10-Q 1 q3_10q.htm AT&T INC. FORM 10-Q
 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

  

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

or

 

 

 

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

For the transition period from    to

 

Commission File 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

[   ]

 

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 October 31, 2018, there were 7,278 million common shares outstanding.

 

 


 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

 

AT&T INC.

CONSOLIDATED STATEMENTS OF INCOME

Dollars in millions except per share amounts

(Unaudited)

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

As Adjusted

 

 

 

 

As Adjusted

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

Service

$

41,297

 

$

36,378

 

$

109,849

 

$

109,372

Equipment

 

4,442

 

 

3,290

 

 

12,914

 

 

9,498

Total operating revenues

 

45,739

 

 

39,668

 

 

122,763

 

 

118,870

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

   Equipment

 

4,828

 

 

4,191

 

 

14,053

 

 

12,177

   Broadcast, programming and operations

 

7,227

 

 

5,284

 

 

17,842

 

 

15,156

   Other cost of revenues (exclusive of depreciation and

         amortization shown separately below)

 

8,651

 

 

9,694

 

 

24,215

 

 

28,551

Selling, general and administrative

 

9,598

 

 

8,650

 

 

26,179

 

 

25,981

Depreciation and amortization

 

8,166

 

 

6,042

 

 

20,538

 

 

18,316

Total operating expenses

 

38,470

 

 

33,861

 

 

102,827

 

 

100,181

Operating Income

 

7,269

 

 

5,807

 

 

19,936

 

 

18,689

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,051)

 

 

(1,686)

 

 

(5,845)

 

 

(4,374)

Equity in net income (loss) of affiliates

 

(64)

 

 

11

 

 

(71)

 

 

(148)

Other income (expense) – net

 

1,053

 

 

842

 

 

5,108

 

 

2,255

Total other income (expense)

 

(1,062)

 

 

(833)

 

 

(808)

 

 

(2,267)

Income Before Income Taxes

 

6,207

 

 

4,974

 

 

19,128

 

 

16,422

Income tax expense

 

1,391

 

 

1,851

 

 

4,305

 

 

5,711

Net Income

 

4,816

 

 

3,123

 

 

14,823

 

 

10,711

Less: Net Income Attributable to Noncontrolling Interest

 

(98)

 

 

(94)

 

 

(311)

 

 

(298)

Net Income Attributable to AT&T

$

4,718

 

$

3,029

 

$

14,512

 

$

10,413

Basic Earnings Per Share Attributable to AT&T

$

0.65

 

$

0.49

 

$

2.19

 

$

1.69

Diluted Earnings Per Share Attributable to AT&T

$

0.65

 

$

0.49

 

$

2.19

 

$

1.69

Weighted Average Number of Common Shares

   Outstanding – Basic (in millions)

 

7,284

 

 

6,162

 

 

6,603

 

 

6,164

Weighted Average Number of Common Shares

   Outstanding –  with Dilution (in millions)

 

7,320

 

 

6,182

 

 

6,630

 

 

6,184

Dividends Declared Per Common Share

$

0.50

 

$

0.49

 

$

1.50

 

$

1.47

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

2


 

AT&T INC.

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

Dollars in millions

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

Net income

$

4,816

 

$

3,123

 

$

14,823

 

$

10,711

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

    Foreign currency:

 

 

 

 

 

 

 

 

 

 

 

        Translation adjustment (includes $(7), $10, $(37) and $6

            attributable to noncontrolling interest), net of taxes of

            $(2), $74, $(145) and $580

 

(14)

 

 

151

 

 

(824)

 

 

490

    Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

        Net unrealized gains (losses), net of taxes of $(4), $28, $(8)

            and $72

 

(10)

 

 

45

 

 

(22)

 

 

128

        Reclassification adjustment included in net income, net of

            taxes of $0, $(50), $0 and $(54)

 

-

 

 

(79)

 

 

-

 

 

(86)

     Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

        Net unrealized gains (losses), net of taxes of $0, $178,

            $68 and $(94)

