TIDM58KN
RNS Number : 5602Q
AT & T Inc.
06 June 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
QUARTERLY REPORT PURSUANT
x TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period
ended March 31, 2018
or
o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or emerging growth company. See
definition of "accelerated filer," "large accelerated filer,"
"smaller reporting company" and "emerging growth company" in Rule
12b-2 of the Exchange Act.
Large accelerated [X] Accelerated filer [ ]
filer
Non-accelerated [ ] (Do not check if a smaller Smaller reporting [ ]
filer reporting company) company
Emerging growth [ ]
company
If an emerging growth company, indicate by checkmark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At April 30, 2018, there were 6,141 million common shares
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
-------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
-------------------------------------------------------------------------------
Three months
ended
March 31,
2018 2017
----------------------------------------------------- ------- -------------
As Adjusted
Operating Revenues
Service $33,646 $ 36,456
Equipment 4,392 2,909
------------------------------------------------------ ------ ---------
Total operating revenues 38,038 39,365
------------------------------------------------------ ------ ---------
Operating Expenses
Cost of services and sales
Equipment 4,848 3,848
Broadcast, programming and operations 5,166 4,974
Other cost of services (exclusive of depreciation
and
amortization shown separately below) 7,932 9,288
Selling, general and administrative 7,897 8,772
Depreciation and amortization 5,994 6,127
------------------------------------------------------ ------ ---------
Total operating expenses 31,837 33,009
------------------------------------------------------ ------ ---------
Operating Income 6,201 6,356
------------------------------------------------------ ------ ---------
Other Income (Expense)
Interest expense (1,771) (1,293)
Equity in net income (loss) of affiliates 9 (173)
Other income (expense) - net 1,702 488
------------------------------------------------------ ------ ---------
Total other income (expense) (60) (978)
------------------------------------------------------ ------ ---------
Income Before Income Taxes 6,141 5,378
Income tax expense 1,382 1,804
Net Income 4,759 3,574
------------------------------------------------------ ------ ---------
Less: Net Income Attributable to Noncontrolling
Interest (97) (105)
------------------------------------------------------ ------ ---------
Net Income Attributable to AT&T $ 4,662 $ 3,469
====================================================== ====== =========
Basic Earnings Per Share Attributable to AT&T $ 0.75 $ 0.56
Diluted Earnings Per Share Attributable to
AT&T $ 0.75 $ 0.56
------------------------------------------------------ ------ ---------
Weighted Average Number of Common Shares Outstanding
- Basic (in millions) 6,161 6,166
Weighted Average Number of Common Shares Outstanding
- with Dilution (in millions) 6,180 6,186
Dividends Declared Per Common Share $ 0.50 $ 0.49
====================================================== ====== =========
See Notes to Consolidated Financial Statements.
2
AT&T INC.
---------------------------------------------------------- ------ ------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
---------------------------------------------------------- ------ ------
Three months
ended
March 31,
2018 2017
---------------------------------------------------------- ------ ------
Net income $4,759 $3,574
Other comprehensive income (loss), net of tax:
Foreign currency:
Translation adjustment (includes $2 and $6
attributable to noncontrolling interest),
net of taxes of $175 and $391 108 372
Available-for-sale securities:
Net unrealized gains (losses), net of taxes
of $(4) and $15 (12) 33
Reclassification adjustment included in net
income, net of taxes of $0, and $3 - 5
Cash flow hedges:
Net unrealized gains, net of taxes of $180
and $7 674 13
Reclassification adjustment included in net
income, net of taxes of $3 and $5 12 10
Defined benefit postretirement plans:
Net prior service credit arising during period,
net of taxes of $185 and $0 567 -
Amortization of net prior service credit included
in net income, net of taxes of $(105)
and $(139) (323) (228)
----------------------------------------------------------- ----- -----
Other comprehensive income (loss) 1,026 205
----------------------------------------------------------- ----- -----
Total comprehensive income 5,785 3,779
Less: Total comprehensive income attributable
to noncontrolling interest (99) (111)
----------------------------------------------------------- ----- -----
Total Comprehensive Income Attributable to
AT&T $5,686 $3,668
=========================================================== ===== =====
See Notes to Consolidated Financial Statements.
3
AT&T INC.
-------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
-------------------------------------------------------------------------------
March December
31, 31,
2018 2017
--------------------------------------------------- ------------- ---------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 48,872 $ 50,498
Accounts receivable - net of allowances for
doubtful accounts of $642 and $663 16,290 16,522
Prepaid expenses 1,335 1,369
Other current assets 12,008 10,757
---------------------------------------------------- --------- --------
Total current assets 78,505 79,146
---------------------------------------------------- --------- --------
Property, plant and equipment 317,127 313,499
Less: accumulated depreciation and amortization (192,003) (188,277)
---------------------------------------------------- --------- --------
Property, Plant and Equipment - Net 125,124 125,222
---------------------------------------------------- --------- --------
Goodwill 105,482 105,449
Licenses 96,556 96,136
Customer Lists and Relationships - Net 9,878 10,676
Other Intangible Assets - Net 7,201 7,464
Investments in and Advances to Equity Affiliates 2,623 1,560
Other Assets 20,974 18,444
---------------------------------------------------- --------- --------
Total Assets $ 446,343 $ 444,097
==================================================== ========= ========
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 29,322 $ 38,374
Accounts payable and accrued liabilities 31,569 34,470
Advanced billings and customer deposits 5,081 4,213
Accrued taxes 1,534 1,262
Dividends payable 3,074 3,070
---------------------------------------------------- --------- --------
Total current liabilities 70,580 81,389
---------------------------------------------------- --------- --------
Long-Term Debt 133,724 125,972
---------------------------------------------------- --------- --------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 45,730 43,207
Postemployment benefit obligation 30,116 31,775
Other noncurrent liabilities 19,117 19,747
---------------------------------------------------- --------- --------
Total deferred credits and other noncurrent
liabilities 94,963 94,729
---------------------------------------------------- --------- --------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000
authorized at March 31, 2018 and
December 31, 2017: issued 6,495,231,088 at
March 31, 2018 and December 31, 2017) 6,495 6,495
Additional paid-in capital 89,404 89,563
Retained earnings 55,067 50,500
Treasury stock (347,690,578 at March 31, 2018
and 355,806,544
at December 31, 2017, at cost) (12,432) (12,714)
Accumulated other comprehensive income 7,386 7,017
Noncontrolling interest 1,156 1,146
---------------------------------------------------- --------- --------
Total stockholders' equity 147,076 142,007
---------------------------------------------------- --------- --------
Total Liabilities and Stockholders' Equity $ 446,343 $ 444,097
==================================================== ========= ========
See Notes to Consolidated Financial Statements.
4
AT&T INC.
---------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
------------------------------------------------------- ------- -------------
Three months
ended
March 31,
2018 2017
------------------------------------------------------- ------- -------------
As Adjusted
Operating Activities
Net income $ 4,759 $ 3,574
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,994 6,127
Undistributed earnings from investments in
equity affiliates (2) 182
Provision for uncollectible accounts 438 393
Deferred income tax expense 1,222 480
Net (gain) loss from investments, net of
impairments 2 61
Actuarial (gain) loss on pension and postretirement
benefits (930) -
Changes in operating assets and liabilities:
Accounts receivable (439) 445
Other current assets 614 229
Accounts payable and other accrued liabilities (1,962) (1,582)
Equipment installment receivables and related
sales 505 394
Deferred customer contract acquisition and
fulfillment costs (826) (436)
Retirement benefit funding (140) (140)
Other - net (288) (762)
-------------------------------------------------------- ------ ---------
Total adjustments 4,188 5,391
-------------------------------------------------------- ------ ---------
Net Cash Provided by Operating Activities 8,947 8,965
-------------------------------------------------------- ------ ---------
Investing Activities
Capital expenditures:
Purchase of property and equipment (5,957) (5,784)
Interest during construction (161) (231)
Acquisitions, net of cash acquired (234) (162)
Dispositions 56 6
Sales (purchases) of securities, net (116) 17
Advances to and investments in equity affiliates,
net (1,007) -
Cash collections of deferred purchase price 267 185
-------------------------------------------------------- ------ ---------
Net Cash Used in Investing Activities (7,152) (5,969)
-------------------------------------------------------- ------ ---------
Financing Activities
Issuance of long-term debt 2,565 12,440
Repayment of long-term debt (4,911) (3,053)
Purchase of treasury stock (145) (177)
Issuance of treasury stock 11 21
Dividends paid (3,070) (3,009)
Other 2,048 (173)
-------------------------------------------------------- ------ ---------
Net Cash (Used in) Provided by Financing Activities (3,502) 6,049
-------------------------------------------------------- ------ ---------
Net (decrease) increase in cash and cash equivalents
and restricted cash (1,707) 9,045
Cash and cash equivalents and restricted cash
beginning of year 50,932 5,935
-------------------------------------------------------- ------ ---------
Cash and Cash Equivalents and Restricted Cash
End of Period $49,225 $ 14,980
======================================================== ====== =========
See Notes to Consolidated Financial Statements.
5
AT&T INC.
----------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
----------------------------------------------------------------------------
March 31, 2018
------------------
Shares Amount
------------------------------------------------------- ------- --------
Common Stock
Balance at beginning of year 6,495 $ 6,495
Issuance of stock - -
------------------------------------------------------- ------ -------
Balance at end of period 6,495 $ 6,495
========================================================= ====== =======
Additional Paid-In Capital
Balance at beginning of year $ 89,563
Issuance of treasury stock (4)
Share-based payments (155)
--------------------------------------------------------- ------ -------
Balance at end of period $ 89,404
========================================================= ====== =======
Retained Earnings
Balance at beginning of year $ 50,500
Net income attributable to AT&T ($0.75 per
diluted share) 4,662
Dividends to stockholders ($0.50 per share) (3,092)
Cumulative effect of accounting changes 2,997
--------------------------------------------------------- ------ -------
Balance at end of period $ 55,067
========================================================= ====== =======
Treasury Stock
Balance at beginning of year (356) $(12,714)
Repurchase and acquisition of common stock (4) (164)
Issuance of treasury stock 12 446
--------------------------------------------------------- ------ -------
Balance at end of period (348) $(12,432)
========================================================= ====== =======
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 1,024
Amounts reclassified to retained earnings (655)
--------------------------------------------------------- ------ -------
Balance at end of period $ 7,386
========================================================= ====== =======
Noncontrolling Interest
Balance at beginning of year $ 1,146
Net income attributable to noncontrolling interest 97
Distributions (124)
Translation adjustments attributable to noncontrolling
interest, net of taxes 2
Cumulative effect of accounting changes 35
--------------------------------------------------------- ------ -------
Balance at end of period $ 1,156
========================================================= ====== =======
Total Stockholders' Equity at beginning of
year $142,007
========================================================= ====== =======
Total Stockholders' Equity at end of period $147,076
========================================================= ====== =======
See Notes to Consolidated Financial Statements.
