10-Q 1 d592180d10q.htm 10-Q 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 June 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

 

[   ]

  

(Do not check if a smaller reporting company)

 

Smaller reporting company

  

[    ]

      

Emerging growth company

  

[    ]

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes [    ]    No [    ]        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [    ]    No [X]        

At July 31, 2018, there were 7,262 million common shares outstanding.


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AT&T INC.

 

CONSOLIDATED STATEMENTS OF INCOME

Dollars in millions except per share amounts

(Unaudited)

      Three months ended     Six months ended  
     June 30,     June 30,  
      2018     2017     2018     2017  
           As Adjusted           As Adjusted  

Operating Revenues

        

Service

   $     33,773     $     36,538     $     67,419     $     72,994  

Equipment

     4,080       3,299       8,472       6,208  

Media

     1,133       -       1,133       -  

Total operating revenues

     38,986       39,837       77,024       79,202  

Operating Expenses

        

Cost of revenues

        

Equipment

     4,377       4,138       9,225       7,986  

Broadcast, programming and operations

     5,449       4,898       10,615       9,872  

Other cost of revenues (exclusive of depreciation and amortization shown separately below)

     7,632       9,569       15,564       18,857  

Selling, general and administrative

     8,684       8,559       16,581       17,331  

Depreciation and amortization

     6,378       6,147       12,372       12,274  

Total operating expenses

     32,520       33,311       64,357       66,320  

Operating Income

     6,466       6,526       12,667       12,882  

Other Income (Expense)

        

Interest expense

     (2,023     (1,395     (3,794     (2,688

Equity in net income (loss) of affiliates

     (16     14       (7     (159

Other income (expense) – net

     2,353       925       4,055       1,413  

Total other income (expense)

     314       (456     254       (1,434

Income Before Income Taxes

     6,780       6,070       12,921       11,448  

Income tax expense

     1,532       2,056       2,914       3,860  

Net Income

     5,248       4,014       10,007       7,588  

Less: Net Income Attributable to Noncontrolling Interest

     (116     (99     (213     (204

Net Income Attributable to AT&T

   $ 5,132     $ 3,915     $ 9,794     $ 7,384  
                                  

Basic Earnings Per Share Attributable to AT&T

   $ 0.81     $ 0.63     $ 1.56     $ 1.19  

Diluted Earnings Per Share Attributable to AT&T

   $ 0.81     $ 0.63     $ 1.56     $ 1.19  

Weighted Average Number of Common Shares

Outstanding – Basic (in millions)

     6,351       6,165       6,257       6,166  

Weighted Average Number of Common Shares
Outstanding – with Dilution (in millions)

     6,374       6,184       6,277       6,185  

Dividends Declared Per Common Share

   $ 0.50     $ 0.49     $ 1.00     $ 0.98  
                                  

See Notes to Consolidated Financial Statements.

 

2


AT&T INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in millions

(Unaudited)

      Three months ended     Six months ended  
     June 30,     June 30,  
      2018     2017     2018     2017  

Net income

   $       5,248     $       4,014     $       10,007     $       7,588  

Other comprehensive income (loss), net of tax:

        

Foreign currency:

        

Translation adjustment (includes $(32), $(10), $(30) and $(4)
attributable to noncontrolling interest), net of taxes of $(318), $115, $(143) and $506

     (918     (33     (810     339  

Available-for-sale securities:

        

Net unrealized gains (losses), net of taxes of $0, $29, $(4) and $44

     -       50       (12     83  

Reclassification adjustment included in net income, net of taxes of $0, $(7), $0 and $(4)

     -       (12     -       (7

Cash flow hedges:

        

Net unrealized gains (losses), net of taxes of $(112), $(279), $68 and $(272)

     (421     (517     253       (504

Reclassification adjustment included in net income, net of taxes of $3, $5, $6 and $10

     11       9       23       19  

Defined benefit postretirement plans:

        

Net prior service (cost) credit arising during period, net of taxes of $(12), $594, $173 and $594

     (37     969       530       969  

Amortization of net prior service credit included in net income, net of taxes of $(109), $(151), $(214) and $(290)

     (334     (247     (657     (475

Other comprehensive income (loss)

     (1,699     219       (673     424  

Total comprehensive income

     3,549       4,233       9,334       8,012  

Less: Total comprehensive income attributable to noncontrolling interest

     (84     (89     (183     (200

Total Comprehensive Income Attributable to AT&T

   $ 3,465     $ 4,144     $ 9,151     $ 7,812  
                                  

See Notes to Consolidated Financial Statements.

 

3


AT&T INC.

 

CONSOLIDATED BALANCE SHEETS

Dollars in millions except per share amounts

      June 30,     December 31,  
      2018     2017  
Assets    (Unaudited)        

Current Assets

    

Cash and cash equivalents

   $ 13,523     $ 50,498  

Accounts receivable - net of allowances for doubtful accounts of $804 and $663

     25,492       16,522  

Prepaid expenses

     1,966       1,369  

Other current assets

     14,305       10,757  

Total current assets

     55,286       79,146  

Noncurrent Inventories and Theatrical Film and Television Production Costs

     5,849       -  

Property, plant and equipment

     324,889       313,499  

Less: accumulated depreciation and amortization

     (195,333     (188,277

Property, Plant and Equipment – Net

     129,556       125,222  

Goodwill

     142,607       105,449  

Licenses

     96,802       96,136  

Trademarks and Trade Names – Net

     24,440       7,021  

Distribution Networks – Net

     17,403       -  

Other Intangible Assets – Net

     30,800       11,119  

Investments in and Advances to Equity Affiliates

     8,007       1,560  

Other Assets

     23,941       18,444  

Total Assets

   $ 534,691     $ 444,097  
                  

Liabilities and Stockholders’ Equity

    

Current Liabilities

    

Debt maturing within one year

   $ 21,672     $ 38,374  

Accounts payable and accrued liabilities

     35,488       34,470  

Advanced billing and customer deposits

     5,914       4,213  

Accrued taxes

     1,889       1,262  

Dividends payable

     3,630       3,070  

Total current liabilities

     68,593       81,389  

Long-Term Debt

     168,495       125,972  

Deferred Credits and Other Noncurrent Liabilities

    

Deferred income taxes

     59,665       43,207  

Postemployment benefit obligation

     28,791       31,775  

Other noncurrent liabilities

     25,017       19,747  

Total deferred credits and other noncurrent liabilities

     113,473       94,729  

Stockholders’ Equity

    

Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2018 and December 31, 2017: issued 7,620,748,598 at June 30, 2018 and 6,495,231,088 at December 31, 2017)

     7,621       6,495  

Additional paid-in capital

     125,960       89,563  

Retained earnings

     56,555       50,500  

Treasury stock (360,993,619 at June 30, 2018 and 355,806,544 at December 31, 2017, at cost)

     (12,872     (12,714

Accumulated other comprehensive income

     5,716       7,017  

Noncontrolling interest

     1,150       1,146  

Total stockholders’ equity

     184,130       142,007  

Total Liabilities and Stockholders’ Equity

   $       534,691     $       444,097  
                  

See Notes to Consolidated Financial Statements.

 

4


AT&T INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in millions

(Unaudited)

     

Six months ended

June 30,

 
      2018     2017  
       As Adjusted  

Operating Activities

    

Net income

   $         10,007     $       7,588  

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

    

Depreciation and amortization

     12,372       12,274  

Amortization of television and film costs

     168       -  

Undistributed earnings from investments in equity affiliates

     235       167  

Provision for uncollectible accounts

     808       795  

Deferred income tax expense

     2,032       964  

Net (gain) loss from investments, net of impairments

     (29     12  

Actuarial (gain) loss on pension and postretirement benefits

     (2,726     (259

Changes in operating assets and liabilities:

    

Accounts receivable

     233       119  

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

     1,039       470  

Accounts payable and other accrued liabilities

     (3,890     (2,761

Equipment installment receivables and related sales

     490       525  

Deferred customer contract acquisition and fulfillment costs

     (1,725     (796

Retirement benefit funding

     (280     (280

Other – net

     442       (1,148

Total adjustments

     9,169       10,082  

Net Cash Provided by Operating Activities

     19,176       17,670  

Investing Activities

    

Capital expenditures:

    

Purchase of property and equipment

     (10,959     (10,750

Interest during construction

     (267     (473

Acquisitions, net of cash acquired

     (40,715     1,224  

Dispositions

     59       51  

(Purchases) sales of securities, net

     (218     169  

Advances to and investments in equity affiliates, net

     (1,035     -  

Cash collections of deferred purchase price

     500       382  

Net Cash Used in Investing Activities

     (52,635     (9,397

Financing Activities

    

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

     2,227       (2

Issuance of other short-term borrowings

     4,839       -  

Issuance of long-term debt

     26,478       24,115  

Repayment of long-term debt

     (29,447     (6,118

Purchase of treasury stock

     (564     (458

Issuance of treasury stock

     12       24  

Dividends paid

     (6,144     (6,021

Other

     (1,121     77  

Net Cash (Used in) Provided by Financing Activities

     (3,720     11,617  

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

     (37,179     19,890  

Cash and cash equivalents and restricted cash beginning of year

     50,932       5,935  

Cash and Cash Equivalents and Restricted Cash End of Period

   $ 13,753     $         25,825  
                  

See Notes to Consolidated Financial Statements.