 

4

 

 

330

 

 

257

 

 

(174)

        Reclassification adjustment included in net income, net of

            taxes of $3, $5, $9 and $15

 

12

 

 

10

 

 

35

 

 

29

     Defined benefit postretirement plans:

 

 

 

 

 

 

 

 

 

 

 

        Net prior service (cost) credit arising during period, net of

            taxes of $0, $0, $173 and $594

 

-

 

 

-

 

 

530

 

 

969

        Amortization of net prior service credit included in net

            income, net of taxes of $(108), $(157), $(322) and $(447)

 

(332)

 

 

(256)

 

 

(989)

 

 

(731)

Other comprehensive income (loss)

 

(340)

 

 

201

 

 

(1,013)

 

 

625

Total comprehensive income

 

4,476

 

 

3,324

 

 

13,810

 

 

11,336

Less: Total comprehensive income attributable to

            noncontrolling interest

 

(91)

 

 

(104)

 

 

(274)

 

 

(304)

Total Comprehensive Income Attributable to AT&T

$

4,385

 

$

3,220

 

$

13,536

 

$

11,032

See Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

3


AT&T INC.

CONSOLIDATED BALANCE SHEETS

Dollars in millions except per share amounts

 

September 30,

 

December 31,

 

2018

 

2017

Assets

(Unaudited)

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

$

8,657

 

$

50,498

Accounts receivable - net of allowances for doubtful accounts of $845 and $663

 

26,312

 

 

16,522

Prepaid expenses

 

1,860

 

 

1,369

Other current assets

 

16,278

 

 

10,757

Total current assets

 

53,107

 

 

79,146

Noncurrent Inventories and Theatrical Film and Television Production Costs

 

7,221

 

 

-

Property, plant and equipment

 

327,680

  

 

313,499

   Less: accumulated depreciation and amortization

 

(197,332)

 

 

(188,277)

Property, Plant and Equipment – Net

 

130,348

 

 

125,222

Goodwill

 

146,475

 

 

105,449

Licenses

 

96,077

 

 

96,136

Trademarks and Trade Names – Net

 

24,389

 

 

7,021

Distribution Networks – Net

 

16,962

 

 

-

Other Intangible Assets – Net

 

28,673

 

 

11,119

Investments in and Advances to Equity Affiliates

 

6,128

 

 

1,560

Other Assets

 

25,490

 

 

18,444

Total Assets

$

534,870

 

$

444,097

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Debt maturing within one year

$

14,905

 

$

38,374

Accounts payable and accrued liabilities

 

39,375

 

 

34,470

Advanced billing and customer deposits

 

6,045

 

 

4,213

Accrued taxes

 

1,460

 

 

1,262

Dividends payable

 

3,635

 

 

3,070

Total current liabilities

 

65,420

 

 

81,389

Long-Term Debt

 

168,513

 

 

125,972

Deferred Credits and Other Noncurrent Liabilities

 

 

 

 

 

Deferred income taxes

 

60,495

 

 

43,207

Postemployment benefit obligation

 

28,981

 

 

31,775

Other noncurrent liabilities

 

26,490

 

 

19,747

Total deferred credits and other noncurrent liabilities

 

115,966

 

 

94,729

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2018 and

   December 31, 2017: issued 7,620,748,598 at September 30, 2018 and 6,495,231,088 at

   December 31, 2017)

 

7,621

 

 

6,495

Additional paid-in capital

 

125,706

 

 

89,563

Retained earnings

 

57,624

 

 

50,500

Treasury stock (350,465,537 at September 30, 2018 and 355,806,544

 

 

 

 

 

   at December 31, 2017, at cost)

 

(12,486)

 

 

(12,714)

Accumulated other comprehensive income

 

5,383

 

 

7,017

Noncontrolling interest

 

1,123

 

 

1,146

Total stockholders’ equity

 

184,971

 

 

142,007

Total Liabilities and Stockholders’ Equity

$

534,870

 

$

444,097

See Notes to Consolidated Financial Statements.