6
AT&T INC.
MARCH 31, 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 in the communications and
digital entertainment services industry. Our subsidiaries and
affiliates provide services and equipment that deliver voice, video
and broadband services domestically and internationally. You should
read this document in conjunction with the consolidated financial
statements and accompanying notes included in our Annual Report on
Form 10-K for the year ended December 31, 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.
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. We treat distributions received from equity method
investees as returns on investment and classify them as cash flows
from operating activities until those distributions exceed our
cumulative equity in the earnings of that investment. We treat the
excess amount as a return of investment and classify it as cash
flows from investing activities.
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 Acts (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
quarter of 2018. Our future results could include additional
adjustments, and those adjustments could be material.
7
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Recently Adopted Accounting Standards
Revenue Recognition As of January 1, 2018, we adopted Financial
Accounting Standards Board (FASB) Accounting Standards Update (ASU)
No. 2014-09, "Revenue from Contracts with Customers (Topic 606),"
as modified (ASC 606), using the modified retrospective method,
which does not allow us to adjust prior periods. We applied the
rules to all open contracts existing as of January 1, 2018,
recording an increase of $2,342 to retained earnings for the
cumulative effect of the change, with an offsetting contract asset
of $1,737, deferred contract acquisition costs of $1,454, other
asset reductions of $239, other liability reductions of $212,
deferred income taxes of $787 and noncontrolling interest of $35.
(See Note 5)
Pension and Other Postretirement Benefits As of January 1, 2018,
we adopted, with retrospective application, ASU No. 2017-07,
"Compensation - Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost" (ASU 2017-07). We are no longer
allowed to present 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):
Effect
Historical of
Adoption
Accounting of As
Method ASU 2017-07 Adjusted
------------------------------------- ------------ ------------- ----------
For the three months ended March 31,
2018
Consolidated Statements of Income
Other cost of services $ 7,572 $ 360 $ 7,932
Selling, general and administrative
expenses 6,755 1,142 7,897
Operating Income 7,703 (1,502) 6,201
Other Income (Expense) - net 200 1,502 1,702
Net Income 4,759 - 4,759
====================================== ======== ========= ======
For the three months ended March 31,
2017
Consolidated Statements of Income
Other cost of services $ 9,065 $ 223 $ 9,288
Selling, general and administrative
expenses 8,487 285 8,772
Operating Income 6,864 (508) 6,356
Other Income (Expense) - net (20) 508 488
Net Income 3,574 - 3,574
====================================== ======== ========= ======
8
AT&T INC.
MARCH 31, 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 10)
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):
Effect Effect
Historical of of
Adoption Adoption
Accounting of of As
Method ASU 2016-15 ASU 2016-18 Adjusted
------------------------------------ ------------ ------------- ------------- ----------
For the three months ended
March 31, 2018
Consolidated Statements of
Cash Flows
Equipment installment receivables
and related sales $ 772 $ (267) $ - $ 505
Other - net (322) - 34 (288)
Cash Provided by (Used in)
Operating Activities 9,180 (267) 34 8,947
Sales (purchases) of securities
- net - - (116) (116)
Cash collections of deferred
purchase price - 267 - 267
Cash Used in Investing Activities (7,303) 267 (116) (7,152)
Change in cash and cash equivalents
and restricted cash $ (1,625) $ - $ (82) $ (1,707)
===================================== ======== === ======== === ======== ======
For the three months ended
March 31, 2017
Consolidated Statements of
Cash Flows
Changes in other current assets $ 228 $ - $ 1 $ 229
Equipment installment receivables
and related sales 579 (185) - 394
Other - net (693) - (69) (762)
Cash Provided by Operating
Activities 9,218 (185) (68) 8,965
Sales (purchases) of securities
- net - - 17 17
Cash collections of deferred
purchase price - 185 - 185
Cash Used in Investing Activities (6,171) 185 17 (5,969)
Change in cash and cash equivalents
and restricted cash $ 9,096 $ - $ (51) $ 9,045
===================================== ======== === ======== === ======== ======
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 $655 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.
MARCH 31, 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,
and is effective for annual reporting periods beginning after
December 15, 2018, subject to early adoption. 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.
Upon initial evaluation, we believe the key change upon adoption
will be the balance sheet recognition. At adoption, we will
recognize a right-to-use asset and corresponding lease liability on
our consolidated balance sheets. 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 ended March 31,
2018 and 2017, is shown in the table below:
Three months
ended
March 31,
2018 2017
-------------------------------------------------------- ------ ------
Numerators
Numerator for basic earnings per share:
Net Income $4,759 $3,574
Less: Net income attributable to noncontrolling
interest (97) (105)
--------------------------------------------------------- ----- -----
Net Income attributable to AT&T 4,662 3,469
Dilutive potential common shares:
Share-based payment 5 4
--------------------------------------------------------- ----- -----
Numerator for diluted earnings per share $4,667 $3,473
========================================================= ===== =====
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding 6,161 6,166
Dilutive potential common shares:
Share-based payment (in shares) 19 20
--------------------------------------------------------- ----- -----
Denominator for diluted earnings per share 6,180 6,186
========================================================= ===== =====
Basic earnings per share attributable to AT&T $ 0.75 $ 0.56
Diluted earnings per share attributable to
AT&T $ 0.75 $ 0.56
========================================================= ===== =====
10
AT&T INC.
MARCH 31, 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.
Net
Net Unrealized Unrealized
Foreign Gains (Losses) Gains Defined Accumulated
Currency on (Losses) Benefit Other
Translation Available-for-Sale on Cash Postretirement Comprehensive
Adjustment Securities Flow Hedges Plans Income
------------------- ------------- ------------------- ----------- ---------------- --------------
Balance as of
December 31,
2017 $ (2,054) $ 660 $ 1,402 $ 7,009 $ 7,017
Other comprehensive
income
(loss) before
reclassifications 106 (12) 674 567 1,335
Amounts
reclassified
from accumulated
OCI - 1 - 1 12 2 (323) 3 (311)
------------------- --------- ------------------ ---------- ------------ -------------
Net other
comprehensive
income (loss) 106 (12) 686 244 1,024
------------------- --------- ------------------ ---------- ------------ -------------
Amounts
reclassified
to
retained earnings - (655) 4 - - (655)
------------------- --------- ------------------ ---------- ------------ -------------
Balance as of
March 31, 2018 $ (1,948) $ (7) $ 2,088 $ 7,253 $ 7,386
=================== ========= ================== ========== ============ =============
Net
Net Unrealized Unrealized
Foreign Gains (Losses) Gains Defined Accumulated
Currency on (Losses) Benefit Other
Translation Available-for-Sale on Cash Postretirement Comprehensive
Adjustment Securities Flow Hedges Plans Income
------------------- ------------- ------------------- ----------- ---------------- --------------
Balance as of
December 31,
2016 $ (1,995) $ 541 $ 744 $ 5,671 $ 4,961
Other comprehensive
income
(loss) before
reclassifications 366 33 13 - 412
Amounts
reclassified
from accumulated
OCI - 1 5 1 10 2 (228) 3 (213)
------------------- --------- ------------------ ---------- ------------ -------------
Net other
comprehensive
income (loss) 366 38 23 (228) 199
------------------- --------- ------------------ ---------- ------------ -------------
Balance as of
March 31, 2017 $ (1,629) $ 579 $ 767 $ 5,443 $ 5,160
=================== ========= ================== ========== ============ =============
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 for additional
information.
3 The amortization of prior service credits associated with
postretirement benefits are included in Other income (expense)
in the
consolidated statements of income (see Note 6).
4 With the adoption of ASU 2016-01, the unrealized (gains)
losses on our equity investments
are reclassified to retained earnings (see Note 1).
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products
and services to different customer segments over various technology
platforms and/or in different geographies that are managed
accordingly. We analyze our segments based on Segment Contribution,
which consists of operating income, excluding acquisition-related
costs and other significant items (as discussed below), and equity
in net income (loss) of affiliates for investments managed within
each segment. We have four reportable segments: (1) Consumer
Mobility, (2) Business Solutions, (3) Entertainment Group and (4)
International.
11
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
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, we have
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).
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).
In reconciling items to consolidated operating income and income
before income taxes, Corporate and Other includes: (1) operations
that are not considered reportable segments and that are no longer
integral to our operations or which we no longer actively market,
(2) corporate support functions and operations, (3) impacts of
corporate-wide decisions for which the individual operating
segments are not being evaluated, and (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.
Certain operating items are not allocated to our business
segments, and those include:
-- Acquisition-related items which consists of (1) items associated
with the merger and integration of acquired businesses
and (2) the noncash amortization of intangible assets acquired
in acquisitions.
-- Certain significant items which consists of (1) 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.
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 communications 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.