 

5


AT&T INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Dollars and shares in millions except per share amounts

(Unaudited)

      June 30, 2018  
      Shares     Amount  

Common Stock

    

Balance at beginning of year

     6,495     $ 6,495  

Issuance of stock

     1,126       1,126  

Balance at end of period

     7,621     $ 7,621  
                  

Additional Paid-In Capital

    

Balance at beginning of year

     $ 89,563  

Issuance of common stock

       35,473  

Issuance of treasury stock

       (4

Share-based payments

             928  

Balance at end of period

           $ 125,960  
                  

Retained Earnings

    

Balance at beginning of year

     $ 50,500  

Net income attributable to AT&T ($1.56 per diluted share)

       9,794  

Dividends to stockholders ($1.00 per share)

       (6,739

Cumulative effect of accounting changes

             3,000  

Balance at end of period

           $ 56,555  
                  

Treasury Stock

    

Balance at beginning of year

     (356   $ (12,714

Repurchase and acquisition of common stock

     (18     (607

Issuance of treasury stock

     13       449  

Balance at end of period

     (361   $ (12,872
                  

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

    

Balance at beginning of year

     $ 7,017  

Other comprehensive income attributable to AT&T

       (643

Amounts reclassified to retained earnings

             (658

Balance at end of period

           $ 5,716  
                  

Noncontrolling Interest

    

Balance at beginning of year

     $ 1,146  

Net income attributable to noncontrolling interest

       213  

Contributions

       8  

Distributions

       (223

Acquisition of noncontrolling interest

       1  

Translation adjustments attributable to noncontrolling interest, net of taxes

       (30

Cumulative effect of accounting changes

             35  

Balance at end of period

           $ 1,150  
                  

Total Stockholders’ Equity at beginning of year

           $ 142,007  
                  

Total Stockholders’ Equity at end of period

           $       184,130  
                  

See Notes to Consolidated Financial Statements.

 

6


AT&T INC.

JUNE 30, 2018

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on 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 amounts have been conformed to the current period’s presentation, including impacts for the adoption of recent accounting standards and the realignment of certain business units within our reportable segments (see Note 4).

Tax Reform The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax rate from 35% to 21% and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. Recognizing the late enactment of the Act and complexity of accurately accounting for its impact, the Securities and Exchange Commission (SEC) in Staff Accounting Bulletin (SAB) 118 provided guidance that allows registrants to provide a reasonable estimate of the impact to their financial statements and adjust the reported impact in a measurement period not to exceed one year. We included the estimated impact of the Act in our financial results at or for the period ended December 31, 2017 and did not record any adjustments thereto during the first six months of 2018. Our future results could include additional adjustments, and those adjustments could be material.

Customer Fulfillment Costs During the second quarter of 2018, we updated our analysis of economic lives of customer relationships. As of April 1, 2018, we extended the amortization period to 58 months to better reflect the estimated economic lives of our entertainment group customers. This change in accounting estimate decreased other cost of revenues and impacted net income $126, or $0.02 per diluted share, in the second quarter of 2018.

Recently Adopted Accounting Standards

Revenue Recognition As of January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606), using the modified retrospective method, which does not allow us to adjust prior periods. We applied the rules to all open contracts existing as of January 1, 2018, recording an increase of $2,342 to retained earnings for the cumulative effect of the change, with an offsetting contract asset of $1,737, deferred contract acquisition costs of $1,454, other asset reductions of $239, other liability reductions of $212, deferred income taxes of $787 and noncontrolling interest of $35. (See Note 5)

 

7


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Pension and Other Postretirement Benefits As of January 1, 2018, we adopted, with retrospective application, ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU 2017-07). We are no longer allowed to present interest, estimated return on assets and amortization of prior service credits components of our net periodic benefit cost in our consolidated operating expenses, but rather are required to include those amounts in “other income (expense) – net” in our consolidated statements of income. We continue to present service costs with the associated compensation costs within our operating expenses. As a practical expedient, we used the amounts disclosed as the estimated basis for applying the retrospective presentation requirement.

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

 

              Pension and Postretirement Benefits  
              Historical
Accounting
Method
             Effect of
Adoption of
ASU 2017-07
            As
Adjusted
 

For the three months ended June 30, 2018

                

Consolidated Statements of Income

                

Other cost of revenues

   $        7,068      $        564     $        7,632  

Selling, general and administrative expenses

        6,896           1,788          8,684  

Operating Income

        8,818           (2,352        6,466  

Other Income (Expense) – net

        1           2,352          2,353  

Net Income

        5,248           -          5,248  
   

For the three months ended June 30, 2017

                

Consolidated Statements of Income

                

Other cost of revenues

   $        9,218      $        351     $        9,569  

Selling, general and administrative expenses

        8,113           446          8,559  

Operating Income

        7,323           (797        6,526  

Other Income (Expense) – net

        128           797          925  

Net Income

        4,014           -          4,014  
   

For the six months ended June 30, 2018

                

Consolidated Statements of Income

                

Other cost of revenues

   $        14,639      $        925     $        15,564  

Selling, general and administrative expenses

        13,652           2,929          16,581  

Operating Income

        16,521           (3,854        12,667  

Other Income (Expense) – net

        201           3,854          4,055  

Net Income

        10,007           -          10,007  
   

For the six months ended June 30, 2017

                

Consolidated Statements of Income

                

Other cost of revenues

   $        18,283      $        574     $        18,857  

Selling, general and administrative expenses

        16,600           731          17,331  

Operating Income

        14,187           (1,305        12,882  

Other Income (Expense) – net

        108           1,305          1,413  

Net Income

        7,588           -          7,588  
   

 

8


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Cash Flows As of January 1, 2018, we adopted, with retrospective application, 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
Accounting
Method
    Effect of
Adoption of
ASU 2016-15
    Effect of
Adoption of
ASU 2016-18
           

As

Adjusted

 

For the six months ended June 30, 2018

              

Consolidated Statements of Cash Flows

              

Equipment installment receivables and related sales

   $        990     $ (500   $ -     $        490  

Other – net

        431       -       11          442  

Cash Provided by (Used in) Operating Activities

        19,665       (500     11          19,176  

(Purchases) sales of securities – net

        4       -       (222        (218

Cash collections of deferred purchase price

        -       500       -          500  

Cash (Used in) Provided by Investing Activities

        (52,913     500       (222        (52,635

Change in cash and cash equivalents and restricted cash

   $        (36,968   $ -     $ (211   $        (37,179
   

For the six months ended June 30, 2017

              

Consolidated Statements of Cash Flows

              

Changes in other current assets

   $        471     $ -     $ (1   $        470  

Equipment installment receivables and related sales

        907       (382     -          525  

Other – net

        (1,041     -       (107        (1,148

Cash Provided by (Used in) Operating Activities

        18,160       (382     (108        17,670  

(Purchases) sales of securities – net

        -       -       169          169  

Cash collections of deferred purchase price

        -       382       -          382  

Cash (Used in) Provided by Investing Activities

        (9,948     382       169          (9,397

Change in cash and cash equivalents and restricted cash

   $        19,829     $ -     $ 61     $        19,890  
   

Financial Instruments As of January 1, 2018, we adopted 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).

 

9


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

New Accounting Standards and Accounting Standards Not Yet Adopted

Leases In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASC 842 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP. In July 2018, the FASB amended ASC 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. Through the same amendment, the FASB will allow lessors the option to make a policy election to treat lease and nonlease components as a single lease component under certain conditions. ASC 842 is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption.

Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition of lease expense appears similar to our current methodology. We are continuing to evaluate the magnitude and other potential impacts to our financial statements.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and six months ended June 30, 2018 and 2017, is shown in the table below:

 

              Three months ended
June 30,
            Six months ended
June 30,
 
              2018             2017             2018             2017      

Numerators

                    

Numerator for basic earnings per share:

                    

Net Income

   $          5,248     $          4,014     $          10,007     $          7,588  

Less: Net income attributable to noncontrolling interest

              (116              (99              (213              (204

Net Income attributable to AT&T

        5,132          3,915          9,794          7,384  

Dilutive potential common shares:

                    

Share-based payment

              4                2                9                6  

Numerator for diluted earnings per share

   $          5,136     $          3,917     $          9,803     $          7,390  
   

Denominators (000,000)

                    

Denominator for basic earnings per share:

                    

Weighted average number of common shares outstanding

        6,351          6,165          6,257          6,166  

Dilutive potential common shares:

                    

Share-based payment (in shares)

              23                19                20                19  

Denominator for diluted earnings per share

        6,374          6,184          6,277          6,185  
   

Basic earnings per share attributable to AT&T

   $          0.81     $          0.63     $          1.56     $          1.19  

Diluted earnings per share attributable to AT&T

   $          0.81     $          0.63     $          1.56     $          1.19  
   

 

10


AT&T INC.