 

 

 

 

 

4


 

AT&T INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in millions

(Unaudited)

  

 

  

 

Nine months ended

 

September 30,

 

2018

 

2017

 

 

 

 

As Adjusted

Operating Activities

 

 

 

  

 

Net income

$

14,823

 

$

10,711

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

   Depreciation and amortization

 

20,538

 

 

18,316

   Amortization of television and film costs

 

1,608

 

 

-

   Undistributed earnings from investments in equity affiliates

 

312

 

 

171

   Provision for uncollectible accounts

 

1,240

 

 

1,216

   Deferred income tax expense

 

2,934

 

 

3,254

   Net (gain) loss from investments, net of impairments

 

(501)

 

 

(114)

   Actuarial (gain) loss on pension and postretirement benefits

 

(2,726)

 

 

(259)

Changes in operating assets and liabilities:

 

 

 

 

 

   Accounts receivable

 

(1,018)

 

 

(652)

   Other current assets, inventories and theatrical film and television production costs

 

(2,729)

 

 

(106)

   Accounts payable and other accrued liabilities

 

(1,385)

 

 

(1,437)

   Equipment installment receivables and related sales

 

220

 

 

451

   Deferred customer contract acquisition and fulfillment costs

 

(2,657)

 

 

(1,102)

Retirement benefit funding

 

(420)

 

 

(420)

Other net

 

1,283

 

 

(1,556)

Total adjustments

 

16,699

 

 

17,762

Net Cash Provided by Operating Activities

 

31,522

 

 

28,473

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

   Purchase of property and equipment

 

(16,695)

 

 

(15,756)

   Interest during construction

 

(404)

 

 

(718)

Acquisitions, net of cash acquired

 

(43,116)

 

 

1,154

Dispositions

 

983

 

 

56

(Purchases) sales of securities, net

 

(234)

 

 

235

Advances to and investments in equity affiliates, net

 

(1,021)

 

 

-

Cash collections of deferred purchase price

 

500

 

 

665

Net Cash Used in Investing Activities

 

(59,987)

 

 

(14,364)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in short-term borrowings with original maturities of three months or less

 

(1,071)

 

 

(2)

Issuance of other short-term borrowings

 

4,852

 

 

-

Repayment of other short-term borrowings

 

(1,075)

 

 

-

Issuance of long-term debt

 

38,325

 

 

46,761

Repayment of long-term debt

 

(43,579)

 

 

(10,309)

Purchase of treasury stock

 

(577)

 

 

(460)

Issuance of treasury stock

 

359

 

 

26

Dividends paid

 

(9,775)

 

 

(9,030)

Other

 

(1,138)

 

 

1,716

Net Cash (Used in) Provided by Financing Activities

 

(13,679)

 

 

28,702

Net (decrease) increase in cash and cash equivalents and restricted cash

 

(42,144)

 

 

42,811

Cash and cash equivalents and restricted cash beginning of year

 

50,932

 

 

5,935

Cash and Cash Equivalents and Restricted Cash End of Period

$

8,788

 

$

48,746

See Notes to Consolidated Financial Statements.

5


 

AT&T INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Dollars and shares in millions except per share amounts

(Unaudited)

 

September 30, 2018

 

Shares

 

Amount

Common Stock

 

 

 

 

Balance at beginning of year

6,495

 

$

6,495

Issuance of stock

1,126

 

 

1,126

Balance at end of period

7,621

 

$

7,621

 

 

 

 

 

Additional Paid-In Capital

 

 

 

 

Balance at beginning of year

 

 

$

89,563

Issuance of common stock

 

 

 

35,473

Issuance of treasury stock

 

 

 

(49)

Share-based payments

 

 

 

719

Balance at end of period

 

 

$

125,706

 

 

 

 

 

Retained Earnings

 

 

 

 

Balance at beginning of year

 

 

$

50,500

Net income attributable to AT&T ($2.19 per diluted share)

 

 

 

