acquisitions.

Operating income decreased $267, or 3.7%, for the first quarter of 2017. Our operating income margin in the first quarter decreased from 17.6% in 2016 to 17.4% in 2017.

Interest expense increased $86, or 7.1%, in the first quarter of 2017. The increases were primarily due to higher average rates and debt balances when compared to the prior year.

Equity in net income of affiliates decreased $186 in the first quarter of 2017, predominantly from losses from our legacy publishing business, partially offset by income from our investments in video-related businesses.

Other income (expense) – net We had other expense of $20 in the first quarter of 2017 and other income of $70 in the first quarter of 2016. Results in the first quarter of 2017 included net losses on the sale of non-strategic assets and investments of $61 and interest and dividend income of $30.

Other income (expense) in the first quarter of 2016 included net gains on the sale of non-strategic assets and investments of $44 and interest and dividend income of $29.

Income taxes decreased $318, or 15.0%, in the first quarter of 2017. Our effective tax rate was 33.5% for the first quarter of 2017, as compared to 35.3% for the first quarter of 2016. The decrease in income tax expense and our effective tax rate for the first quarter of 2017 was primarily due to lower income before income taxes in 2017 and the recognition of tax benefits related to the restructuring of a portion of our wireless business.
 
21

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
 
Selected Financial and Operating Data
           
   
March 31,
 
Subscribers and connections in (000s)
 
2017
   
2016
 
Domestic wireless subscribers
   
134,218
     
130,445
 
Mexican wireless subscribers
   
12,606
     
9,213
 
North American wireless subscribers
   
146,824
     
139,658
 
                 
North American branded subscribers
   
103,532
     
98,158
 
North American branded net additions
   
738
     
1,195
 
                 
Domestic satellite video subscribers
   
21,012
     
20,112
 
AT&T U-verse® (U-verse) video subscribers
   
4,048
     
5,260
 
Latin America satellite video subscribers 1
   
13,678
     
12,436
 
Total video subscribers
   
38,738
     
37,808
 
                 
Total domestic broadband connections
   
15,695
     
15,764
 
                 
Network access lines in service
   
13,363
     
15,975
 
U-verse VoIP connections
   
5,858
     
5,484
 
                 
Debt ratio 2
   
51.6
%
   
51.2
%
Net debt ratio 3
   
45.8
%
   
47.3
%
Ratio of earnings to fixed charges 4
   
3.80
     
4.22
 
Number of AT&T employees
   
264,530
     
280,870
 
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At December 31, 2016, SKY Mexico had 8.0 million subscribers.
2 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.
3 Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.

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 four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

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.
 
22

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts

The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our wireless and wired networks to provide a complete integrated communications solution to our business customers.
 
The 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. We utilize our copper and IP-based wired network and/or our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including high-speed internet, video and home monitoring services over wireless devices.

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by segment, and therefore asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.

Business Solutions
                 
Segment Results
                 
   
First Quarter
 
   
2017
   
2016
   
Percent Change
 
 
Segment operating revenues
                 
     Wireless service
 
$
7,929
   
$
7,855
     
0.9
%
     Fixed strategic services
   
2,974
     
2,751
     
8.1
 
     Legacy voice and data services
   
3,630
     
4,373
     
(17.0
)
     Other service and equipment
   
817
     
859
     
(4.9
)
     Wireless equipment
   
1,498
     
1,771
     
(15.4
)
Total Segment Operating Revenues
   
16,848
     
17,609
     
(4.3
)
                         
Segment operating expenses
                       
     Operations and support
   
10,176
     
10,802
     
(5.8
)
     Depreciation and amortization
   
2,312
     
2,508
     
(7.8
)
Total Segment Operating Expenses
   
12,488
     
13,310
     
(6.2
)
Segment Operating Income
   
4,360
     
4,299
     
1.4
 
Equity in Net Income of Affiliates
   
-
     
-
     
-
 
Segment Contribution
 
$
4,360
   
$
4,299
     
1.4
%
 
23

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
The following tables highlight other key measures of performance for the Business Solutions segment:

   
March 31,
   
 
 
(in 000s)
 