JUNE 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

     (780)       (12     253       530       (9

Amounts reclassified from accumulated OCI

     - 1       -  1       23  2       (657 )3      (634

Net other comprehensive income (loss)

     (780)       (12     276       (127     (643

Amounts reclassified to retained earnings

     -         (658 )4      -       -       (658

Balance as of June 30, 2018

   $ (2,834)     $ (10   $ 1,678     $ 6,882     $ 5,716  
                                          
                                
           
      Foreign
Currency
Translation
Adjustment
    Net Unrealized
Gains (Losses)
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

     343       83       (504     969       891  

Amounts reclassified from accumulated OCI

     -  1       (7 )1      19  2       (475 )3      (463

Net other comprehensive income (loss)

     343       76       (485     494       428  

Balance as of June 30, 2017

   $ (1,652   $ 617     $ 259     $ 6,165     $ 5,389  
   
 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).

 

11


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. We have five reportable segments: (1) Consumer Mobility, (2) Business Solutions, (3) Entertainment Group, (4) International, and (5) WarnerMedia.

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

To most effectively implement our strategies for 2018, effective January 1, 2018, we retrospectively realigned certain responsibilities and operations within our reportable segments. The most significant of these changes is to report individual wireless accounts with employer discounts in our Consumer Mobility segment, instead of our Business Solutions segment. As a result of these realignments, $19,686 of goodwill from the Business Solutions segment was reallocated to the Consumer Mobility segment. Our reported segment results include the impact for the adoption of recent accounting standards, which affects the comparability between 2018 and 2017 (see Note 5).

With our acquisition of WarnerMedia, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset (see Note 8). For consolidated reporting, all amortization of pre-acquisition released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we will continue to report the historic content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historic content production cost amortization reported in the segment results was $189 for the 16-day period ended June 30, 2018, $98 of which was for pre-acquisition released programming.

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

The Business Solutions segment provides services to business customers, including multinational companies and governmental and wholesale customers. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products; FlexWare, a service that relies on Software Defined Networking and Network Function Virtualization to provide application-based routing, and broadband, collectively referred to as strategic services; as well as traditional data and voice products. We provide a complete communications solution to our business customers.

The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories.

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates (operations in countries with highly inflationary economies consider the U.S. dollar as the functional currency).

The WarnerMedia segment provides global media and entertainment services through television networks and film, using its brands to create, package and deliver high-quality content worldwide. The segment consists of Turner, HBO and Warner Bros. businesses.

 

12


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Corporate and Other items reconcile our segment results to consolidated operating income and income before income taxes, and include:

  Corporate, which consists of: (1) operations that are no longer integral to our operations or which we no longer actively market, (2) corporate support functions and operations, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense) – net and (5) the recharacterization of programming cost amortization, which we continue to report with WarnerMedia segment operating expense, to consolidated amortization expense.
  Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, including amortization of intangible assets.
  Certain significant items which consists of (1) employee separation charges associated with voluntary and/or strategic offers, (2) losses resulting from abandonment or impairment of assets and (3) other items for which the segments are not being evaluated.
  Eliminations, which remove transactions involving dealings between AT&T companies, including content licensing with WarnerMedia.

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

Our domestic business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our shared asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.

 

13


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended June 30, 2018  
            Revenues             

Operations  
and Support  
Expenses  

           EBITDA             

Depreciation
and
Amortization

          

Operating
Income (Loss)

          

Equity in Net
Income (Loss)
of

Affiliates

          

Segment
Contribution

 

Consumer Mobility

  $         14,869     $         8,085     $         6,784     $         1,806     $         4,978     $         -     $         4,978  

Business Solutions

      9,063         5,616         3,447         1,487         1,960         1         1,961  

Entertainment Group

      11,650         8,852         2,798         1,346         1,452         (20       1,432  

International

      1,951         1,803         148         313         (165       15         (150

WarnerMedia

            1,275               794               481               30               451               (6             445  

Segment Total

            38,808               25,150               13,658               4,982               8,676     $         (10   $         8,666  

Corporate and Other

                           

Corporate

      319         660         (341       118         (459        

Acquisition-related items

      -         321         (321       1,278         (1,599        

Certain significant items

      -         152         (152       -         (152        

Eliminations

            (141             (141             -               -               -          

AT&T Inc.

  $         38,986     $         26,142     $         12,844     $         6,378     $         6,466          
                                                                                         
For the six months ended June 30, 2018                                     
            Revenues             

Operations  
and Support  
Expenses  

           EBITDA             

Depreciation
and
Amortization

          

Operating
Income (Loss)

          

Equity in Net
Income (Loss)
of

Affiliates

          

Segment
Contribution

 

Consumer Mobility

  $         29,855     $         16,609     $         13,246     $         3,613     $         9,633     $         -     $         9,633  

Business Solutions

      18,179         11,210         6,969         2,945         4,024         -         4,024  

Entertainment Group

      23,227         17,791         5,436         2,658         2,778         (11       2,767  

International

      3,976         3,607         369         645         (276       15         (261

WarnerMedia

            1,275               794               481               30               451               (6             445  

Segment Total

            76,512               50,011               26,501               9,891               16,610     $         (2   $         16,608  

Corporate and Other

                           

Corporate

      653         1,395         (742       141         (883        

Acquisition-related items

      -         388         (388       2,340         (2,728        

Certain significant items

      -         332         (332       -         (332        

Eliminations

            (141             (141             -               -               -          

AT&T Inc.

  $         77,024     $         51,985     $         25,039     $         12,372     $         12,667          
                                                                                         

 

14


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended June 30, 2017  
              Revenues               

Operations  

and Support  

Expenses  

            EBITDA              

Depreciation

and

Amortization

            

Operating

Income (Loss)

           

Equity in Net

Income (Loss)
of

Affiliates

           

Segment

Contribution

 

Consumer Mobility

   $        15,091      $        8,636     $        6,455     $        1,716      $        4,739     $        -     $        4,739  

Business Solutions

        9,667           6,053          3,614          1,483           2,131          -          2,131  

Entertainment Group

        12,661           9,561          3,100          1,458           1,642          (12        1,630  

International

              2,026                 1,772                254                311                 (57              25                (32

Segment Total

              39,445                 26,022                13,423                4,968                 8,455     $        13     $        8,468  

Corporate and Other

                                     

Corporate

        392           766          (374        9           (383          

Acquisition-related items

        -           281          (281        1,170           (1,451          

Certain significant items

              -                 95                (95              -                 (95          

AT&T Inc.

   $        39,837      $        27,164     $        12,673     $        6,147      $        6,526            
                                                                                                   
For the six months ended June 30, 2017  
            Revenues              

Operations  

and Support  

Expenses  

           EBITDA             

Depreciation

and

Amortization

           

Operating

Income (Loss)

          

Equity in Net

Income (Loss)

of

Affiliates

          

Segment

Contribution

 

 

 

Consumer Mobility

   $        29,897      $        17,196     $        12,701     $        3,432      $        9,269     $        -     $        9,269  

Business Solutions

        19,288           12,051          7,237          2,943           4,294          -          4,294  

Entertainment Group

        25,262           19,166          6,096          2,878           3,218          (18        3,200  

International

              3,955                 3,531                424                601                 (177              45                (132

Segment Total

              78,402                 51,944                26,458                9,854                 16,604     $        27     $        16,631  

Corporate and Other

                                     

Corporate

        800           1,637          (837        48           (885          

Acquisition-related items

        -           488          (488        2,372           (2,860          

Certain significant items

              -                 (23              23                -                 23            

AT&T Inc.

   $        79,202      $        54,046     $        25,156     $        12,274      $        12,882            
                                                                                                   

 

15


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The following table is a reconciliation of Segment Contribution to “Income Before Income Taxes” reported on our consolidated statements of income.