12
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
For the three months ended March 31, 2018
---------------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ---------- ----------- ------- -------------- ----------- ------------ --------------
Consumer Mobility $ 14,986 $ 8,524 $ 6,462 $ 1,807 $ 4,655 $ - $ 4,655
Business Solutions 9,185 5,638 3,547 1,462 2,085 (1) 2,084
Entertainment
Group 11,577 8,939 2,638 1,312 1,326 9 1,335
International 2,025 1,804 221 332 (111) - (111)
--------------------- ------ ---------- ------ ---------- ------- -------- --- ---------
Segment Total 37,773 24,905 12,868 4,913 7,955 $ 8 $ 7,963
--------------------- ------ ---------- ------ ---------- ------- -------- --- ---------
Corporate
and Other 265 691 (426) 19 (445)
Acquisition-related
items - 67 (67) 1,062 (1,129)
Certain significant
items - 180 (180) - (180)
--------------------- ------ ---------- ------ ---------- -------
AT&T Inc. $ 38,038 $ 25,843 $12,195 $ 5,994 $ 6,201
===================== ====== ========== ====== ========== =======
For the three months ended March 31, 2017
----------------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ---------- ----------- ------- -------------- ----------- ------------ --------------
Consumer Mobility $ 14,806 $ 8,560 $ 6,246 $ 1,716 $ 4,530 $ - $ 4,530
Business Solutions 9,692 6,040 3,652 1,465 2,187 - 2,187
Entertainment
Group 12,601 9,605 2,996 1,420 1,576 (6) 1,570
International 1,929 1,759 170 290 (120) 20 (100)
--------------------- ------ ---------- ------ ---------- ------- -------- --- ---------
Segment Total 39,028 25,964 13,064 4,891 8,173 $ 14 $ 8,187
--------------------- ------ ---------- ------ ---------- ------- -------- --- ---------
Corporate
and Other 337 829 (492) 34 (526)
Acquisition-related
items - 207 (207) 1,202 (1,409)
Certain significant
items - (118) 118 - 118
--------------------- ------ ---------- ------ ---------- -------
AT&T Inc. $ 39,365 $ 26,882 $12,483 $ 6,127 $ 6,356
===================== ====== ========== ====== ========== =======
13
AT&T INC.
MARCH 31, 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.
First Quarter
-----------------
2018 2017
---------------------------------------------------- ------- -------
Consumer Mobility $ 4,655 $ 4,530
Business Solutions 2,084 2,187
Entertainment Group 1,335 1,570
International (111) (100)
----------------------------------------------------- ------ ------
Segment Contribution 7,963 8,187
----------------------------------------------------- ------ ------
Reconciling Items:
Corporate and Other (445) (526)
Amortization of intangibles acquired (1,062) (1,202)
Merger and integration charges (67) (207)
Venezuela devaluation (25) -
Employee separation costs (51) -
Natural disaster charges (104) -
Gain on wireless spectrum transactions - 118
Segment equity in net (income) loss of affiliates (8) (14)
----------------------------------------------------- ------ ------
AT&T Operating Income 6,201 6,356
----------------------------------------------------- ------ ------
Interest expense 1,771 1,293
Equity in net income (loss) of affiliates 9 (173)
Other income (expense) - net 1,702 488
----------------------------------------------------- ------ ------
Income Before Income Taxes $ 6,141 $ 5,378
===================================================== ====== ======
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.
Contracts with Customers
Our products and services are offered to customers in
service-only contracts and in contracts that bundle equipment used
to access the services and/or with other service offerings. Service
revenue is recognized when services are provided, based upon either
usage (e.g., minutes of traffic/bytes of data processed) or period
of time (e.g., monthly service fees). We record the sale of
equipment when title has passed and the products are accepted by
the customer. Some contracts have fixed terms and others are
cancellable on a short-term basis (i.e., month-to-month
arrangements).
Revenues from transactions between us and our customers are
recorded net of regulatory fees and taxes. Cash incentives given to
customers are recorded as a reduction of revenue. Nonrefundable,
upfront service activation and setup fees associated with service
arrangements are deferred and recognized over the associated
service contract period or customer life. We record the sale of
equipment and services to customers as gross revenue when we are
the principal in the arrangement and net of the associated costs
incurred when we act as an agent in the arrangement.
Our contracts allow for customers to frequently modify their
arrangement, without incurring penalties in many cases. When a
contract is modified, we evaluate the change in scope or price of
the contract to determine if the modification should be
14
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
treated as a new contract or if it should be considered a change
of the existing contract. We generally do not have significant
impacts from contract modifications.
Service-Only Contracts and Standalone Equipment Sales
Revenue is recognized as service is provided or when control has
transferred. For devices sold through indirect channels (e.g.,
national dealers), revenue is recognized when the dealer accepts
the device, not upon activation.
Arrangements with Multiple Performance Obligations
Revenue recognized from fixed term contracts that bundle
services and/or equipment are allocated based on the standalone
selling price of all required performance obligations of the
contract (i.e., each item included in the bundle). Promotional
discounts are attributed to each required component of the
arrangement, resulting in recognition over the contract term.
Standalone selling prices are determined by assessing prices paid
for service-only contracts (e.g., arrangements where customers
bring their own devices) and standalone device pricing.
We offer the majority of our customers the option to purchase
certain wireless devices in installments over a specified period of
time, and, in many cases, they may be eligible to trade in the
original equipment for a new device and have the remaining unpaid
balance paid or settled. For customers that elect these equipment
installment payment programs, at the point of sale, we recognize
revenue for the entire amount of revenue allocated to the customer
receivable net of fair value of the trade-in right guarantee. The
difference between the revenue recognized and the consideration
received is recorded as a note receivable when the devices are not
discounted and our right to consideration is unconditional. When
installment sales include promotional discounts (e.g., "buy one get
one free"), the difference between revenue recognized and
consideration received is recorded as a contract asset to be
amortized over the contract term.
Less commonly, we offer certain customers highly discounted
devices when they enter into a minimum service agreement term. For
these contracts, we recognize equipment revenue at the point of
sale based on a standalone selling price allocation. The difference
between the revenue recognized and the cash received is recorded as
a contract asset that will amortize over the contract term.
For contracts that require the use of certain equipment in order
to receive service (e.g., AT&T U-verse(R) and DIRECTV linear
video services), we allocate the total transaction price to service
if the equipment does not meet the criteria to be a distinct
performance obligation.
Disaggregation of Revenue
The following table sets forth disaggregated reported revenue by
category:
For the three months ended March 31, 2018
----------------------------------------------------------------------------------------------
Consumer Business Entertainment AT&T
Mobility Solutions Group International Other Inc.
-------------- ----------- ------------ --------------- --------------- ------- -------
Wireless
service $ 11,612 $ 1,791 $ - $ 404 $ - $13,807
Video
entertainment - - 8,359 1,354 - 9,713
Strategic
services - 3,138 - - - 3,138
High-speed
internet - - 1,878 - - 1,878
Legacy voice
and data - 2,839 819 - - 3,658
Other service - 669 519 - 264 1,452
Wireless
equipment 3,374 578 - 267 - 4,219
Other equipment - 170 2 - 1 173
--------------- ------- -------- ----------- ----------- --- ------
$ 14,986 $ 9,185 $ 11,577 $ 2,025 $ 265 $38,038
============== ======= ======== =========== =========== === ======
15
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Deferred Customer Contract Acquisition and Fulfillment Costs
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. Costs to acquire customer contracts, including
commissions on service activations, for our wireless and video
entertainment services, are deferred and amortized over the
contract period or expected customer life, which typically ranges
from two to five years. 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 $2,117 and
$10,763 as of March 31, 2018, respectively, of which $782 and
$4,062 were included in Other current assets on our consolidated
balance sheets. For the three months ended March 31, 2018, we
amortized $263 and $1,047 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 additional 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 March 31, 2018:
March
31,
2018
--------------------------------------------------- ------
Contract asset $1,757
Contract liability 5,510
Beginning of period contract liability recorded as
customer contract revenue during period 3,625
==================================================== =====
Our consolidated balance sheet included approximately $1,252 for
the current portion of our contract asset in "Other current assets"
and $4,882 for the current portion of our contract liability in
"Advanced billings and customer deposits."
Transaction Price Allocated to Remaining Performance
Obligations
Our 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 device price and average service component for the
portfolio. As of March 31, 2018, the aggregate amount of the
transaction price allocated to remaining performance obligations
was $27,836, of which we expect to recognize approximately 50% over
the remainder of 2018, with the balance recognized thereafter.
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 expensed as incurred.
16
AT&T INC.
MARCH 31, 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:
Historical
At or for the three months ended March 31, As Accounting
2018 Reported Method
----------------------------------------------- ----------- -------------
Consolidated Statements of Income:
Service Revenues $ 33,646 $ 35,069
Equipment Revenues 4,392 3,861
Total Operating Revenues 38,038 38,930
Other cost of services 7,932 8,861
Selling, general and administrative expenses 7,897 8,497
Total Operating Expenses 31,837 33,366
Operating income 6,201 5,564
Income before income taxes 6,141 5,504
Income tax expense 1,382 1,226
Net income 4,759 4,278
Net income attributable to AT&T 4,662 4,187
Basic Earnings per Share Attributable to
AT&T $ 0.75 $ 0.68
Diluted Earnings per Share Attributable to
AT&T $ 0.75 $ 0.68
Consolidated Balance Sheets:
Other current assets 12,008 10,124
Other Assets 20,974 19,164
Accounts payable and accrued liabilities 31,569 31,748
Advanced billings and customer deposits 5,081 5,140
Deferred income taxes 45,730 44,787
Other noncurrent liabilities 19,117 18,990
Retained earnings 55,067 52,250
Accumulated other comprehensive income 7,386 7,375
Noncontrolling interest 1,156 1,115
================================================ ======= =========
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 $8,944 at March 31, 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 $140 to the trust during the three months ended
March 31, 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
17
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
credit increases was communicated to our retirees. This plan
change resulted in additional prior service credits recognized in
other comprehensive income, reducing our liability by $752. Such
credits amortize through earnings over a period approximating the
average service period to full eligibility. The plan change also
triggered a remeasurement of our postretirement benefit obligation,
resulting in an actuarial gain of $930 recognized in the first
quarter of 2018, for a total reduction in our liability of
$1,682.
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. S ervice costs are eligible for
capitalization as part of internal construction projects, providing
a small reduction in the net expense recorded.