14,512

Dividends to stockholders ($1.50 per share)

 

 

 

(10,388)

Cumulative effect of accounting changes

 

 

 

3,000

Balance at end of period

 

 

$

57,624

 

 

 

 

 

Treasury Stock

 

 

 

 

Balance at beginning of year

(356)

 

$

(12,714)

Repurchase and acquisition of common stock

(19)

 

 

(641)

Issuance of treasury stock

24

 

 

869

Balance at end of period

(351)

 

$

(12,486)

 

 

 

 

 

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax

 

 

 

 

Balance at beginning of year

 

 

$

7,017

Other comprehensive income attributable to AT&T

 

 

 

(976)

Amounts reclassified to retained earnings

 

 

 

(658)

Balance at end of period

 

 

$

5,383

 

 

 

 

 

Noncontrolling Interest

 

 

 

 

Balance at beginning of year

 

 

$

1,146

Net income attributable to noncontrolling interest

 

 

 

311

Contributions

 

 

 

8

Distributions

 

 

 

(332)

Acquisition of noncontrolling interest

 

 

 

1

Acquisition of interest held by noncontrolling owners

 

 

 

(9)

Translation adjustments attributable to noncontrolling interest, net of taxes

 

 

 

(37)

Cumulative effect of accounting changes

 

 

 

35

Balance at end of period

 

 

$

1,123

 

 

 

 

 

Total Stockholders’ Equity at beginning of year

 

 

$

142,007

Total Stockholders’ Equity at end of period

 

 

$

184,971

See Notes to Consolidated Financial Statements.

 

6


AT&T INC.
SEPTEMBER 30, 2018

 

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2017. The results for the interim periods are not necessarily indicative of those for the full year.

 

In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

 

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 prior period amounts have been conformed to the current period’s presentation, including impacts for the adoption of recent accounting standards and changes in 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 nine 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, which had an impact on net income of $107, or $0.02 per diluted share, in the third quarter and $233, or $0.04 per diluted share, for the first nine months of 2018.

 

Film and Television Production Cost Recognition, Participations and Residuals and Impairments  Film and television production costs include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value. The amount of capitalized film and television production costs recognized as broadcast, programming and operations expenses for a given period is determined using the film forecast computation method. Under this method, the amortization of capitalized costs and the accrual of participations and residuals is based on the proportion of the film’s revenues recognized for such period to the film’s estimated remaining ultimate revenues (i.e., the total revenue to be received throughout a film’s life cycle).

 

7


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The process of estimating a film’s ultimate revenues requires us to make a series of significant judgments related to future revenue generating activities associated with a particular film. We estimate the ultimate revenues, less additional costs to be incurred (including exploitation and participation costs), in order to determine whether the value of a film or television series is impaired and requires an immediate write-off of unrecoverable film and television production costs. We also determine, using the film forecast computation method, the amount of capitalized film and television production costs and the amount of participations and residuals to be recognized as broadcast, programming and operations expenses for a given film or television series in a particular period. To the extent that the ultimate revenues are adjusted, the resulting gross margin reported on the exploitation of that film or television series in a period is also adjusted.

 

Prior to the theatrical release of a film, our estimates are based on factors such as the historical performance of similar films, the star power of the lead actors, the rating and genre of the film, pre-release market research (including test market screenings), international distribution plans and the expected number of theaters in which the film will be released. In the absence of revenues directly related to the exhibition of owned film or television programs on our television networks, premium pay television or over-the-top (OTT) services, management estimates a portion of the unamortized costs that are representative of the utilization of that film or television program in that exhibition and expenses such costs as the film or television program is exhibited. The period over which ultimate revenues are estimated is generally not to exceed ten years from the initial release of a motion picture or from the date of delivery of the first episode of an episodic television series. Estimates are updated based on information available during the film’s production and, upon release, the actual results of each film. Changes in estimates of ultimate revenues from period to period affect the amount of production costs amortized in a given period and, therefore, could have an impact on the financial results for that period.