 

              Three months ended              Six months ended  
            June 30,             June 30,  
              2018     2017                     2018     2017  

Consumer Mobility

   $                4,978     $         4,739        $                9,633     $         9,269  

Business Solutions

        1,961       2,131             4,024       4,294  

Entertainment Group

        1,432       1,630             2,767       3,200  

International

        (150     (32           (261     (132

WarnerMedia

              445       -                         445       -  

Segment Contribution

              8,666       8,468                         16,608       16,631  

Reconciling Items:

                 

Corporate and Other

        (459     (383           (883     (885

Merger and integration items

        (321     (281           (388     (488

Amortization of intangibles acquired

        (1,278     (1,170           (2,340     (2,372

Employee separation charges

        (133     (60           (184     (60

Gain on wireless spectrum transactions

        -       63             -       181  

Natural disaster items

        -       -             (104     -  

Foreign currency devaluation

        (19     (98           (44     (98

Segment equity in net income of affiliates

              10       (13                       2       (27

AT&T Operating Income

              6,466       6,526                         12,667       12,882  

Interest Expense

        2,023       1,395             3,794       2,688  

Equity in net income (loss) of affiliates

        (16     14             (7     (159

Other income (expense) - Net

              2,353       925                         4,055       1,413  

Income Before Income Taxes

   $        6,780     $ 6,070              $        12,921     $ 11,448  
                                                             

NOTE 5. REVENUE RECOGNITION

As of January 1, 2018, we adopted FASB ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606). With our adoption of ASC 606, we made a policy election to record certain regulatory fees, primarily Universal Service Fund (USF) fees, on a net basis. See the Notes to the Consolidated Financial Statements of our 2017 Annual Report on Form 10-K for additional information regarding our policies prior to adoption of ASC 606.

When implementing ASC 606, we utilized the practical expedient allowing us to reflect the aggregate effect of all contract modifications occurring before the beginning of the earliest period presented when allocating the transaction price to performance obligations.

Service and Equipment Revenues

Our products and services are offered to customers in service-only contracts and in contracts that bundle equipment used to access the services and/or with other service offerings. Service revenue is recognized when services are provided, based upon either usage (e.g., minutes of traffic/bytes of data processed) or period of time (e.g., monthly service fees). We record the sale of equipment when title has passed and the products are accepted by the customer. Some contracts have fixed terms and others are cancellable on a short-term basis (i.e., month-to-month arrangements).

Revenues from transactions between us and our customers are recorded net of regulatory fees and taxes. Cash incentives given to customers are recorded as a reduction of revenue. Nonrefundable, upfront service activation and setup fees associated with service arrangements are deferred and recognized over the associated service contract period or customer life. We record the sale of equipment and services to customers as gross revenue when we are the principal in the arrangement and net of the associated costs incurred when we act as an agent in the arrangement.

 

16


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

Our contracts allow for customers to frequently modify their arrangement, without incurring penalties in many cases. When a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be treated as a new contract or if it should be considered a change of the existing contract. We generally do not have significant impacts from contract modifications.

Service-Only Contracts and Standalone Equipment Sales

Revenue is recognized as service is provided or when control has transferred. For devices sold through indirect channels (e.g., national dealers), revenue is recognized when the dealer accepts the device, not upon activation.

Arrangements with Multiple Performance Obligations

Revenue recognized from fixed term contracts that bundle services and/or equipment are allocated based on the standalone selling price of all required performance obligations of the contract (i.e., each item included in the bundle). Promotional discounts are attributed to each required component of the arrangement, resulting in recognition over the contract term. Standalone selling prices are determined by assessing prices paid for service-only contracts (e.g., arrangements where customers bring their own devices) and standalone device pricing.

We offer the majority of our customers the option to purchase certain wireless devices in installments over a specified period of time, and, in many cases, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. For customers that elect these equipment installment payment programs, at the point of sale, we recognize revenue for the entire amount of revenue allocated to the customer receivable net of fair value of the trade-in right guarantee. The difference between the revenue recognized and the consideration received is recorded as a note receivable when the devices are not discounted and our right to consideration is unconditional. When installment sales include promotional discounts (e.g., “buy one get one free”), the difference between revenue recognized and consideration received is recorded as a contract asset to be amortized over the contract term.

Less commonly, we offer certain customers highly discounted devices when they enter into a minimum service agreement term. For these contracts, we recognize equipment revenue at the point of sale based on a standalone selling price allocation. The difference between the revenue recognized and the cash received is recorded as a contract asset that will amortize over the contract term.

For contracts that require the use of certain equipment in order to receive service (e.g., AT&T U-verse® and DIRECTV linear video services), we allocate the total transaction price to service if the equipment does not meet the criteria to be a distinct performance obligation.

Media Revenues

Media revenues are primarily derived from content production and distribution (i.e., content revenue), providing programming to distributors that have contracted to receive and distribute this programming to their subscribers (i.e., subscription revenue) and the sale of advertising on our networks and digital properties and the digital properties we manage and/or operate for others (i.e., advertising revenue).

 

17


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Disaggregation of Revenue

The following tables set forth disaggregated reported revenue by category:

 

For the three months ended June 30, 2018                         
             

Consumer  
Mobility  

            

Business  

Solutions  

            

Entertainment

Group

             International              WarnerMedia             Corporate  
and Other  
            Total      

Wireless service

   $        11,853      $        1,829      $        -      $        417      $        -     $        -     $        14,099  

Video entertainment

        -           -           8,331           1,254           -          -          9,585  

Strategic services

        -           3,039           -           -           -          -          3,039  

High-speed internet

        -           -           1,981           -           -          -          1,981  

Legacy voice and data

        -           2,723           785           -           -          -          3,508  

Content

        -           -           -           -           487          -          487  

Subscription

        -           -           -           -           591          -          591  

Advertising

        -           -           -           -           208          -          208  

Other media revenues

        -           -           -           -           51          (1        50  

Other service

        -           691           550           -           -          320          1,561  

Wireless equipment

        3,016           584           -           280           -          -          3,880  

Other equipment

        -           197           3           -           -          -          200  

Eliminations

              -                 -                 -                 -                 (62              (141              (203

Total Operating Revenues

   $        14,869      $        9,063      $        11,650      $        1,951      $        1,275     $        178     $        38,986  
                                                                                                                             

 

18


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the six months ended June 30, 2018                         
             

Consumer  

Mobility  

            

Business  

Solutions  

            

Entertainment

Group

             International              WarnerMedia             Corporate
and Other
            Total      

Wireless service

   $        23,465      $        3,620      $        -      $        821      $        -     $        -     $        27,906  

Video entertainment

        -           -           16,690           2,608           -          -          19,298  

Strategic services

        -           6,109           -           -           -          -          6,109  

High-speed internet

        -           -           3,859           -           -          -          3,859  

Legacy voice and data

        -           5,561           1,604           -           -          -          7,165  

Content

        -           -           -           -           487          -          487  

Subscription

        -           -           -           -           591          -          591  

Advertising

        -           -           -           -           208          -          208  

Other media revenues

        -           -           -           -           51          (1        50  

Other service

        -           1,360           1,069           -           -          653          3,082  

Wireless equipment

        6,390           1,162           -           547           -          -          8,099  

Other equipment

        -           367           5           -           -          1          373  

Eliminations

              -                 -                 -                 -                 (62              (141              (203

Total Operating Revenues

   $        29,855      $        18,179      $        23,227      $        3,976      $        1,275     $        512     $                77,024  
                                                                                                                             

 

19


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Deferred Customer Contract Acquisition and Fulfillment Costs

Costs to acquire customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from two to five years. Costs to fulfill customer contracts are deferred and amortized over periods ranging generally from four to five years, reflecting the estimated economic lives of the respective customer relationships, subject to an assessment of the recoverability of such costs. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.

Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $2,764 and $11,017 as of June 30, 2018, respectively, of which $1,250 and $3,715 were included in Other current assets on our consolidated balance sheets. For the six months ended June 30, 2018, we amortized $595 and $1,889 of these costs, respectively.

Contract Assets and Liabilities

A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration (i.e., we must perform additional services or satisfy another performance obligation in order to bill and receive consideration). The contract asset will decrease as services are provided and billed. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Reductions in the contract liability will be recorded as we satisfy the performance obligations.

The following table presents contract assets and liabilities and revenue recorded at or for the period ended June 30, 2018:

 

          June 30,  
          2018  
          

Contract asset

   $                 1,906  

Contract liability

     6,853  

Beginning of period contract liability recorded as customer contract revenue during the period

     3,839  
          

Our consolidated balance sheet at June 30, 2018 included approximately $1,257 for the current portion of our contract asset in “Other current assets” and $5,723 for the current portion of our contract liability in “Advanced billings and customer deposits.”

 

20


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Remaining Performance Obligations

Remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. In determining the transaction price allocated, we do not include non-recurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year, which are primarily prepaid wireless, video and residential internet agreements.

Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $41,838, of which we expect to recognize approximately 80% over the next two years, with the balance recognized thereafter.

The aggregate amount of transaction price allocated to remaining performance obligations included $13,623 related to WarnerMedia operations, which relates to the licensing of theatrical and television content that will be made available to customers at some point in the future. It excludes advertising and subscription arrangements that have an expected contract duration of one year or less.