2017
   
2016
   
Percent Change
 
Business Wireless Subscribers
                 
   Postpaid/Branded
   
50,839
     
48,844
     
4.1
%
   Reseller
   
76
     
64
     
18.8
 
   Connected devices 1
   
31,439
     
26,863
     
17.0
 
Total Business Wireless Subscribers
   
82,354
     
75,771
     
8.7
 
                         
Business IP Broadband Connections
   
980
     
928
     
5.6
%
Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 

   
First Quarter
 
   
2017
   
2016
 
 
 
(in 000s)
Percent Change
 
                 
Business Wireless Net Additions 1, 4
               
   Postpaid/Branded
   
(125
)
   
133
     
-
%
   Reseller
   
6
     
(22
)
   
-
 
   Connected devices 2
   
2,553
     
1,578
     
61.8
 
Business Wireless Net Subscriber Additions
   
2,434
     
1,689
     
44.1
 
                         
Business Wireless Postpaid Churn 1, 3, 4
   
1.07
%
   
1.02
%
5 BP
 
                         
Business IP Broadband Net Additions
   
4
     
17
     
(76.5
)%
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period. 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.  
4 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.
 

Operating Revenues decreased $761, or 4.3%, in the first quarter of 2017. Revenue declines reflect technological shifts away from legacy products, as well as decreasing wireless equipment revenues resulting from changes in customer buying habits. Our second-quarter 2016 sale of certain hosting operations also negatively impacted revenue comparability. These decreases were partially offset by continued growth in wireless services and fixed strategic services, which represent 40% of non-wireless revenues.

Wireless service revenues increased $74, or 0.9%, in the first quarter of 2017. The revenue increase is primarily due to the migration of customers from our Consumer Mobility segment.

At March 31, 2017, we served 82.4 million subscribers, an increase of 8.7% from the prior year. Postpaid subscribers increased 4.1% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 17.0% from the prior year reflecting growth in our connected car business and other data centric devices that utilize the network to connect and control physical devices using embedded computing systems and/or software, commonly called the Internet of Things (IoT).
 
24

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the first quarter, business wireless postpaid churn increased to 1.07% in 2017 from 1.02% in 2016.

Fixed strategic services revenues increased $223, or 8.1%, in the first quarter of 2017. Our revenues increased in the first quarter of 2017 primarily due to: Ethernet of $73; Dedicated Internet services of $59; IP Broadband, Voice, and Video of $44; and VoIP of $43.

Legacy wired voice and data service revenues decreased $743, or 17.0%, in the first quarter of 2017. Legacy voice billings in the first quarter of 2017 decreased $402 and traditional data billings decreased $341. The decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or to competitors, and the sale of certain hosting operations in 2016.

Wireless equipment revenues decreased $273, or 15.4%, in the first quarter of 2017. The decrease in the first quarter was primarily due to decreases in handset upgrades.

Operations and support expenses decreased $626, or 5.8%, in the first quarter of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

Decreased operations and support expenses in the first quarter were primarily due to lower wireless equipment sales and upgrade transactions, which decreased equipment costs $248, and efforts to automate and digitize our support activities, which improved results approximately $170. Expense reductions also reflect lower USF rates, contributing to a $77 reduction in USF fees, and fewer traffic compensation and wireless interconnect costs, resulting in a $51 decline in access and interconnect costs.

Depreciation expense decreased $196, or 7.8%, in the first quarter of 2017. The decreases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income increased $61, or 1.4%, in the first quarter of 2017. Our Business Solutions segment operating income margin in the first quarter increased from 24.4% in 2016 to 25.9% in 2017. Our Business Solutions EBITDA margin in the first quarter increased from 38.7% in 2016 to 39.6% in 2017.
25

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Entertainment Group
 
Segment Results
                 
   
First Quarter
 
   
2017
   
2016
   
Percent Change
 
 
Segment operating revenues
                 
     Video entertainment
 
$
9,020
   
$
8,904
     
1.3
%
     High-speed internet
   
1,941
     
1,803
     
7.7
 
     Legacy voice and data services
   
1,056
     
1,313
     
(19.6
)
     Other service and equipment
   
606
     
638
     
(5.0
)
Total Segment Operating Revenues
   
12,623
     
12,658
     
(0.3
)
                         