 

Licensed Programming Inventory Cost Recognition and Impairment  We enter into agreements to license programming exhibition rights from licensors. A programming inventory asset related to these rights and a corresponding liability payable to the licensor are recorded (on a discounted basis if the license agreements are long-term) when (i) the cost of the programming is reasonably determined, (ii) the programming material has been accepted in accordance with the terms of the agreement, (iii) the programming is available for its first showing or telecast, and (iv) the license period has commenced. There are variations in the amortization methods of these rights, depending on whether the network is advertising-supported (e.g., TNT and TBS) or not advertising-supported (e.g., HBO and Turner Classic Movies).

 

For the advertising-supported networks, our general policy is to amortize each program’s costs on a straight-line basis (or per-play basis, if greater) over its license period. In circumstances where the initial airing of the program has more value than subsequent airings, an accelerated method of amortization is used. The accelerated amortization upon the first airing versus subsequent airings is determined based on a study of historical and estimated future advertising sales for similar programming. For rights fees paid for sports programming arrangements, such rights fees are amortized using a revenue-forecast model, in which the rights fees are amortized using the ratio of current period advertising revenue to total estimated remaining advertising revenue over the term of the arrangement.

 

For premium pay television and OTT services that are not advertising-supported, each licensed program’s costs are amortized on a straight-line basis over its license period or estimated period of use, beginning with the month of initial exhibition. When we have the right to exhibit feature theatrical programming in multiple windows over a number of years, historical audience viewership is used as the basis for determining the amount of programming amortization attributable to each window.

 

Licensed programming inventory is carried at the lower of unamortized cost or estimated net realizable value. For networks that generate both advertising and subscription revenues, the net realizable value of unamortized programming costs is generally evaluated based on the network’s programming taken as a whole. In assessing whether the programming inventory for a particular advertising-supported network is impaired, the net realizable value for all of the network’s programming inventory is determined based on a projection of the network’s profitability. Similarly, for premium pay television and OTT services that are not advertising-supported, an evaluation of the net realizable value of unamortized programming costs is performed based on the premium pay television and OTT services’ licensed programming taken as a whole. Specifically, the net realizable value for all premium pay television and OTT service licensed programming is determined based on projections of estimated subscription revenues less certain costs of delivering and distributing the licensed programming. Changes in management’s intended usage of a specific program, such as a decision to no longer exhibit that program and forego the use of the rights associated with the program license, results in a reassessment of that program’s net realizable value, which could result in an impairment.

8


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Recently Adopted Accounting Standards

 

Revenue Recognition  As of January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606), using the modified retrospective method, which does not allow us to adjust prior periods. We applied the rules to all open contracts existing as of January 1, 2018, recording an increase of $2,342 to retained earnings for the cumulative effect of the change, with an offsetting contract asset of $1,737, deferred contract acquisition costs of $1,454, other asset reductions of $239, other liability reductions of $212, deferred income taxes of $787 and noncontrolling interest of $35. (See 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 the interest, estimated return on assets and amortization of prior service credits components of our net periodic benefit cost in our consolidated operating expenses, but rather are required to include those amounts in “other income (expense) – net” in our consolidated statements of income. We continue to present service costs with the associated compensation costs within our operating expenses. As a practical expedient, we used the amounts disclosed as the estimated basis for applying the retrospective presentation requirement.

 

The following table presents our results under our historical method and as adjusted to reflect ASU 2017-07 (presentation of benefit cost): 

 

 

 

 

Pension and Postretirement Benefits

 

 

 

Historical

 

Effect of

 

 

 

 

 

 

Accounting

 

Adoption of

 

As

 

 

 

Method

 

ASU 2017-07

 

Adjusted

For the three months ended September 30, 2018

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

Other cost of revenues

$

8,527

 

$

124

 

$

8,651

Selling, general and administrative expenses

 

9,207

 

 

391

 

 

9,598

Operating Income

 

7,784

 

 

(515)

 

 

7,269

Other Income (Expense) – net

 