Three months
ended
March 31,
2018 2017
---------------------------------------------------- ------- -----
Pension cost:
Service cost - benefits earned during the
period $ 291 $ 282
Interest cost on projected benefit obligation 487 484
Expected return on assets (760) (783)
Amortization of prior service credit (30) (31)
----------------------------------------------------- ------ ----
Net pension (credit) cost $ (12) $ (48)
===================================================== ====== ====
Postretirement cost:
Service cost - benefits earned during the
period $ 29 $ 41
Interest cost on accumulated postretirement
benefit obligation 191 222
Expected return on assets (77) (80)
Amortization of prior service credit (397) (336)
Actuarial (gain) loss (930) -
----------------------------------------------------- ------ ----
Net postretirement (credit) cost $(1,184) $(153)
===================================================== ====== ====
Combined net pension and postretirement (credit)
cost $(1,196) $(201)
===================================================== ====== ====
As part of our first-quarter 2018 remeasurement, we increased
the weighted-average discount rate used to measure our
postretirement benefit obligation to 4.10%. The discount rate in
effect for determining postretirement service and interest costs
after remeasurement is 4.30% and 3.70%, respectively. As a result
of our plan change and remeasurement, the total estimated prior
service credits that will be amortized from accumulated OCI into
net periodic benefit cost over the remainder of 2018 is $1,237
($933 net of tax) for postretirement benefits.
We also provide senior- and middle-management employees with
nonqualified, unfunded supplemental retirement and savings plans.
For the first quarter ended 2018 and 2017, net supplemental pension
benefits costs not included in the table above were $21 and
$22.
18
AT&T INC.
MARCH 31, 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 Inputs to the valuation methodology are unadjusted quoted
1 prices for identical assets or liabilities in active
markets that we have the ability to access.
Level Inputs to the valuation methodology include:
2
-- 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 Inputs to the valuation methodology are unobservable
3 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:
December 31,
March 31, 2018 2017
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------- --------- -------- -------- --------
Notes and debentures 1 $161,161 $169,388 $162,526 $171,938
Bank borrowings 2 2 2 2
Investment securities 2 2,584 2,584 2,447 2,447
========================================= ======= ======= ======= =======
1 Includes credit agreement borrowings.
2 Excludes investments accounted
for under the equity method.
The carrying amount of debt with an original maturity of less
than one year approximates market value. The fair value
measurements used for notes and debentures are considered Level 2
and are determined using various methods, including quoted prices
for identical or similar securities in both active and inactive
markets.
Following is the fair value leveling for investment securities
that are measured at fair value and derivatives as of March 31,
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.
19
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
March 31, 2018
--------------------------------
Level Level Level
1 2 3 Total
----------------------------------- ------ ------ ------- ------
Equity Securities
Domestic equities $1,065 $ - $ - $1,065
International equities 294 - - 294
Fixed income equities - 149 - 149
Available-for-Sale Debt Securities - 777 - 777
Asset Derivatives
Interest rate swaps - 10 - 10
Cross-currency swaps - 2,761 - 2,761
Foreign exchange contracts - 12 - 12
Liability Derivatives
Interest rate swaps - (78) - (78)
Cross-currency swaps - (706) - (706)
Foreign exchange contracts - (15) - (15)
==================================== ===== ===== === =====
December 31, 2017
----------------------------------
Level Level Level
1 2 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.
Prior to 2018, realized gains and losses on investment
securities were included in "Other income (expense) - net" in the
consolidated statements of income, while unrealized gains and
losses, net of tax, were recorded in accumulated OCI. ASU 2016-01
required unrealized gains and losses, net of tax, on equity
securities to also be included in "Other income (expense) - net"
while debt securities will continue to be recorded in accumulated
OCI.
Upon the adoption of ASU 2016-01, we reclassified $655 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.
20
AT&T INC.
MARCH 31, 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
March 31,
2018 2017
----------------------------------------------------- ---------- ----
Total gains (losses) recognized on equity securities $ (13) $ 89
Gains (Losses) recognized on equity securities
sold 52 11
------------------------------------------------------ ----- ---
Unrealized gains (losses) recognized on equity
securities held at end of period (65) 78
====================================================== ===== ===
Unrealized losses that are considered other than temporary are
recorded in "Other income (expense) - net" with the corresponding
reduction to the carrying basis of the investment.
Debt securities of $18 have maturities of less than one year,
$137 within one to three years, $63 within three to five years and
$559 for five or more years.
Our cash equivalents (money market securities), short-term
investments (certificate and time deposits) and nonrefundable
customer deposits are recorded at amortized cost, and the
respective carrying amounts approximate fair values. Short-term
investments and nonrefundable customer deposits are recorded in
"Other current assets" and our investment securities are recorded
in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market
risks, primarily interest rate risk and foreign currency exchange
risk. This includes the use of interest rate swaps, interest rate
locks, foreign exchange forward contracts and combined interest
rate foreign exchange contracts (cross-currency swaps). We do not
use derivatives for trading or speculative purposes. We record
derivatives on our consolidated balance sheets at fair value that
is derived from observable market data, including yield curves and
foreign exchange rates (all of our derivatives are Level 2). Cash
flows associated with derivative instruments are presented in the
same category on the consolidated statements of cash flows as the
item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest
rate swaps as fair value hedges. The purpose of these swaps is to
manage interest rate risk by managing our mix of fixed-rate and
floating-rate debt. These swaps involve the receipt of fixed-rate
amounts for floating interest rate payments over the life of the
swaps without exchange of the underlying principal amount. Accrued
and realized gains or losses from interest rate swaps impact
interest expense in the consolidated statements of income.
Unrealized gains on interest rate swaps are recorded at fair market
value as assets, and unrealized losses on interest rate swaps are
recorded at fair market value as liabilities. Changes in the fair
values of the interest rate swaps are exactly offset by changes in
the fair value of the underlying debt. Gains or losses realized
upon early termination of our fair value hedges are recognized in
interest expense. In the three months ended March 31, 2018 and
March 31, 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 three months ended March 31, 2018 and March
31, 2017, no ineffectiveness was measured on cross-currency swaps
designated as cash flow hedges.
21
AT&T INC.
MARCH 31, 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 $59 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation
of highly probable foreign currency-denominated transactions. In
anticipation of these transactions, we often enter into foreign
exchange contracts to provide currency at a fixed rate. Gains and
losses at the time we settle or take delivery on our designated
foreign exchange contracts are amortized into income in the same
period the hedged transaction affects earnings, except where an
amount is deemed to be ineffective, which would be immediately
reclassified to "Other income (expense) - net" in the consolidated
statements of income. In the three months ended March 31, 2018 and
March 31, 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 March 31, 2018, we had posted collateral of
$125 (a deposit asset) and held collateral of $2,672 (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 March, we would have been required to post
additional collateral of $84. If DIRECTV Holdings LLC's credit
rating had been downgraded below BBB- (S&P), we would have been
required to post additional collateral of $72. 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:
March December
31, 31,
2018 2017
--------------------------- ------- ----------
Interest rate swaps $ 8,333 $ 9,833
Cross-currency swaps 36,092 38,694
Foreign exchange contracts 2,908 -
---------------------------- ------ ------
Total $47,333 $ 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
Fair Value Hedging Relationships ended
March 31,
2018 2017
------------------------------------------------------ --------- -----
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (53) $ (25)
Gain (Loss) on long-term debt 53 25
======================================================= ==== ====
In addition, the net swap settlements that accrued and settled
in the quarter ended March 31 were offset against interest
expense.
22
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Three months
Cash Flow Hedging Relationships ended
March 31,
2018 2017
------------------------------------------------- --------- -----
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ 854 $ 20
Interest rate locks:
Interest income (expense) reclassified from
accumulated OCI into income (15) (15)
================================================== ==== ====
NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Pending Acquisition
Time Warner Inc. On October 22, 2016, we entered into and
announced a merger agreement (Merger Agreement) to acquire Time
Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction
for $107.50 per share of Time Warner common stock, or approximately
$85,400 at the date of the announcement (Merger). Combined with
Time Warner's net debt at March 31, 2018, the total transaction
value is approximately $105,962. Each share of Time Warner common
stock will be exchanged for $53.75 per share in cash and a number
of shares of AT&T common stock equal to the exchange ratio. If
the average stock price (as defined in the Merger Agreement) at the
time of closing the Merger is between (or equal to) $37.411 and
$41.349 per share, the exchange ratio will be the quotient of
$53.75 divided by the average stock price. If the average stock
price is greater than $41.349, the exchange ratio will be 1.300. If
the average stock price is less than $37.411, the exchange ratio
will be 1.437. Post-transaction, Time Warner shareholders will own
between 14.4% and 15.7% of AT&T shares on a fully-diluted basis
based on the number of AT&T shares outstanding.
Time Warner is a global leader in media and entertainment whose
major businesses encompass an array of some of the most respected
and successful media brands. The deal combines Time Warner's vast
library of content and ability to create new premium content for
audiences around the world with our extensive customer
relationships and distribution, one of the world's largest pay-TV
subscriber bases and leading scale in TV, mobile and broadband
distribution.
On November 20, 2017, the United States Department of Justice
filed a complaint in the U.S. District Court, District of Columbia
seeking a permanent injunction to prevent AT&T from acquiring
Time Warner, alleging that the effect of the transaction "may be
substantially to lessen competition" in violation of federal
antitrust law. AT&T disputes the government allegations, and
believes the merger is pro-consumer and pro-competition, and
ultimately will be approved. The trial began in late March 2018,
with oral arguments concluding on April 30, 2018. In light of the
trial date and allowing time for a decision, both AT&T and Time
Warner elected to further extend the termination date of the merger
agreement to June 21, 2018. If the Merger is terminated as a result
of reaching the extended termination date (and at that time one or
more of the conditions relating to certain regulatory approvals
have not been satisfied), or there is a final, non-appealable order
preventing the transaction relating to antitrust laws,
communications laws, utilities laws or foreign regulatory laws,
then under certain circumstances, we would be obligated to pay Time
Warner $500.
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 March 31, 2018 and
December 31, 2017, gross equipment installment receivables of
$4,798 and $6,079 were included on our consolidated balance sheets,
of which $2,627 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
23
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
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 March 31, 2018, total cash proceeds
received, net of remittances (excluding amounts returned as
deferred purchase price), were $5,569.
The following table sets forth a summary of equipment
installment receivables sold during the three months ended March
31, 2018 and 2017:
Three months
ended
March 31,
2018 2017
---------------------------------------------- ------------ -------
Gross receivables sold $ 3,010 $ 2,846
Net receivables sold 1 2,795 2,621
Cash proceeds received 2,395 1,432
Deferred purchase price recorded 519 1,189
Guarantee obligation recorded 123 -
=============================================== ======= ======
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).