Segment operating expenses
                       
     Operations and support
   
9,601
     
9,578
     
0.2
 
     Depreciation and amortization
   
1,419
     
1,488
     
(4.6
)
Total Segment Operating Expenses
   
11,020
     
11,066
     
(0.4
)
Segment Operating Income
   
1,603
     
1,592
     
0.7
 
Equity in Net Income (Loss) of Affiliates
   
(6
)
   
3
     
-
 
Segment Contribution
 
$
1,597
   
$
1,595
     
0.1
%

The following tables highlight other key measures of performance for the Entertainment Group segment:

   
March 31,
     
(in 000s)
 
2017
   
2016
   
Percent Change
 
Linear Video Connections
                 
   Satellite
   
21,012
     
20,112
     
4.5
%
   U-verse
   
4,020
     
5,232
     
(23.2
)
Total Linear Video Connections
   
25,032
     
25,344
     
(1.2
)
                         
Broadband Connections
                       
   IP
   
13,130
     
12,542
     
4.7
 
   DSL
   
1,164
     
1,749
     
(33.4
)
Total Broadband Connections
   
14,294
     
14,291
     
-
 
                         
Retail Consumer Switched Access Lines
   
5,533
     
6,888
     
(19.7
)
U-verse Consumer VoIP Connections
   
5,470
     
5,225
     
4.7
 
Total Retail Consumer Voice Connections
   
11,003
     
12,113
     
(9.2
)%
 
26

 
AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
   
First Quarter
 
   
2017
   
2016
   
Percent Change
 
(in 000s)
Linear Video Net Additions 1
                 
   Satellite
   
-
     
328
     
-
%
   U-verse
   
(233
)
   
(382
)
   
39.0
 
Linear Net Video Additions
   
(233
)
   
(54
)
   
-
 
                         
Broadband Net Additions
                       
   IP
   
242
     
186
     
30.1
 
   DSL
   
(127
)
   
(181
)
   
29.8
 
Net Broadband Additions
   
115
     
5
     
-
%
1 Includes disconnections for customers that migrated to DIRECTV NOW. 

Operating revenues decreased $35, or 0.3%, in the first quarter of 2017, largely due to lower revenues from legacy voice and data products, substantially offset by growth in revenues from consumer IP broadband and satellite video services.

As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite and U-verse subscribers. In November 2016, we launched DIRECTV NOW, our newest video streaming option that does not require either satellite or U-verse service (commonly called over-the-top video service).

Video entertainment revenues increased $116, or 1.3%, in the first quarter of 2017, primarily due to a 1.8% increase in average revenue per linear video connection. Our continued focus on satellite service and the lower marginal content costs associated with those subscribers contributed to increased video revenue. However, this strategy contributed to lower U-verse video revenue and connections. More than 80% of our linear video subscribers are on the DIRECTV platform. Our decline in linear video connections for the first quarter of 2017 reflects, in part, the migration of satellite customers to DIRECTV NOW. Churn rose for subscribers with linear video only service, partially reflecting annual content cost increases.

High-speed internet revenues increased $138, or 7.7%, in the first quarter of 2017. When compared to 2016, IP broadband subscribers increased 4.7%, to 13.1 million subscribers at March 31, 2017, reflecting higher IP broadband net additions. Also contributing to higher revenues was a 3.3% increase in average revenue per IP broadband connection.

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 in those areas.

Legacy voice and data service revenues decreased $257, or 19.6%, in the first quarter of 2017. For the quarter ended March 31, 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 10% at March 31, 2016, and reflect decreases of $174 in local voice and long-distance, and $83 in traditional data billings. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At March 31, 2017, approximately 8% of our broadband connections were DSL compared to 12% at March 31, 2016.

Operations and support expenses increased $23, or 0.2%, in the first quarter of 2017. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, which include costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.

Increased operations and support expenses were primarily due to annual content cost increases and the impact of storms and flooding on the West Coast in 2017. Partially offsetting these increases was the impact of our ongoing focus on cost efficiencies and merger synergies, lower employee-related expenses resulting from workforce reductions and lower advertising costs.
27

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
Depreciation expense decreased $69, or 4.6%, in the first quarter of 2017. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated assets. These decreases were offset by ongoing capital spending for network upgrades and expansion.