538

 

 

515

 

 

1,053

Net Income

 

4,816

 

 

-

 

 

4,816

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2017

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

Other cost of revenues

$

9,431

 

$

263

 

$

9,694

Selling, general and administrative expenses

 

8,317

 

 

333

 

 

8,650

Operating Income

 

6,403

 

 

(596)

 

 

5,807

Other Income (Expense) – net

 

246

 

 

596

 

 

842

Net Income

 

3,123

 

 

-

 

 

3,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

Other cost of revenues

$

23,166

 

$

1,049

 

$

24,215

Selling, general and administrative expenses

 

22,859

 

 

3,320

 

 

26,179

Operating Income

 

24,305

 

 

(4,369)

 

 

19,936

Other Income (Expense) – net

 

739

 

 

4,369

 

 

5,108

Net Income

 

14,823

 

 

-

 

 

14,823

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2017

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

 

 

Other cost of revenues

$

27,714

 

$

837

 

$

28,551

Selling, general and administrative expenses

 

24,917

 

 

1,064

 

 

25,981

Operating Income

 

20,590

 

 

(1,901)

 

 

18,689

Other Income (Expense) – net

 

354

 

 

1,901

 

 

2,255

Net Income

 

10,711

 

 

-

 

 

10,711

9


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Cash Flows  As of January 1, 2018, we adopted, with retrospective application, 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

 

 

 

 

 

Accounting

 

Adoption of

 

Adoption of

 

As

 

 

 

Method

 

ASU 2016-15

 

ASU 2016-18

 

Adjusted

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Changes in other current assets

$

(2,731)

 

$

-

 

$

2

 

$

(2,729)

Equipment installment receivables and related sales

  

720

 

  

(500)

 

  

-

 

  

220

Other – net

 

1,399

 

 

-

 

 

(116)

 

 

1,283

Cash Provided by (Used in) Operating Activities

 

32,136

 

 

(500)

 

 

(114)

 

 

31,522

(Purchases) sales of securities – net

 

7

 

 

-

 

 

(241)

 

 

(234)

Cash collections of deferred purchase price

 

-

 

 

500

 

 

-

 

 

500

Cash (Used in) Provided by Investing Activities

 

(60,246)

 

 

500

 

 

(241)

 

 

(59,987)

Change in cash and cash equivalents and restricted cash

$

(41,789)

 

$

-

 

$

(355)

 

$

(42,144)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Changes in other current assets

$

(106)

 

$

-

 

$

-

 

$

(106)

Equipment installment receivables and related sales

 

1,116

 

 

(665)

 

 

-

 

 

451

Other – net

 

(1,420)

 

 

-

 

 

(136)

 

 

(1,556)

Cash Provided by (Used in) Operating Activities

 

29,274

 

 

(665)

 

 

(136)

 

 

28,473

(Purchases) sales of securities – net

 

(2)

 

 

-

 

 

237

 

 

235

Cash collections of deferred purchase price

 

-

 

 

665

 

 

-

 

 

665

Cash (Used in) Provided by Investing Activities

 

(15,266)

 

 

665

 

 

237

 

 

(14,364)

Change in cash and cash equivalents and restricted cash

$

42,711

 

$

-

 

$

100

 

$

42,811

 

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).

 

10


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

New Accounting Standards and Accounting Standards Not Yet Adopted

 

Leases  In February 2016, the FASB issued 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 nine months ended September 30, 2018 and 2017, is shown in the table below:

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2018

 

2017

 

2018

 

2017

Numerators

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

   Net Income

$

4,816

 

$

3,123

 

$

14,823

 

$

10,711

   Less: Net income attributable to noncontrolling interest

 

(98)

 

 

(94)

 

 

(311)

 

 

(298)

   Net Income attributable to AT&T

 

4,718

 

 

3,029

 

 

14,512

 

 

10,413

   Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

      Share-based payment

 

4

 

 

3

 

 

13

 

 

9

Numerator for diluted earnings per share

$

4,722

 