The following table shows the equipment installment receivables,
previously sold to the Purchasers, which we repurchased in exchange
for the associated deferred purchase price during the three months
ended March 31, 2018 and 2017. We did not repurchase any
installment receivables in the quarter ended March 31, 2018.
Three months ended
March 31,
2018 2017
-------------------------------------------------------- ------------- ----------
Fair value of repurchased receivables $ - $ 377
Carrying value of deferred purchase price - 339
--------------------------------------------------------- ------- --- ------
Gain (loss) on repurchases 1 $ - $ 38
========================================================= ======= === ======
1 These gains (losses) are included in "Selling, general
and administrative" in the consolidated statements of income.
At March 31, 2018 and December 31, 2017, our deferred purchase
price receivable was $3,009 and $2,749, respectively, of which
$1,996 and $1,781 are included in "Other current assets" on our
consolidated balance sheets, with the remainder in "Other Assets."
The guarantee obligation at March 31, 2018 and December 31, 2017
was $309 and $204, respectively, of which $94 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.
The outstanding portfolio of installment receivables
derecognized from our consolidated balance sheets, but which we
continue to service, was $8,895 and $7,446 at March 31, 2018 and
December 31, 2017.
24
AT&T INC.
MARCH 31, 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 10. ADDITIONAL FINANCIAL INFORMATION
We typically maintain our restricted cash balances for purchases
and sales of certain investment securities, investment income for
those investments 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:
March 31, December 31,
---------------- ---------------
Cash and Cash Equivalents and
Restricted Cash 2018 2017 2017 2016
------------------------------------ ------- ------- ------- ------
Cash and cash equivalents $48,872 $14,884 $50,498 $5,788
Restricted cash in Other current
assets 8 7 6 7
Restricted cash in Other Assets 345 89 428 140
------------------------------------- ------ ------ ------ -----
Cash and cash equivalents and
restricted cash $49,225 $14,980 $50,932 $5,935
===================================== ====== ====== ====== =====
Three months
ended
March 31,
-------------------------------------------- ----------------
Consolidated Statements of Cash Flows 2018 2017
-------------------------------------------- ------- ------
Cash paid (received) during the period for:
Interest $ 2,408 $1,643
Income taxes, net of refunds (1,089) (160)
============================================= ====== =====
25
AT&T INC.
MARCH 31, 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 in the communications and digital entertainment services
industry. Our subsidiaries and affiliates provide services and
equipment that deliver voice, video and broadband services both
domestically and internationally. You should read this discussion
in conjunction with the consolidated financial statements and
accompanying notes. A reference to a "Note" in this section refers
to the accompanying Notes to Consolidated Financial Statements.
Certain amounts have been conformed to the current period's
presentation, including impacts for the adoption of recent
accounting standards (see Note 1) and the realignment of certain
business units within our reportable segments (see Note 4).
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 is available in "Supplemental
Results Under Historical Accounting Method." Our reported financial
results in the first quarter of 2018, including impacts from
revenue accounting rules, and 2017 are summarized as follows:
First Quarter
-------------------------
Percent
2018 2017 Change
-------------------------------------------- ------- ------- -------
Operating Revenues
Service $33,646 $36,456 (7.7)%
Equipment 4,392 2,909 51.0
--------------------------------------------- ------ ------
Total Operating Revenues 38,038 39,365 (3.4)
--------------------------------------------- ------ ------
Operating expenses
Cost of services and sales
Equipment 4,848 3,848 26.0
Broadcast, programming and operations 5,166 4,974 3.9
Other cost of services 7,932 9,288 (14.6)
Selling, general and administrative 7,897 8,772 (10.0)
Depreciation and amortization 5,994 6,127 (2.2)
--------------------------------------------- ------ ------
Total Operating Expenses 31,837 33,009 (3.6)
--------------------------------------------- ------ ------
Operating Income 6,201 6,356 (2.4)
Income Before Income Taxes 6,141 5,378 14.2
Net Income 4,759 3,574 33.2
Net Income Attributable to AT&T $ 4,662 $ 3,469 34.4%
============================================= ====== ====== =======
Overview
Operating revenues decreased $1,327, or 3.4%, in the first
quarter of 2018.
Service revenues decreased $2,810, or 7.7%, in the first quarter
of 2018, reflecting 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
legacy wireline voice and data products, video services and lower
wireless service revenues driven by customer migration to unlimited
wireless plans.
Equipment revenues increased $1,483, or 51.0%, in the first
quarter of 2018, driven by increased device sales and upgrades. The
adoption of new accounting standards also contributed to higher
revenue allocations from bundled contracts.
26
AT&T INC.
MARCH 31, 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
Operating expenses decreased $1,172, or 3.6%, in the first quarter of 2018.
Equipment expenses increased $1,000, or 26.0%, in the first
quarter of 2018, driven by an increase in the sale of higher-priced
devices as well as an overall increase in handset volumes.
Broadcast, programming and operations expenses increased $192,
or 3.9%, in the first quarter of 2018, reflecting annual content
cost increases and additional programming costs.
Other cost of services expenses decreased $1,356, or 14.6%, in
the first quarter of 2018, primarily due to our adoption of new
accounting rules, which included our policy election to record USF
fees net. Also contributing to the decrease were lower expenses due
to cost management and utilization of automation and digitalization
where appropriate.
Selling, general and administrative expenses decreased $875, or
10.0%, in the first quarter of 2018, primarily due to commission
deferrals resulting from new accounting standards, which are now
deferred and amortized over the contract period or expected
customer life. Also contributing to the decrease were lower
expenses for merger and integration-related activities and expense
reductions due to our disciplined cost management. Partially
offsetting the decrease are higher costs arising from natural
disasters and, in the comparable period of 2017, gains on wireless
spectrum transactions.
Depreciation and amortization expense decreased $133, or 2.2%,
in the first quarter of 2018. Amortization expense decreased $140,
or 11.6%, in the first quarter of 2018 due to lower amortization of
intangibles for the customer lists associated with
acquisitions.
Depreciation expense increased $7, or 0.1%, in the first
quarter. The increase was primarily due to ongoing capital spending
for upgrades and expansion offset by our fourth-quarter 2017
abandonment of certain copper network assets.
Operating income decreased $155, or 2.4%, for the first quarter
of 2018. Our operating income margin in the first quarter increased
from 16.1% in 2017 to 16.3% in 2018.
Interest expense increased $478, or 37.0%, in the first quarter
of 2018. The increase was primarily due to higher debt balances in
anticipation of closing our acquisition of Time Warner Inc. (Time
Warner), and an increase in average interest rates when compared to
the prior year.
Equity in net income of affiliates increased $182 in the first
quarter of 2018, predominantly due to losses in the first quarter
of 2017 from our legacy publishing business, which was sold in June
2017.
Other income (expense) - net increased $1,214 in the first
quarter of 2018. The increase was primarily due to an actuarial
gain of $930 resulting from remeasurement of our postretirement
benefit obligation and increased interest income of $164.
Income taxes decreased $422, or 23.4%, in the first quarter of
2018. Our effective tax rate was 22.5% for the first quarter of
2018, as compared to 33.5% for the first quarter of 2017. The
decrease in income tax expense and our effective tax rate for the
first quarter of 2018 was 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
rate was higher earnings.
27
AT&T INC.
MARCH 31, 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
Selected Financial and Operating Data
-------------------------------------------- ------- -------
March 31,
Subscribers and connections in (000s) 2018 2017
-------------------------------------------- ------- -------
Domestic wireless subscribers 143,832 133,804
Mexican wireless subscribers 15,642 12,606
-------------------------------------------- ------- -------
North American wireless subscribers 159,474 146,410
============================================ ======= =======
North American branded subscribers 108,566 103,118
North American branded net additions 858 735
Domestic satellite video subscribers 20,270 21,012
AT&T U-verse(R) (U-verse) video subscribers 3,657 4,048
DIRECTV NOW video subscribers 1,467 339
Latin America satellite video subscribers
1 13,573 13,678
-------------------------------------------- ------- -------
Total video subscribers 38,967 39,077
============================================ ======= =======
Total domestic broadband connections 15,775 15,695
Network access lines in service 11,288 13,363
U-verse VoIP connections 5,585 5,858
Debt ratio 2 52.6% 51.6%
Net debt ratio 3 36.8% 45.8%
Ratio of earnings to fixed charges 4 3.56 3.80
Number of AT&T employees 249,240 264,530
============================================ ======= =======
1 Excludes subscribers of our International segment equity
investments in SKY Mexico, in which we own a 41% stake. At December
31, 2017, SKY Mexico had 8.0 million subscribers.
2 Debt ratios are calculated by dividing total debt (debt
maturing within one year plus long-term debt) by total capital
(total debt plus total stockholders' equity) and do not consider
cash available to pay down debt. See our "Liquidity and Capital
Resources" section for discussion.
3 Net debt ratios are calculated by deriving total debt (debt
maturing within one year plus long-term debt) less cash available
by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.
Segment Results
Our segments are strategic business units that offer different
products and services over various technology platforms and/or in
different geographies that are managed accordingly. Our segment
results presented in Note 4 and discussed below for each segment
follow our internal management reporting. We analyze our segments
based on Segment Contribution, which consists of operating income,
excluding acquisition-related costs and other significant items,
and equity in net income (loss) of affiliates for investments
managed within each segment. We have four reportable segments: (1)
Consumer Mobility, (2) Business Solutions, (3) Entertainment Group
and (4) International.
We also evaluate segment performance based on EBITDA and/or
EBITDA margin, which is defined as Segment Contribution, excluding
equity in net income (loss) of affiliates and depreciation and
amortization. We believe EBITDA to be a relevant and useful
measurement to our investors as it is part of our internal
management reporting and planning processes and it is an important
metric that management uses to evaluate operating performance.
EBITDA does not give effect to cash used for debt service
requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses. EBITDA
margin is EBITDA divided by total revenues.
28
AT&T INC.
MARCH 31, 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
To most effectively implement our strategies for 2018, we have
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.
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).