Operating income increased $11, or 0.7%, in the first quarter of 2017. Our Entertainment Group segment operating income margin in the first quarter increased from 12.6% in 2016 to 12.7% in 2017. Our Entertainment Group segment EBITDA margin in the first quarter decreased from 24.3% in 2016 to 23.9% in 2017.
 
Consumer Mobility
                 
Segment Results
                 
   
First Quarter
 
   
2017
   
2016
   
Percent Change
 
 
Segment operating revenues
                 
     Service
 
$
6,609
   
$
6,943
     
(4.8
)%
     Equipment
   
1,131
     
1,385
     
(18.3
)
Total Segment Operating Revenues
   
7,740
     
8,328
     
(7.1
)
                         
Segment operating expenses
                       
     Operations and support
   
4,528
     
4,912
     
(7.8
)
     Depreciation and amortization
   
873
     
922
     
(5.3
)
Total Segment Operating Expenses
   
5,401
     
5,834
     
(7.4
)
Segment Operating Income
   
2,339
     
2,494
     
(6.2
)
Equity in Net Income of Affiliates
   
-
     
-
     
-
 
Segment Contribution
 
$
2,339
   
$
2,494
     
(6.2
)%

The following tables highlight other key measures of performance for the Consumer Mobility segment:
 
                   
   
March 31,
   
 
 
(in 000s)
 
2017
   
2016
   
Percent Change
 
Consumer Mobility Subscribers
                 
   Postpaid
   
26,510
     
28,294
     
(6.3
)%
   Prepaid
   
13,844
     
12,171
     
13.7
 
Branded
   
40,354
     
40,465
     
(0.3
)
Reseller
   
10,549
     
13,313
     
(20.8
)
Connected devices 1
   
961
     
896
     
7.3
 
Total Consumer Mobility Subscribers
   
51,864
     
54,674
     
(5.1
)%
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets. 
 
28

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
   
First Quarter
 
   
2017
   
2016
 
Percent Change
 
(in 000s)
Consumer Mobility Net Additions 1, 4
               
   Postpaid
   
(66
)
   
(4
)
   
-
%
   Prepaid
   
282
     
500
     
(43.6
)
Branded Net Additions
   
216
     
496
     
(56.5
)
Reseller
   
(588
)
   
(378
)
   
(55.6
)
Connected devices 2
   
19
     
(26
)
   
-
 
Consumer Mobility Net Subscriber Additions
   
(353
)
   
92
     
-
%
                         
Total Churn 1, 3, 4
   
2.42
%
   
2.11
%
31 BP
 
Postpaid Churn 1, 3, 4
   
1.22
%
   
1.24
%
(2) BP
 
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period.
 
4 2017 excludes the impact of the 2G shutdown and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.
 

Operating Revenues decreased $588, or 7.1%, in the first quarter of 2017. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited and Mobile Share plans, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.

Service revenue decreased $334, or 4.8%, in the first quarter of 2017. The decrease was largely due to the migration of subscribers to Business Solutions and postpaid customers continuing to shift to discounted monthly service charges under our unlimited and Mobile Share plans. Revenues from postpaid customers declined $507, or 9.9%, in the first quarter of 2017. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 5.4%. The decreases were partially offset by higher prepaid service revenues of $239, or 18.4%, primarily from growth in Cricket subscribers.

Equipment revenue decreased $254, or 18.3%, in the first quarter of 2017. The decrease in equipment revenues resulted from lower handset sales and upgrades. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.

Operations and support expenses decreased $384, or 7.8%, in the first quarter of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

Decreased operations and support expenses were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment costs $257. Also contributing to the declines were increased operational efficiencies and lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising.

Depreciation expense decreased $49, or 5.3%, in the first quarter of 2017. The decrease was primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.
 
Operating income decreased $155, or 6.2%, in the first quarter of 2017. Our Consumer Mobility segment operating income margin in the first quarter increased from 29.9% in 2016 to 30.2% in 2017. Our Consumer Mobility EBITDA margin in the first quarter increased from 41.0% in 2016 to 41.5% in 2017.
 
29

AT&T INC.
MARCH 31, 2017
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
 
International
                 
Segment Results