Comparative Results

Prior to 2018, revenue recognized from contracts that bundle services and equipment was limited to the lesser of the amount allocated based on the relative selling price of the equipment and service already delivered or the consideration received from the customer for the equipment and service already delivered. Our prior accounting also separately recognized regulatory fees as operating revenue when received and as an expense when incurred. Sales commissions were previously expensed as incurred.

 

21


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The following table presents our reported results under ASC 606 and our pro forma results using the historical accounting method:

 

For the three months ended June 30, 2018   

As

Reported

     Historical
Accounting
Method
 

Consolidated Statements of Income:

     

Service Revenues

   $                     33,773      $                     35,163  

Equipment Revenues

     4,080        3,611  

Media Revenues

     1,133        1,135  

Total Operating Revenues

     38,986        39,909  

Other cost of revenue

     7,632        8,535  

Selling, general and administrative expenses

     8,684        9,267  

Total Operating Expenses

     32,520        34,006  

Operating income

     6,466        5,903  

Income before income taxes

     6,780        6,217  

Income tax expense

     1,532        1,394  

Net income

     5,248        4,823  

Net income attributable to AT&T

     5,132        4,713  

Basic Earnings per Share Attributable to AT&T

   $ 0.81      $ 0.74  

Diluted Earnings per Share Attributable to AT&T

   $ 0.81      $ 0.74  

For the six months ended June 30, 2018

     

Consolidated Statements of Income:

     

Service Revenues

   $ 67,419      $ 70,232  

Equipment Revenues

     8,472        7,472  

Media Revenues

     1,133        1,135  

Total Operating Revenues

     77,024        78,839  

Other cost of revenue

     15,564        17,396  

Selling, general and administrative expenses

     16,581        17,764  

Total Operating Expenses

     64,357        67,372  

Operating income

     12,667        11,467  

Income before income taxes

     12,921        11,721  

Income tax expense

     2,914        2,620  

Net income

     10,007        9,101  

Net income attributable to AT&T

     9,794        8,900  

Basic Earnings per Share Attributable to AT&T

   $ 1.56      $ 1.42  

Diluted Earnings per Share Attributable to AT&T

   $ 1.56      $ 1.42  

At June 30, 2018

     

Consolidated Balance Sheets:

     

Other current assets

     14,305        11,961  

Other Assets

     23,941        21,983  

Accounts payable and accrued liabilities

     35,488        35,667  

Advanced billings and customer deposits

     5,914        5,978  

Deferred income taxes

     59,665        58,585  

Other noncurrent liabilities

     25,017        24,832  

Retained earnings

     56,555        53,313  

Accumulated other comprehensive income

     5,716        5,723  

Noncontrolling interest

     1,150        1,103  
                   

 

22


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 6. PENSION AND POSTRETIREMENT BENEFITS

Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,829 at June 30, 2018. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and accounted for as contributions. We distributed $280 to the trust during the six months ended June 30, 2018. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan’s separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.

We recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. During the first quarter of 2018, a substantive plan change involving the frequency of future health reimbursement account credit increases was communicated to our retirees. During the second quarter of 2018, a written plan change involving the ability of certain participants of the pension plan to receive their benefit in a lump-sum amount upon retirement was communicated to our employees. These plan changes resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by $752, and increasing our liability by $50 in the first and second quarters of 2018, respectively. Such credits amortize through earnings over a period approximating the average service period to full eligibility. These plan changes also triggered a remeasurement of our postretirement and pension benefit obligations, resulting in an actuarial gain of $930 in the first quarter and $1,796 in the second quarter of 2018. As a result of the plan changes and remeasurements, our pension and postretirement benefit obligation decreased $1,746 and $1,682, respectively.

 

23


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The following table details pension and postretirement benefit costs included in the accompanying consolidated statements of income. The service cost component of net periodic pension cost (benefit) is recorded in operating expenses in the consolidated statements of income while the remaining components are recorded in other income (expense) – net. Service costs are eligible for capitalization as part of internal construction projects, providing a small reduction in the net expense recorded.

 

      Three months ended      Six months ended  
     June 30,      June 30,  
      2018      2017      2018      2017  

Pension cost:

           

Service cost – benefits earned during the period

   $             284       $             282       $             575       $             564   

Interest cost on projected benefit obligation

     504         484         991         968   

Expected return on assets

     (755)        (784)        (1,515)        (1,567)  

Amortization of prior service credit

     (29)        (31)        (59)        (62)  

Actuarial (gain) loss

     (1,796)               (1,796)         

Net pension (credit) cost

   $ (1,792)      $ (49)      $ (1,804)      $ (97)  
                                     

Postretirement cost:

           

Service cost – benefits earned during the period

   $ 26       $ 34       $ 55       $ 75   

Interest cost on accumulated postretirement benefit obligation

     195         202         386         424   

Expected return on assets

     (75)        (79)        (152)        (159)  

Amortization of prior service credit

     (413)        (366)        (810)        (702)  

Actuarial (gain) loss

            (259)        (930)        (259)  

Net postretirement (credit) cost

   $ (267)      $ (468)      $ (1,451)      $ (621)  
                                     

Combined net pension and postretirement (credit) cost

   $ (2,059)      $ (517)      $ (3,255)      $ (718)  
                                     

As part of our first- and second-quarter 2018 remeasurements, we modified the weighted-average discount rate used to measure our benefit obligations increasing the rate to 4.10% for the postretirement obligation and to 4.30% for the pension obligation. The discount rate in effect for determining service and interest costs after remeasurement is 4.30% and 3.70%, respectively, for postretirement and 4.40% and 4.00% for pension. As a result of our plan changes and remeasurements, the total estimated prior service credits that will be amortized from accumulated OCI into net periodic benefit cost over the second half of 2018 is $882 ($665 net of tax) for postretirement benefits.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the second quarter ended 2018 and 2017, net supplemental pension benefits costs not included in the table above were $21 and $23. For the first six months of 2018 and 2017, net supplemental pension benefit costs were $42 and $45.

 

24


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1    Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.
Level 2   

Inputs to the valuation methodology include:

●   Quoted prices for similar assets and liabilities in active markets.

●   Quoted prices for identical or similar assets or liabilities in inactive markets.

●   Inputs other than quoted market prices that are observable for the asset or liability.

●   Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3   

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

●   Fair value is often based on developed models in which there are few, if any, external observations.

The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2017.

Long-Term Debt and Other Financial Instruments

The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:

 

      June 30, 2018      December 31, 2017  
      Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Notes and debentures1

   $         180,209      $         182,732      $         162,526      $         171,938  

Commercial paper

     8,139        8,139        -        -  

Bank borrowings

     15        15        2        2  

Investment securities2

     3,511        3,511        2,447        2,447  
                                     

1 Includes credit agreement borrowings.

2 Excludes investments accounted for under the equity method.

The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.

 

25


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Following is the fair value leveling for investment securities that are measured at fair value and derivatives as of June 30, 2018 and December 31, 2017. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.

 

      June 30, 2018  
      Level 1      Level 2      Level 3      Total  

Equity Securities

           

Domestic equities

   $         1,252      $             -       $             -      $         1,252   

International equities

     304               -        304   

Fixed income equities

     149               -        149   

Available-for-Sale Debt Securities

     -        890         -        890   

Asset Derivatives

           

Cross-currency swaps

     -        1,216         -        1,216   

Foreign exchange contracts

     -        55         -        55   

Liability Derivatives

           

Interest rate swaps

     -        (89)        -        (89)  

Cross-currency swaps

     -        (1,506)        -        (1,506)  
                                     

 

      December 31, 2017  
      Level 1      Level 2      Level 3      Total  

Equity Securities

           

Domestic equities

   $         1,142      $             -       $             -      $         1,142   

International equities

     321               -        321   

Fixed income equities

     -        152         -        152   

Available-for-Sale Debt Securities

     -        581         -        581   

Asset Derivatives

           

Interest rate swaps

     -        17         -        17   

Cross-currency swaps

     -        1,753         -        1,753   

Liability Derivatives

           

Interest rate swaps

     -        (31)        -        (31)  

Cross-currency swaps

     -        (1,290)        -        (1,290)  
                                     

Investment Securities

Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities are estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Upon the adoption of ASU 2016-01, we reclassified $658 of such unrealized gains and losses on equity securities to retained earnings and beginning in 2018, gains and losses, both realized and unrealized, on equity securities measured at fair value are included in “Other income (expense) – net” in the consolidated statements of income using the specific identification method.

 

26


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The components comprising total gains and losses on equity securities are as follows:

 

      Three months ended      Six months ended  
     June 30,      June 30,  
      2018     2017      2018     2017  

Total gains (losses) recognized on equity securities

   $             21     $             14      $             8     $         103  

Gains (Losses) recognized on equity securities sold

     (3     -        49       11  

Unrealized gains (losses) recognized on equity securities held at end of period    

     24       14        (41     92  
                                   

Debt securities of $34 have maturities of less than one year, $136 within one to three years, $117 within three to five years and $603 for five or more years.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in “Other current assets” and our investment securities are recorded in “Other Assets” on the consolidated balance sheets.