Our domestic communications 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
----------------------------------- ------- ------- -------
First Quarter
-------------------------
Percent
2018 2017 Change
------- ------- -------
Segment operating revenues
Service $11,612 $12,465 (6.8)%
Equipment 3,374 2,341 44.1
------------------------------------ ------ ------
Total Segment Operating Revenues 14,986 14,806 1.2
------------------------------------ ------ ------
Segment operating expenses
Operations and support 8,524 8,560 (0.4)
Depreciation and amortization 1,807 1,716 5.3
------------------------------------ ------ ------
Total Segment Operating Expenses 10,331 10,276 0.5
------------------------------------ ------ ------
Segment Operating Income 4,655 4,530 2.8
Equity in Net Income of Affiliates - - -
----------------------------------- ------ ------
Segment Contribution $ 4,655 $ 4,530 2.8%
==================================== ====== ====== =======
29
AT&T INC.
MARCH 31, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The following tables highlight other key measures of performance
for the Consumer Mobility segment:
March 31, Percent
(in 000s) 2018 2017 Change
--------------------------------------------- -------- ------- -------
Consumer Mobility Subscribers
Postpaid 65,489 65,692 (0.3)%
Prepaid 14,928 13,844 7.8
----------------------------------------------- ------- -------
Branded 80,417 79,536 1.1
Reseller 8,910 10,549 (15.5)
----------------------------------------------- ------- -------
Total Consumer Mobility Subscribers 89,327 90,085 (0.8)%
=============================================== ======= ======= =======
First Quarter
-----------------------
Percent
(in 000s) 2018 2017 Change
----------------------------------------------- ------ ---- -------
Consumer Mobility Net Additions 1
Postpaid (64) (282) 77.3%
Prepaid 192 282 (31.9)
------------------------------------------------- ----- ----
Branded Net Additions 128 - -
Reseller (390) (587) 33.6
------------------------------------------------- ----- ----
Consumer Mobility Net Subscriber Additions (262) (587) 55.4%
================================================= ===== ==== =======
1 Excludes migrations between AT&T segments and/or subscriber
categories and acquisition-related additions during the period.
Operating Revenues increased $180, or 1.2%, in the first quarter
of 2018. The increase was due to higher equipment revenues,
partially offset by 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.
Service revenue decreased $853, or 6.8%, in the first quarter of
2018. The decrease was largely due to our adoption of a new
accounting standard that included our policy election to no longer
include USF fees in revenues and resulted in less revenue
allocation to the service component of bundled contracts. Also
contributing to the decrease was the impact of customers continuing
to shift to discounted monthly service charges under our unlimited
plans, partially offset by higher prepaid service revenues
resulting from growth in Cricket and AT&T PREPAID SM
subscribers.
Equipment revenue increased $1,033, or 44.1%, in the first
quarter of 2018. The increase in equipment revenues resulted from
the sale of higher-priced devices as well as an overall increase in
handset volumes. The adoption of new accounting standards also
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 $36, or 0.4%, in the
first quarter 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 resulting from the higher cost and
volumes of wireless equipment sales and upgrades.
Depreciation expense increased $91, or 5.3%, in the first
quarter of 2018. The increase was primarily due to ongoing capital
spending for network upgrades and expansion, partially offset by
fully depreciated assets.
30
AT&T INC.
MARCH 31, 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
Operating income increased $125, or 2.8%, in the first quarter
of 2018. Our Consumer Mobility segment operating income margin in
the first quarter increased from 30.6% in 2017 to 31.1% in 2018.
Our Consumer Mobility EBITDA margin in the first quarter increased
from 42.2% in 2017 to 43.1% in 2018.
Business Solutions
Segment Results
------------------------------------------ ------ ------ -------
First Quarter
------------------------
Percent
2018 2017 Change
------------------------------------------ ------ ------ -------
Segment operating revenues
Wireless service $1,791 $2,003 (10.6)%
Strategic services 3,138 2,974 5.5
Legacy voice and data services 2,839 3,549 (20.0)
Other service and equipment 839 878 (4.4)
Wireless equipment 578 288 -
------------------------------------------- ----- -----
Total Segment Operating Revenues 9,185 9,692 (5.2)
------------------------------------------- ----- -----
Segment operating expenses
Operations and support 5,638 6,040 (6.7)
Depreciation and amortization 1,462 1,465 (0.2)
------------------------------------------- ----- -----
Total Segment Operating Expenses 7,100 7,505 (5.4)
------------------------------------------- ----- -----
Segment Operating Income 2,085 2,187 (4.7)
Equity in Net Income (Loss) of Affiliates (1) - -
------------------------------------------- ----- -----
Segment Contribution $2,084 $2,187 (4.7)%
=========================================== ===== ===== =======
31
AT&T INC.
MARCH 31, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The following tables highlight other key measures of performance
for the Business Solutions segment:
March 31, Percent
(in 000s) 2018 2017 Change
--------------------------------------------- --------- ------- -------
Business Wireless Subscribers
Postpaid 11,942 11,243 6.2%
Prepaid 1 743 - -
----------------------------------------------- -------- -------
Branded 12,685 11,243 12.8
Reseller 92 76 21.1
Connected devices 1, 2 41,728 32,400 28.8
----------------------------------------------- -------- -------
Total Business Wireless Subscribers 54,505 43,719 24.7
=============================================== ======== =======
Business IP Broadband Connections 1,021 980 4.2%
=============================================== ======== ======= =======
1 Beginning in the third quarter of 2017, we began reporting
prepaid Internet of Things (IoT) connections, which primarily
consist of
connected cars, as a component of prepaid subscribers instead
of connected devices.
2 Includes data-centric devices such as session-based tablets
and automobile systems. Excludes postpaid tablets.
First Quarter
------------------------
Percent
(in 000s) 2018 2017 Change
----------------------------------------------- ------- ----- -------
Business Wireless Net Additions 1
Postpaid 113 88 28.4%
Prepaid 2 49 - -
------------------------------------------------- ------ -----
Branded 162 88 84.1
Reseller 2 5 (60.0)
Connected devices 3 2,728 2,572 6.1
------------------------------------------------- ------ -----
Business Wireless Net Subscriber Additions 2,892 2,665 8.5
================================================= ====== =====
Business IP Broadband Net Additions (4) 4 -%
================================================= ====== ===== =======
1 Excludes migrations between AT&T segments and/or subscriber
categories and acquisition-related additions during the
period.
2 Beginning in the third quarter of 2017, we began reporting
prepaid IoT connections, which primarily consist of connected
cars, as a
component of prepaid subscribers instead of connected devices.
3 Includes data-centric devices such as session-based tablets,
monitoring devices and automobile systems. Excludes postpaid
tablets.
Operating Revenues decreased $507, or 5.2%, in the first quarter
of 2018, primarily due to our adoption of a new revenue accounting
standard, which included our policy election to no longer include
USF fees in revenue. Technological shifts away from legacy
products, as well as decreasing wireless service revenues resulting
from customers shifting to unlimited plans, also contributed to
revenue declines. These decreases were partially offset by
continued growth in strategic services, which represent 46% of
non-wireless (or fixed) revenues and wireless equipment
revenue.
Wireless service revenues decreased $212, or 10.6%, in the first
quarter of 2018. The decrease was largely due to our adoption of a
new accounting standard that resulted in less revenue allocation to
the service component of bundled contracts and included our policy
election to no longer include USF fees in revenues.
At March 31, 2018, we served 54.5 million subscribers, an
increase of 24.7% from the prior year. Connected devices, which
have lower average revenue per average subscriber (ARPU) and churn,
increased 28.8% from the prior year reflecting growth in our
connected car business and other data centric devices that utilize
the network to connect and control physical devices using embedded
computing systems and/or software, commonly known as IoT. Postpaid
subscribers increased 6.2% from the prior year reflecting the
addition of new customers, partially offset by continuing
competitive pressures in the industry.
32
AT&T INC.
MARCH 31, 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
Strategic services revenues increased $164, or 5.5%, in the
first quarter of 2018. Our revenues increased in the first quarter
of 2018 primarily due to: Dedicated Internet Services of $37;
Ethernet of $36; VoIP of $35; Security Services of $23; and VPN of
$22.
Legacy wired voice and data service revenues decreased $710, or
20.0%, in the first quarter of 2018. The decrease was primarily due
to lower demand, as customers continue to shift to our more
advanced IP-based offerings or to competitors and our netting of
USF fees in 2018.
Wireless equipment revenues increased $290 in the first quarter
of 2018, primarily due to the adoption of new accounting standards
which increased the amount of revenue attributable to equipment
from our bundled contracts.
Operations and support expenses decreased $402, or 6.7%, in the
first quarter of 2018. Operations and support expenses consist of
costs incurred to provide our products and services, including
costs of operating and maintaining our networks and personnel
costs, such as compensation and benefits.
Decreased operations and support expenses were primarily due to
our adoption of new accounting rules, which included our policy
election to record USF fees on a net basis. Also contributing to
declines were our ongoing efforts to automate and digitize our
support activities, partially offset by higher equipment costs from
increased sales of higher-priced wireless devices.
Depreciation expense decreased $3, or 0.2%, in the first quarter
of 2018. The decrease was primarily due to updates to the asset
lives of certain network assets and our fourth-quarter 2017
abandonment of certain copper network assets, partially offset by
ongoing capital spending for network upgrades and expansion.
Operating income decreased $102, or 4.7%, in the first quarter
of 2018. Our Business Solutions segment operating income margin in
the first quarter increased from 22.6% in 2017 to 22.7% in 2018.
Our Business Solutions EBITDA margin in the first quarter increased
from 37.7% in 2017 to 38.6% in 2018.
Entertainment Group
Segment Results
------------------------------------------ ------- ------- -------
First Quarter
--------------------------
Percent
2018 2017 Change
------------------------------------------ ------- ------- -------
Segment operating revenues
Video entertainment $ 8,359 $ 9,020 (7.3)%
High-speed internet 1,878 1,941 (3.2)
Legacy voice and data services 819 1,031 (20.6)
Other service and equipment 521 609 (14.4)
------------------------------------------- ------ ------
Total Segment Operating Revenues 11,577 12,601 (8.1)
------------------------------------------- ------ ------
Segment operating expenses
Operations and support 8,939 9,605 (6.9)
Depreciation and amortization 1,312 1,420 (7.6)
------------------------------------------- ------ ------
Total Segment Operating Expenses 10,251 11,025 (7.0)
------------------------------------------- ------ ------
Segment Operating Income 1,326 1,576 (15.9)
Equity in Net Income (Loss) of Affiliates 9 (6) -
------------------------------------------- ------ ------
Segment Contribution $ 1,335 $ 1,570 (15.0)%
=========================================== ====== ====== =======
33
AT&T INC.