$

3,032

 

$

14,525

 

$

10,422

Denominators (000,000)

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

   Weighted average number of common shares outstanding

 

7,284

 

 

6,162

 

 

6,603

 

 

6,164

   Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

      Share-based payment (in shares)

 

36

 

 

20

 

 

27

 

 

20

Denominator for diluted earnings per share

 

7,320

 

 

6,182

 

 

6,630

 

 

6,184

Basic earnings per share attributable to AT&T

$

0.65

 

$

0.49

 

$

2.19

 

$

1.69

Diluted earnings per share attributable to AT&T

$

0.65

 

$

0.49

 

$

2.19

 

$

1.69

 

 

11


AT&T INC.
SEPTEMBER 30, 2018

 

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 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, 2017

$

(2,054)

 

$

660

 

$

1,402

 

$

7,009

 

$

7,017

Other comprehensive income

   (loss) before reclassifications

 

(787)

 

 

(22)

 

 

257

 

 

530

 

 

(22)

Amounts reclassified

   from accumulated OCI

 

-

1

 

-

1

 

35

2

 

(989)

3

 

(954)

Net other comprehensive

   income (loss)

 

(787)

 

 

(22)

 

 

292

 

 

(459)

 

 

(976)

Amounts reclassified to

   retained earnings

 

-

 

 

(658)

4

 

-

 

 

-

 

 

(658)

Balance as of September 30, 2018

$

(2,841)

 

$

(20)

 

$

1,694

 

$

6,550

 

$

5,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Foreign Currency Translation Adjustment

 

Net Unrealized Gains (Losses) on Available-for-Sale Securities

 

Net Unrealized Gains (Losses) on Cash Flow Hedges

 

Defined Benefit Postretirement Plans

  

Accumulated Other Comprehensive Income

Balance as of December 31, 2016

$

(1,995)

 

$

541

 

$

744

 

$

5,671

 

$

4,961

Other comprehensive income

   (loss) before reclassifications

 

484

 

 

128

 

 

(174)

 

 

969

 

 

1,407

Amounts reclassified

   from accumulated OCI

 

-

1

 

(86)

1

 

29

2

 

(731)

3

 

(788)

Net other comprehensive

   income (loss)

 

484

 

 

42

 

 

(145)

 

 

238

 

 

619

Balance as of September 30, 2017

$

(1,511)

 

$

583

 

$

599

 

$

5,909

 

$

5,580

 1  

(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.

 2  

(Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7).

 3  

The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the

 

consolidated statements of income (see Note 6).

 4  

With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings

 

(see Note 1).

                               

 

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) Communications, (2) WarnerMedia, (3) Latin America, and (4) Xandr.

 

12


AT&T INC.
SEPTEMBER 30, 2018

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

We also evaluate segment and business unit performance based on EBITDA and/or EBITDA margin, which is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

 

Due to organizational changes and our June 14, 2018 acquisition of Time Warner, effective for the quarter ended September 30, 2018, we revised our operating segments to align with the new management structure and organizational responsibilities, and have accordingly recast our segment disclosures for all periods presented. As a result of the realignment to combine all domestic wireless products and services into the Mobility business unit, which is now one of our reporting units, $27,568 of goodwill from our former Business Solutions segment and $16,540 from our former Consumer Mobility segment was reallocated to the Mobility business unit.   

 

With our acquisition of Time Warner, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset (see Note 8). For consolidated reporting, all amortization of pre-acquisition released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we report the historical content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historical content production cost amortization reported in the segment results was $1,491 for the quarter ended September 30, 2018, $772 of which was for pre-acquisition released programming. For the 108-day period included in our nine months ended September 30, 2018, historical content production cost amortization reported in the segment results was $1,677, $870 of which was for pre-acquisition released programming.

 

The Communications segment provides wireless and wireline telecom, video and broadband services to consumers located in the U.S. or in U.S. territories and businesses globally. This segment contains the following business units:

·        Mobility provides nationwide wireless service and equipment.

·