Derivative Financial Instruments

We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the six months ended June 30, 2018 and June 30, 2017, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.

Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S. dollar denominated interest rate.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as “Other income (expense) – net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the six months ended June 30, 2018 and June 30, 2017, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

 

27


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify $60 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to “Other income (expense) – net” in the consolidated statements of income. In the six months ended June 30, 2018 and June 30, 2017, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At June 30, 2018, we had posted collateral of $580 (a deposit asset) and held collateral of $687 (a receipt liability). Under the agreements, if AT&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in June, we would have been required to post additional collateral of $138. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- (S&P), we would have been required to post additional collateral of $199. At December 31, 2017, we had posted collateral of $495 (a deposit asset) and held collateral of $968 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

 

      June 30,
2018
     December 31,
2017
 

Interest rate swaps

   $             7,333      $             9,833  

Cross-currency swaps

     36,092        38,694  

Foreign exchange contracts

     2,399        -  

Total

   $ 45,824      $ 48,527  
                   

Following are the related hedged items affecting our financial position and performance:

 

Effect of Derivatives on the Consolidated Statements of Income

 

      Three months ended      Six months ended  
     June 30,      June 30,  
Fair Value Hedging Relationships    2018      2017      2018      2017  

Interest rate swaps (Interest expense):

           

Gain (Loss) on interest rate swaps

   $                   (9)      $                 (23)      $                 (62)      $                 (48)  

Gain (Loss) on long-term debt

            23         62         48   
                                     

In addition, the net swap settlements that accrued and settled in the quarter ended June 30 were offset against interest expense.

 

28


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

      Three months ended      Six months ended  
     June 30,      June 30,  
Cash Flow Hedging Relationships    2018      2017      2018      2017  

Cross-currency swaps:

           

Gain (Loss) recognized in accumulated OCI

   $             (533)      $             (717)      $             321       $             (697)  

Interest rate locks:

           

Gain (Loss) recognized in accumulated OCI

            (79)               (79)  

Interest income (expense) reclassified from accumulated OCI into income

     (14)        (14)        (29)        (29)  
                                     

NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

Time Warner On June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. The deal combines Time Warner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world’s largest pay-TV subscriber bases and scale in TV, mobile and broadband distribution. We expect that the transaction will advance our direct-to-consumer efforts and provide us with the ability to develop innovative new offerings.

Under the merger agreement, each share of Time Warner stock was exchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to trusts consolidated by AT&T, share-based payment arrangements and fractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to Time Warner shareholders, giving them an approximate 16% stake in the combined company. Based on our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,114. On July 12, 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we will continue to vigorously defend our legal position in the appellate court.

Our second-quarter 2018 operating results include the results of Time Warner following the acquisition date. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content, in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. Our June 30, 2018, consolidated balance sheet includes the assets and liabilities of Time Warner, which have been measured at fair value.

 

29


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

 

Assets acquired

  

Cash

   $ 1,655   

Accounts receivable

     9,166   

All other current assets

     3,405   

Noncurrent inventory and theatrical film and television production costs

     5,778   

Property, plant and equipment

     4,699   

Intangible assets subject to amortization

  

Distribution network

     17,480   

Released television and film content

     11,322   

Trademarks and trade names

     18,100   

Other

     10,290   

Investments and other assets

     9,669   

Goodwill

     38,102   

 

 

Total assets acquired

     129,666   

 

 

Liabilities assumed

  

Current liabilities, excluding current portion of long-term debt

     8,513   

Long-term debt

     22,846   

Other noncurrent liabilities

     19,192   

 

 

Total liabilities assumed

     50,551   

 

 

Net assets acquired

     79,115   

 

 

Noncontrolling interest

     (1

 

 

Aggregate value of consideration paid

   $         79,114   

 

 

These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecorded pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units any changes in goodwill should be recorded.

Excluded from the table above are commitments of approximately $35,000 for future purchases primarily related to network programming obligations, including contracts to license sports programming.

Due to the proximity of the closing of this acquisition to the end of the quarter, we were not able to provide the requisite combined pro forma financial information.

Held-for-Sale

In June 2018, we entered into an agreement to sell 31 of our data centers to Brookfield Infrastructure Partners (Brookfield) for $1,100. We expect the transaction to close within the next six to eight months, subject to customary closing conditions.

We applied held-for-sale treatment to the assets associated with the data centers to be sold, which primarily consist of net property, plant and equipment of approximately $279 and goodwill of $236. These assets are included in “Other current assets,” on our June 30, 2018 consolidated balance sheet.

 

30


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a specified period of time and, in many cases, once certain conditions are met, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. As of June 30, 2018 and December 31, 2017, gross equipment installment receivables of $5,853 and $6,079 were included on our consolidated balance sheets, of which $3,781 and $3,340 are notes receivable that are included in “Accounts receivable - net.”

In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, in the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. As of June 30, 2018, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $5,723.

The following table sets forth a summary of equipment installment receivables sold during the three and six months ended June 30, 2018 and 2017:

 

      Three months ended      Six months ended  
     June 30,      June 30,  
      2018      2017      2018      2017  

Gross receivables sold

   $             1,906      $             1,752      $             4,916      $             4,598  

Net receivables sold1

     1,811        1,599        4,606        4,220  

Cash proceeds received

     1,532        1,415        3,927        2,847  

Deferred purchase price recorded

     307        293        826        1,482  

Guarantee obligation recorded

     72        74        195        74  

 

 

1  Receivables net of allowance, imputed interest and trade-in right guarantees.

The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of device trade-ins. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).

 

31


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price and cash during the three months and six months ended June 30, 2018 and 2017:

 

      Three months ended      Six months ended  
     June 30,      June 30,  
      2018      2017      2018      2017  

Fair value of repurchased receivables

   $             1,481      $                337      $             1,481      $                714  

Carrying value of deferred purchase price

     1,393        301        1,393        640  

Gain (loss) on repurchases1

   $ 88      $ 36      $ 88      $ 74  

 

 

1  These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income.

At June 30, 2018 and December 31, 2017, our deferred purchase price receivable was $1,686 and $2,749, respectively, of which $813 and $1,781 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at June 30, 2018 and December 31, 2017 was $362 and $204, respectively, of which $111 and $55 are included in “Accounts payable and accrued liabilities” on our consolidated balance sheets, with the remainder in “Other noncurrent liabilities.” Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.

The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to “Total Assets” reported on our consolidated balance sheets. We reflect cash receipts on owned equipment installment receivables as cash flows from operations in our consolidated statements of cash flows. With the retrospective adoption of ASU 2016-15 in 2018 (see Note 1), cash receipts on the deferred purchase price are now classified as cash flows from investing activities instead of cash flows from operating activities for all periods presented.

The outstanding portfolio of installment receivables derecognized from our consolidated balance sheets, but which we continue to service, was $7,564 and $7,446 at June 30, 2018 and December 31, 2017.

 

32


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 10. INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS

Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value and include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. The amount of capitalized film and television production costs recognized as broadcast, programming and operations expenses for a given period is determined using the film forecast computation method.

The following table summarizes inventories and theatrical film and television production costs as of June 30, 2018:

 

      June 30,
2018
 

Inventories:

  

Programming costs, less amortization1

   $ 4,252  

Other inventory, primarily DVD and Blu-ray Discs

     154  

Total inventories

     4,406  

Less: current portion of inventory

     (2,313

Total noncurrent inventories

     2,093  
          

Theatrical film production costs:2

  

Released, less amortization

     6  

Completed and not released

     49  

In production

     1,249  

Development and pre-production

     171  

Television production costs:2

  

Released, less amortization

     168  

Completed and not released

     534  

In production

     1,556  

Development and pre-production

     23  

Total theatrical film and television production costs

     3,756  

Total noncurrent inventories and theatrical film and television production costs

   $           5,849  
          
1  Includes the costs of certain programming rights, primarily sports, for which payments have been made prior to the related rights being received.
2  Does not include $11,150 of acquired film and television library intangible assets as of June 30, 2018, which are included in “Other Intangible Assets – Net” on our consolidated balance sheet.