MARCH 31, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The following tables highlight other key measures of performance
for the Entertainment Group segment:
March 31, Percent
2018 2017 Change
--------------------------------------------- -------- ------- -------
Video Connections
Satellite 20,270 21,012 (3.5)%
U-verse 3,632 4,020 (9.7)
DIRECTV NOW 1 1,467 339 -
----------------------------------------------- ------- -------
Total Video Connections 25,369 25,371 -
=============================================== ======= =======
Broadband Connections
IP 13,616 13,130 3.7
DSL 816 1,164 (29.9)
----------------------------------------------- ------- -------
Total Broadband Connections 14,432 14,294 1.0
=============================================== ======= =======
Retail Consumer Switched Access Lines 4,535 5,533 (18.0)
U-verse Consumer VoIP Connections 5,105 5,470 (6.7)
----------------------------------------------- ------- -------
Total Retail Consumer Voice Connections 9,640 11,003 (12.4)%
=============================================== ======= ======= =======
1 Consistent with industry practice, free or substantially
free-trial DIRECTV NOW connections are included in Over-the-Top.
First Quarter
----------------------------
Percent
(in 000s) 2018 2017 Change
---------------------------------- ------- ----- -------
Video Net Additions
Satellite 1 (188) - -%
U-verse 1 1 (233) -
DIRECTV NOW 312 72 -
------------------------------------ ------ -----
Net Video Additions 125 (161) -
==================================== ====== =====
Broadband Net Additions
IP 154 242 (36.4)
DSL (72) (127) 43.3
------------------------------------ ------ -----
Net Broadband Additions 82 115 (28.7)%
==================================== ====== ===== =======
1 Includes disconnections for customers that migrated to
DIRECTV NOW.
Operating revenues decreased $1,024, or 8.1%, in the first
quarter of 2018, primarily due to lower video and legacy service
revenues, and to a lesser extent, new accounting rules.
As consumers continue to demand more mobile access to video, we
provide streaming access to our subscribers, including mobile
access for existing satellite and U-verse subscribers. In November
2016, we launched DIRECTV NOW, our video streaming option that does
not require either satellite or U-verse service (commonly called
over-the-top video service).
Video entertainment revenues decreased $661, or 7.3%, in the
first quarter of 2018, largely driven by a 4.5% decline in linear
video subscribers. Our over-the-top video subscriber net adds more
than offset our decline in linear video connections. However, this
shift by our customers, consistent with the rest of the industry,
from a premium linear service to our more economically priced
over-the-top video service has pressured our video revenues. Also
contributing to the decrease was the impact of newly adopted
accounting rules, which resulted in less revenue allocated when
video services are bundled with other offerings. Churn rose for
subscribers with linear video only service, partially reflecting
price increases.
34
AT&T INC.
MARCH 31, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
High-speed internet revenues decreased $63, or 3.2%, in the
first quarter of 2018 , primarily due to a 7.1% decrease in average
revenue per IP broadband connection, reflecting our simplified
pricing structure. When compared to 2017, IP broadband subscribers
increased 3.7%, to 13.6 million subscribers at March 31, 2018,
reflecting higher IP broadband net additions. Our bundling strategy
is helping to lower churn with subscribers who bundle broadband
with another AT&T service having about half the churn of
broadband-only subscribers.
To compete more effectively against other broadband providers,
we continued to deploy our all-fiber, high-speed wireline network,
which has improved customer retention rates. We also expect our
planned 5G national deployment to aid in our ability to provide
more locations with competitive broadband speeds.
Legacy voice and data service revenues decreased $212, or 20.6%,
in the first quarter of 2018, reflecting continued decreases in
local voice, long-distance and traditional data services. The
decreases reflect the continued migration of customers to our more
advanced IP-based offerings or to competitors, and the impact of
netting USF fees.
Operations and support expenses decreased $666, or 6.9%, in the
first quarter of 2018. Operations and support expenses consist of
costs associated with providing video content, and expenses
incurred to provide our products and services, including costs of
operating and maintaining our networks, as well as personnel
charges for compensation and benefits.
Decreased operations and support expenses were primarily
impacted by our adoption of new accounting rules, resulting in
commissions deferrals and netting of USF fees in 2018. Also
contributing to the decrease was the impact of our ongoing focus on
cost efficiencies and merger synergies, lower employee-related
expenses resulting from workforce reductions and lower advertising
costs, which were partially offset by annual content cost
increases.
Depreciation expense decreased $108, or 7.6%, in the first
quarter of 2018. The decrease was primarily due to our
fourth-quarter 2017 abandonment of certain copper network assets,
partially offset by ongoing capital spending for network upgrades
and expansion.
Operating income decreased $250, or 15.9%, in the first quarter
of 2018. Our Entertainment Group segment operating income margin in
the first quarter decreased from 12.5% in 2017 to 11.5% in 2018.
Our Entertainment Group segment EBITDA margin in the first quarter
decreased from 23.8% in 2017 to 22.8% in 2018.
International
Segment Results
------------------------------------------ ------ ------ ------- ---
First Quarter
------------------------- ---
Percent
2018 2017 Change
------------------------------------------ ------ ------ ------- ---
Segment operating revenues
Video entertainment $1,354 $1,341 1.0 %
Wireless service 404 475 (14.9)
Wireless equipment 267 113 136.3
------------------------------------------- ----- -----
Total Segment Operating Revenues 2,025 1,929 5.0
------------------------------------------- ----- -----
Segment operating expenses
Operations and support 1,804 1,759 2.6
Depreciation and amortization 332 290 14.5
------------------------------------------- ----- -----
Total Segment Operating Expenses 2,136 2,049 4.2
------------------------------------------- ----- -----
Segment Operating Income (Loss) (111) (120) 7.5
Equity in Net Income (Loss) of Affiliates - 20 -
------------------------------------------- ----- -----
Segment Contribution $ (111) $ (100) (11.0)%
=========================================== ===== ===== =======
35
AT&T INC.
MARCH 31, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The following tables highlight other key measures of performance
for the International segment:
March 31, Percent
(in 000s) 2018 2017 Change
------------------------------------------ ------- ------ -------
Mexican Wireless Subscribers
Postpaid 5,607 5,095 10.0%
Prepaid 9,857 7,244 36.1
-------------------------------------------- ------ ------
Branded 15,464 12,339 25.3
Reseller 178 267 (33.3)
-------------------------------------------- ------ ------
Total Mexican Wireless Subscribers 15,642 12,606 24.1
============================================ ====== ======
Latin America Satellite Subscribers
------------------------------------------ ------ ------
Total Latin America Satellite Subscribers
1 13,573 13,678 (0.8)%
============================================ ====== ====== =======
1 Excludes subscribers of our International segment equity
investments in SKY Mexico, in which we own a 41.3% stake.
SKY Mexico
had 8.0 million subscribers at December 31, 2017 and March
31, 2017.
First Quarter
----------------------
Percent
(in 000s) 2018 2017 Change
--------------------------------------------- ----- ---- -------
Mexican Wireless Net Additions
Postpaid 109 130 (16.2)%
Prepaid 459 517 (11.2)
----------------------------------------------- ---- ----
Branded Net Additions 568 647 (12.2)
Reseller (25) (14) (78.6)
----------------------------------------------- ---- ----
Mexican Wireless Net Subscriber Additions 543 633 (14.2)
=============================================== ==== ====
Latin America Satellite Net Additions
--------------------------------------------- ---- ----
Latin America Satellite Net Subscriber
Additions 1 (15) 91 -%
=============================================== ==== ==== =======
1 SKY Mexico had net subscriber losses of 12 for the quarter
ended December 31, 2017 and 18 for the quarter ended March
31, 2017.
Operating Results
Our International segment consists of the Latin American
satellite video operations as well as our Mexican wireless
operations. Our international subsidiaries conduct business in
their local currency and operating results are converted to U.S.
dollars using official exchange rates. Our International segment is
subject to foreign currency fluctuations.
Operating revenues increased $96, or 5.0%, in the first quarter
of 2018. The increase in the first quarter includes $13, or 1.0%,
from video services in Latin America driven by prices increases
offset by foreign currency pressures. Mexico wireless revenues
increased $83, or 14.1%, in the first quarter of 2018. Our Mexican
wireless revenues reflect subscriber growth and increased equipment
sales, partially offset by competitive pricing, approximately $90
from the shutdown of a legacy wholesale business and our adoption
of the new U.S. revenue accounting standard.
Operations and support expenses increased $45, or 2.6%, in the
first quarter of 2018. Operations and support expenses consist of
costs incurred to provide our products and services, including
costs of operating and maintaining our networks and providing video
content and personnel expenses, such as compensation and benefits.
The increase in expenses is primarily due to higher programming and
other operating costs offset by changes in foreign currency
exchange rates and lower wholesale costs in Mexico.
Depreciation expense increased $42, or 14.5%, in the first
quarter of 2018. The increase was primarily due to higher capital
spending in Mexico.
36
AT&T INC.
MARCH 31, 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
Operating income increased $9, or 7.5%, in the first quarter of
2018. Our International segment operating income margin in the
first quarter increased from (6.2)% in 2017 to (5.5)% in 2018. Our
International EBITDA margin in the first quarter increased from
8.8% in 2017 to 10.9% in 2018.
Supplemental Operating Information
As a supplemental discussion of our operating results, for
comparison purposes, we are providing a view of our combined
domestic wireless operations (AT&T Mobility). See "Discussion
and Reconciliation of Non-GAAP Measure" for a reconciliation of
these supplemental measures to the most directly comparable
financial measures calculated and presented in accordance with U.S.
generally accepted accounting principles.