 

33


AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

NOTE 11. ADDITIONAL FINANCIAL INFORMATION

Cash and Cash Flow

We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments. The following summarizes cash and cash equivalents and restricted cash balances contained on our consolidated balance sheets:

 

      June 30,              December 31,  
Cash and Cash Equivalents and Restricted Cash    2018      2017             2017     2016  

Cash and cash equivalents

   $ 13,523      $ 25,617         $ 50,498     $ 5,788  

Restricted cash in Other current assets

     12        6           6       7  

Restricted cash in Other Assets

     218        202           428       140  

Cash and cash equivalents and restricted cash

   $         13,753      $         25,825               $         50,932     $         5,935  
                                             
                                   
                              Six months ended  
                              June 30,  
Consolidated Statements of Cash Flows                            2018     2017  

Cash paid (received) during the period for:

             

Interest

            $ 4,045     $ 3,095  

Income taxes, net of refunds

                                (757     1,470  
                                             

Debt Transactions

As of June 30, 2018, our total long-term debt obligations totaled $190,167. During the first six months we completed the following debt activity:

 

For the purpose of providing financing in connection with our Time Warner acquisition, we drew the following on our lines of credit: $16,175 with JPMorgan Chase Bank, N.A., $2,500 with BNP Paribas and $2,250 with Bank of Nova Scotia.

 

Issuance of approximately $1,500 three-year floating rate note and other borrowings totaling $2,100.

 

Borrowings of approximately $7,900 of debt under our commercial paper program.

 

Net borrowings of approximately $1,000 by subsidiaries in Latin America.

 

Redemptions totaling approximately $4,550 for AT&T notes that matured prior to June 30, 2018.

 

Redemption of $21,235 of AT&T notes issued in anticipation of the Time Warner acquisition that were subject to mandatory redemption.

 

With the acquisition of Time Warner, we acquired $22,846 of debt, of which we repaid $2,000 for amounts outstanding under term credit agreements, $600 of notes and $765 of commercial paper borrowings.

 

34


AT&T INC.

JUNE 30, 2018

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 worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (“Notes”). We completed the acquisition of Time Warner Inc. (referred to as “Time Warner” or “WarnerMedia”) on June 14, 2018, and have included WarnerMedia results for the 16-day period ended June 30, 2018. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from WarnerMedia prior to the acquisition are excluded.

Consolidated Results In the first quarter of 2018, we adopted new revenue accounting rules that significantly affect the comparability of our consolidated and segment operating results (see Note 5). As a supplement to our discussion of operating results, comparable financial results presented under the historical method of accounting are available in “Supplemental Results Under Historical Accounting Method.” Our financial results in the second quarter and for the first six months of 2018, including impacts from new revenue accounting rules, and 2017 are summarized as follows:

 

      Second Quarter     Six-Month Period  
                   Percent                   Percent  
      2018      2017      Change     2018      2017      Change  

Operating Revenues

                

Service

   $         33,773      $         36,538        (7.6 )%    $         67,419      $         72,994        (7.6 )% 

Equipment

     4,080        3,299        23.7       8,472        6,208        36.5  

Media

     1,133        -        -       1,133        -        -  

Total Operating Revenues

     38,986        39,837        (2.1     77,024        79,202        (2.7

Operating expenses

                

Cost of revenues

                

Equipment

     4,377        4,138        5.8       9,225        7,986        15.5  

Broadcast, programming and operations

     5,449        4,898        11.2       10,615        9,872        7.5  

Other cost of revenues

     7,632        9,569        (20.2     15,564        18,857        (17.5

Selling, general and administrative

     8,684        8,559        1.5       16,581        17,331        (4.3

Depreciation and amortization

     6,378        6,147        3.8       12,372        12,274        0.8  

Total Operating Expenses

     32,520        33,311        (2.4     64,357        66,320        (3.0

Operating Income

     6,466        6,526        (0.9     12,667        12,882        (1.7

Income Before Income Taxes

     6,780        6,070        11.7       12,921        11,448        12.9  

Net Income

     5,248        4,014        30.7       10,007        7,588        31.9  

Net Income Attributable to AT&T

   $ 5,132      $ 3,915        31.1   $ 9,794      $ 7,384        32.6
                                                      

Overview

Operating revenues decreased $851, or 2.1%, in the second quarter and $2,178, or 2.7%, for the first six months of 2018.

Service revenues decreased $2,765, or 7.6%, in the second quarter and $5,575, or 7.6%, for the first six months of 2018. The decreases in the second quarter and first six months were primarily due to our adoption of a new revenue accounting standard, which included our policy election to record Universal Service Fund (USF) fees on a net basis and also resulted in less revenue allocation to the service component of bundled contracts. Also contributing to the decrease was the continued decline in video services and legacy wireline voice and data products.

Equipment revenues increased $781, or 23.7%, in the second quarter and $2,264, or 36.5%, for the first six months of 2018. The increases were due to the adoption of new revenue accounting standards that contributed to higher revenue allocations from bundled contracts and the sale of higher-priced devices.

 

35


AT&T INC.

JUNE 30, 2018

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Media revenues for the second quarter and first six months were $1,133 and in each case are attributable to the 16-day period since acquiring WarnerMedia.

Operating expenses decreased $791, or 2.4%, in the second quarter and $1,963, or 3.0%, for the first six months of 2018.

Equipment expenses increased $239, or 5.8%, in the second quarter and $1,239, or 15.5%, for the first six months of 2018. The increases during the second quarter and the first six months were driven by an increase in the sale of higher-priced devices.

Broadcast, programming and operations expenses increased $551, or 11.2%, in the second quarter and $743, or 7.5%, for the first six months of 2018. Expense increases during the second quarter and first six months were due to annual content cost increases and additional programming costs, including programming and production costs associated with WarnerMedia for the 16-day period since acquisition.

Other cost of revenues expenses decreased $1,937, or 20.2%, in the second quarter and $3,293, or 17.5%, for the first six months of 2018. The decreases during the second quarter and first six months reflect our adoption of new accounting rules, which included our policy election to record USF fees net. Also contributing to the decreases were lower expenses due to cost management and utilization of automation and digitalization where appropriate.

Selling, general and administrative expenses increased $125, or 1.5%, in the second quarter and decreased $750, or 4.3%, for the first six months of 2018. The increase in the second quarter was primarily attributable to expenses from WarnerMedia, including acquisition-related expenses due to the closing of the Time Warner transaction. Also contributing to the second quarter increase were higher employee separation costs. Offsetting some of the increases during the second quarter, and contributing to the overall decrease during the first six months, was the effect of new accounting standards, which resulted in commissions being deferred and amortized over the contract period or expected customer life, in addition to expense reductions due to our disciplined cost management. Partially offsetting the decrease during the first six months were higher costs due to natural disasters and, in the comparable period of 2017, gains on wireless spectrum transactions.

Depreciation and amortization expense increased $231, or 3.8%, in the second quarter and $98, or 0.8%, for the first six months of 2018. Depreciation expense increased $123, or 2.5%, in the second quarter and $130, or 1.3%, for the first six months of 2018. The increases were primarily due to 16-days of WarnerMedia results as well as ongoing capital spending for network upgrades and expansion offset by lower expense resulting from our fourth-quarter 2017 abandonment of certain copper network assets.

Amortization expense increased $108, or 9.2%, in the second quarter and decreased $32, or 1.3%, for the first six months of 2018. The increase in the second quarter was due to the amortization of intangibles associated with the previously mentioned acquisition. For the six-month period, the decrease was due to amortization of intangibles for customer lists associated with prior acquisitions mostly offset by the WarnerMedia acquisition.

Operating income decreased $60, or 0.9%, in the second quarter and decreased $215, or 1.7%, for the first six months of 2018. Our operating income margin in the second quarter increased from 16.4% in 2017 to 16.6% in 2018, and for the first six months increased from 16.3% in 2017 to 16.4% in 2018.

Interest expense increased $628, or 45.0%, in the second quarter and $1,106, or 41.1%, for the first six months of 2018. The increase was primarily due to higher debt balances related to our acquisition of Time Warner, including interest expense on Time Warner notes for 16-days, and an increase in average interest rates when compared to the prior year.

Equity in net income (loss) of affiliates decreased $30 in the second quarter of 2018 and increased $152, or 95.6%, for the first six months of 2018. Results for the second quarter and the first six months of 2018 include net losses from investments acquired through our purchase of Time Warner. The increase in the first six months of 2018 was predominantly due to losses in the first quarter of 2017 from our legacy publishing business, which was sold in June 2017.

 

36


AT&T INC.

JUNE 30, 2018

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Other income (expense) – net increased $1,428 in the second quarter and $2,642 for the first six months. The increases were primarily due to actuarial gains of $1,796 and $2,726, resulting from remeasurement of our pension and postretirement benefit obligations and increased interest income of $94 and $258, partially offset by premiums on the redemption of debt of $226 in the second quarter of 2018.

Income taxes decreased $524, or 25.5%, in the second quarter of 2018 and decreased $946, or 24.5%, for the first six months of 2018. Our effective tax rate was 22.6% in the second quarter and for the first six months of 2018, as compared to 33.9% for the second quarter and 33.7% for the first six months of 2017. The stand-alone effective tax rate of WarnerMedia was 20.3% for the 16-day period ended June 30, 2018. The decreases in income tax expense and our effective tax rates for the second quarter and the first six months of 2018 were primarily due to the December 2017 enactment of U.S. corporate tax reform, which reduced the federal tax rate from 35% to 21%. Partially offsetting the decreased tax rates was higher earnings in the second quarter and first six months of 2018. We continue to expect our effective tax rate for 2018, including WarnerMedia, to be approximately 23%.

 

Selected Financial and Operating Data

                     
       June 30,  

Subscribers and connections in (000s)

       2018          2017  

Domestic wireless subscribers

       146,889          136,102  

Mexican wireless subscribers

       16,398          13,082  

North American wireless subscribers

       163,287          149,184  
                       

North American branded subscribers

       109,806          104,022  

North American branded net additions

       2,138          1,639  

Domestic satellite video subscribers

       19,984          20,856  

AT&T U-verse® (U-verse) video subscribers

       3,680          3,853  

DIRECTV NOW video subscribers

       1,809          491  

Latin America satellite video subscribers1

       13,713          13,622  

Total video subscribers

       39,186          38,822  
                       

Total domestic broadband connections

       15,772          15,686  

Network access lines in service

       10,832          12,791  

U-verse VoIP connections

       5,449          5,853  

Debt ratio2

       50.8%          53.3%  

Net debt ratio3

       47.2%          43.8%  

Ratio of earnings to fixed charges4

       3.64          3.84  

Number of AT&T employees

       273,210          260,480  
                       
1

Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. At March 31, 2018. SKY Mexico had 8.0 million subscribers.

2

Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders’ equity) and do not consider cash available to pay down debt. See our “Liquidity and Capital Resources” section for discussion.

3

Net debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders’ equity).

4 

See Exhibit 12.

 

37


AT&T INC.

JUNE 30, 2018

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. We have five reportable segments: (1) Consumer Mobility, (2) Business Solutions, (3) Entertainment Group (4) International, and (5) WarnerMedia.

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

To most effectively implement our strategies for 2018, effective January 1, 2018, we retrospectively realigned certain responsibilities and operations within our reportable segments. The most significant of these changes was to report individual wireless accounts with employer discounts in our Consumer Mobility segment, instead of our Business Solutions segment.

With our acquisition of WarnerMedia, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset. For consolidated reporting, all amortization of pre-acquisition released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we will continue to report the historic content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historic content production cost amortization reported in the segment results was $189 for the 16-day period ended June 30, 2018, $98 of which was for pre-acquisition released programming.

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

The Business Solutions segment provides services to business customers, including multinational companies and governmental and wholesale customers. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products; FlexWare, a service that relies on Software Defined Networking and Network Function Virtualization to provide application-based routing, and broadband, collectively referred to as strategic services; as well as traditional data and voice products. We provide a complete communications solution to our business customers.

The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories.

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

The WarnerMedia segment provides global media and entertainment services through television networks and film, using its brands to create, package and deliver high-quality content worldwide. The segment consists of Turner, Home Box Office (HBO) and Warner Bros. businesses.

 

38


AT&T INC.

JUNE 30, 2018

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Our domestic business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our shared asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment. We push down administrative activities into the business units to better manage costs and serve our customers.

Consumer Mobility

Segment Results

      Second Quarter     Six-Month Period  
      2018      2017      Percent
Change
    2018      2017      Percent
Change
 

Segment operating revenues

                

Service

   $           11,853      $           12,467        (4.9 )%    $           23,465      $ 24,932         (5.9 )% 

Equipment

     3,016        2,624        14.9       6,390        4,965         28.7  
          

 

 

    
                                 

Total Segment Operating Revenues

     14,869        15,091        (1.5     29,855        29,897         (0.1
          

 

 

    
                                 

Segment operating expenses

                

Operations and support

     8,085        8,636        (6.4     16,609                17,196         (3.4

Depreciation and amortization

     1,806        1,716        5.2       3,613        3,432         5.3  
          

 

 

    
                                 

Total Segment Operating Expenses

     9,891        10,352        (4.5     20,222        20,628         (2.0
          

 

 

    
                                 

Segment Operating Income

     4,978        4,739        5.0       9,633        9,269         3.9  

Equity in Net Income of Affiliates

     -        -        -       -               -  
          

 

 

    
                                 

Segment Contribution

   $ 4,978      $ 4,739        5.0   $ 9,633      $ 9,269         3.9
                                                      

The following tables highlight other key measures of performance for the Consumer Mobility segment:

 

        June 30,        Percent  
(in 000s)      2018        2017        Change  

Consumer Mobility Subscribers

              

Postpaid

       65,326          65,570          (0.4 )% 

Prepaid

       15,376          14,187          8.4  

Branded

       80,702          79,757          1.2  

Reseller

       8,484          10,182          (16.7

Total Consumer Mobility Subscribers

       89,186          89,939          (0.8 )% 
                                  

 

        Second Quarter      Six-Month Period  
(in 000s)      2018        2017        Percent
Change
     2018        2017        Percent
Change
 

Consumer Mobility Net Additions 1

                           

Postpaid

       (49        (28        (75.0 )%       (113        (310        63.5

Prepaid

       356          267          33.3        548          549          (0.2

Branded Net Additions

       307          239          28.5        435          239          82.0  

Reseller

       (451        (364        (23.9      (841        (951        11.6  

Consumer Mobility Net Subscriber Additions

       (144        (125        (15.2 )%       (406        (712        43.0
                                                                 

1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.

Operating Revenues decreased $222, or 1.5%, in the second quarter and $42, or 0.1%, for the first six months of 2018. The decreases were due to lower service revenues resulting from customers choosing unlimited plans and the impact of newly adopted accounting rules, which include our policy election to record USF fees on a net basis. Lower service revenues were partially offset by higher equipment revenues.

 

39


AT&T INC.

JUNE 30, 2018

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Service revenue decreased $614, or 4.9%, in the second quarter and $1,467, or 5.9%, for the first six months of 2018. The decreases were largely due to our adoption of a new accounting standard that included our policy election to no longer include USF fees in revenues which resulted in less revenue being allocated to the service component of bundled contracts. Also contributing to the decrease was the impact of customers continuing to shift to discounted monthly service charges under our unlimited plans, partially offset by higher prepaid service revenues resulting from growth in Cricket and AT&T PREPAIDSM subscribers. Since our unlimited plans have now been in effect for a year, service revenues on a comparable basis should increase for the remainder of 2018.

Equipment revenue increased $392, or 14.9%, in the second quarter and $1,425, or 28.7%, for the first six months of 2018. The increases in equipment revenues resulted from the sale of higher-priced devices as well as the adoption of new accounting standards that contributed to higher revenue allocations from bundled contracts. Equipment revenue is unpredictable as customers are choosing to upgrade devices less frequently or bring their own devices.

Operations and support expenses decreased $551, or 6.4%, in the second quarter and $587, or 3.4%, for the first six months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

Decreased operations and support expenses were primarily due to our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to the decrease were increased operational efficiencies, partially offset by increased equipment costs related to wireless equipment sales and upgrades.

Depreciation expense increased $90, or 5.2%, in the second quarter and $181, or 5.3%, for the first six months of 2018. The increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

Operating income increased $239, or 5.0%, in the second quarter and $364, or 3.9%, for the first six months of 2018. Our Consumer Mobility segment operating income margin in the second quarter increased from 31.4% in 2017 to 33.5% in 2018, and for the first six months increased from 31.0% in 2017 to 32.3% in 2018. Our Consumer Mobility EBITDA margin in the second quarter increased from 42.8% in 2017 to 45.6% in 2018, and for the first six months increased from 42.5% in 2017 to 44.4% in 2018.

 

40


AT&T INC.

JUNE 30, 2018

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

 

Business Solutions

Segment Results

      Second Quarter     Six-Month Period  
      2018      2017      Percent
Change
    2018      2017      Percent
Change
 

Segment operating revenues

                

Wireless service

   $         1,829      $         2,004        (8.7 )%    $         3,620      $         4,007         (9.7)

Strategic services

     3,039        2,958        2.7       6,109        5,862         4.2   

Legacy voice and data services

     2,723        3,423        (20.4     5,561        6,971         (20.2)  

Other service and equipment

     888        922        (3.7     1,727        1,800         (4.1)  

Wireless equipment

     584        360        62.2       1,162        648         79.3   
          

 

 

    
                                 

Total Segment Operating Revenues

     9,063        9,667        (6.2     18,179        19,288         (5.7)  
          

 

 

    
                                 

Segment operating expenses

                

Operations and support

     5,616        6,053        (7.2     11,210        12,051         (7.0)  

Depreciation and amortization

     1,487        1,483        0.3       2,945        2,943         0.1   
          

 

 

    
                                 

Total Segment Operating Expenses

     7,103        7,536