AT&T Mobility Results
--------------------------------- ------- ------- -------
First Quarter
-------------------------
Percent
2018 2017 Change
------- ------- -------
Operating revenues
Service $13,403 $14,468 (7.4)%
Equipment 3,952 2,629 50.3
---------------------------------- ------ ------
Total Operating Revenues 17,355 17,097 1.5
---------------------------------- ------ ------
Operating expenses
Operations and support 10,102 9,885 2.2
---------------------------------- ------ ------
EBITDA 7,253 7,212 0.6
---------------------------------- ------ ------
Depreciation and amortization 2,095 1,992 5.2
---------------------------------- ------ ------
Total Operating Expenses 12,197 11,877 2.7
---------------------------------- ------ ------
Operating Income $ 5,158 $ 5,220 (1.2)%
================================== ====== ====== =======
37
AT&T INC.
MARCH 31, 2018
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The following tables highlight other key measures of performance
for AT&T Mobility:
March 31, Percent
(in 000s) 2018 2017 Change
----------------------------------------------- --------- ------- -------
Wireless Subscribers 1
Postpaid smartphones 60,002 59,025 1.7%
Postpaid feature phones and data-centric
devices 17,429 17,910 (2.7)
------------------------------------------------- -------- -------
Postpaid 77,431 76,935 0.6
Prepaid 3 15,671 13,844 13.2
------------------------------------------------- -------- -------
Branded 93,102 90,779 2.6
Reseller 9,002 10,625 (15.3)
Connected devices 2, 3 41,728 32,400 28.8
------------------------------------------------- -------- -------
Total Wireless Subscribers 143,832 133,804 7.5
================================================= ======== =======
Branded Smartphones 73,403 71,274 3.0
Smartphones under our installment programs
at end of period 32,456 31,583 2.8%
================================================= ======== ======= =======
1 Represents 100% of AT&T Mobility wireless subscribers.
2 Includes data-centric devices such as session-based tablets,
monitoring devices and primarily wholesale automobile systems.
Excludes
postpaid tablets.
3 Beginning in the third quarter of 2017, we began reporting
prepaid IoT connections, which primarily consist of connected
cars,
as a component of prepaid subscribers.
First Quarter
-------------------------------
Percent
(in 000s) 2018 2017 Change
-------------------------------------------- ------- ----- -------
Wireless Net Additions 1
Postpaid 49 (194) -%
Prepaid 4 241 282 (14.5)
---------------------------------------------- ------ -----
Branded Net Additions 290 88 -
Reseller (388) (582) 33.3
Connected devices 2, 4 2,728 2,572 6.1
---------------------------------------------- ------ -----
Wireless Net Subscriber Additions 2,630 2,078 26.6
============================================== ====== =====
Smartphones sold under our installment
programs during period 3,993 3,501 14.1%
Branded Churn 3 1.65% 1.71% (6) BP
Postpaid Churn 3 1.06% 1.12% (6) BP
Postpaid Phone Only Churn 3 0.84% 0.90% (6) BP
============================================== ====== ===== =======
1 Excludes acquisition-related additions during the period.
2 Includes data-centric devices such as session-based tablets,
monitoring devices and primarily wholesale automobile systems.
Excludes
postpaid tablets.
3 Calculated by dividing the aggregate number of wireless
subscribers who canceled service during a month divided
by the total number
of wireless subscribers at the beginning of that month.
The churn rate for the period is equal to the average of
the churn rate for
each month of that period.
4 Beginning in the third quarter of 2017, we began reporting
prepaid IoT connections, which primarily consist of connected
cars,
as a component of prepaid subscribers, resulting in 49
additional prepaid net adds in the first quarter of 2018.
Operating income decreased $62, or 1.2%, in the first quarter of
2018. The first-quarter operating income margin of AT&T
Mobility decreased from 30.5% in 2017 to 29.7% in 2018. AT&T
Mobility's first-quarter EBITDA margin decreased from 42.2% in 2017
to 41.8% in 2018. AT&T Mobility's first-quarter EBITDA service
margin increased from 49.8% in 2017 to
38
AT&T INC.
MARCH 31, 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
54.1% in 2018 (EBITDA service margin is operating income before
depreciation and amortization, divided by total service revenues.)
Our 2018 margins were positively impacted by our policy election to
net USF fees.
Subscriber Relationships
As the wireless industry has matured, future wireless growth
will increasingly depend on our ability to offer innovative
services, plans and devices and to provide these services in
bundled product offerings with our video and broadband services.
Subscribers that purchase two or more services from us have
significantly lower churn than subscribers that purchase only one
service. To support higher mobile video and data usage, our
priority is to best utilize a wireless network that has sufficient
spectrum and capacity to support these innovations on as broad a
geographic basis as possible. To attract and retain subscribers in
a mature and highly competitive market, we have launched a wide
variety of plans, including unlimited and bundled services, as well
as equipment installment programs.
ARPU
Postpaid phone-only ARPU was $53.04 for the first quarter of
2018, compared to $58.09 in 2017, primarily reflecting lower
revenues recognized under new revenue accounting standards. ARPU
has also been affected by customers shifting to unlimited plans,
which decreases overage revenues; however, customers are adding
additional devices helping to offset that decline.
Churn
The effective management of subscriber churn is critical to our
ability to maximize revenue growth and to maintain and improve
margins. Postpaid churn was lower in the first quarter of 2018,
even with higher tablet churn, and postpaid phone only churn was
lower, despite competitive pressure in the industry.
Branded Subscribers
Branded subscribers increased 0.3% in the first quarter of 2018
when compared to December 31, 2017 and increased 2.6% when compared
to March 31, 2017. The sequential increase reflects a 2.2% increase
in prepaid subscribers, partially offset by a 0.1% decline in
postpaid subscribers. The year-over-year increase includes
increases of 0.6% and 13.2% in postpaid and prepaid subscribers,
respectively.
At March 31, 2018, 93% of our postpaid phone subscriber base
used smartphones, compared to 91% at March 31, 2017, with the
majority of phone sales during both years attributable to
smartphones. Virtually all of our postpaid smartphone subscribers
are on plans that provide for service on multiple devices at
reduced rates, and such subscribers tend to have higher retention
and lower churn rates. Such offerings are intended to encourage
existing subscribers to upgrade their current services and/or add
connected devices, attract subscribers from other providers and/or
minimize subscriber churn.
Our equipment installment purchase programs allow for postpaid
subscribers to purchase certain devices in installments over a
specified period of time, with the option to trade in the original
device for a new device and have the remaining unpaid balance paid
or settled once conditions are met. A significant percentage of our
customers choosing equipment installment programs pay a lower
monthly service charge, which results in lower service revenue
recorded for these subscribers. Over half of the postpaid
smartphone base is on an equipment installment program and the
majority of postpaid smartphone gross adds and upgrades for all
periods presented were either equipment installment plans or Bring
Your Own Device (BYOD). While BYOD customers do not generate
equipment revenue or expense, the service revenue helps improve our
margins.
Connected Devices
Connected devices includes data-centric devices such as
session-based tablets, monitoring devices and primarily wholesale
automobile systems. Connected device subscribers increased 7.0%
during the first quarter when compared to December 31, 2017 and
28.8% when compared to March 31, 2017. During the first quarter of
2018, we added approximately 1.8 million wholesale connected cars
through agreements with various carmakers, and experienced strong
growth in other IoT connections as well. We believe that these
connected car agreements give us the opportunity to create future
retail relationships with the car owners.
Supplemental Results Under Historical Accounting Method
As a supplemental discussion of our operating results, we are
providing results under the comparative historical accounting
method prior to our adoption of ASC 606.
39
AT&T INC.
MARCH 31, 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
For the three
months ended
March 31, 2018
Promotions Commission Total Historical
Reported & Other USF Deferrals Impact Accounting
----------------- ---------- ------------ ----- ------------ ------- ----------
Service Revenues
Consumer Mobility $ 11,612 $ (259) $(353) $ - $ (612) $ 12,224
Business
Solutions 8,437 (145) (396) - (541) 8,978
Entertainment
Group 11,575 (41) (172) - (213) 11,788
International 1,758 (50) - - (50) 1,808
Corporate/Other 264 1 (8) - (7) 271
------------------ ------ -------- ---- -------- ------ ---------
AT&T Service
Revenues 33,646 (494) (929) - (1,423) 35,069
------------------ ------ -------- ---- -------- ------ ---------
AT&T Mobility 13,403 (399) (415) - (814) 14,217
Equipment
Revenues
Consumer Mobility 3,374 331 - - 331 3,043
Business
Solutions 748 190 - - 190 558
Entertainment
Group 2 - - - - 2
International 267 10 - - 10 257
Corporate/Other 1 - - - - 1
------------------ ------ -------- ---- -------- ------ ---------
AT&T Equipment
Revenues 4,392 531 - - 531 3,861
------------------ ------ -------- ---- -------- ------ ---------
AT&T Mobility 3,952 521 - - 521 3,431
Total Operating
Revenues
Consumer Mobility 14,986 72 (353) - (281) 15,267
Business
Solutions 9,185 45 (396) - (351) 9,536
Entertainment
Group 11,577 (41) (172) - (213) 11,790
International 2,025 (40) - - (40) 2,065
Corporate/Other 265 1 (8) - (7) 272
------------------ ------ -------- ---- -------- ------ ---------
AT&T Operating
Revenues 38,038 37 (929) - (892) 38,930
------------------ ------ -------- ---- -------- ------ ---------
AT&T Mobility 17,355 122 (415) - (293) 17,648
Total Operating
Expenses
Consumer Mobility 10,331 37 (353) (334) (650) 10,981
Business
Solutions 7,100 2 (396) (29) (423) 7,523
Entertainment
Group 10,251 - (172) (242) (414) 10,665
International 2,136 (2) - (33) (35) 2,171
Corporate/Other 2,019 3 (8) (2) (7) 2,026
------------------ ------ -------- ---- -------- ------ ---------
AT&T Operating
Expenses 31,837 40 (929) (640) (1,529) 33,366
------------------ ------ -------- ---- -------- ------ ---------
AT&T Mobility 12,197 40 (415) (337) (712) 12,909
Total Operating
Income
Consumer Mobility 4,655 35 - 334 369 4,286
Business
Solutions 2,085 43 - 29 72 2,013
Entertainment
Group 1,326 (41) - 242 201 1,125
International (111) (38) - 33 (5) (106)
Corporate/Other (1,754) (2) - 2 - (1,754)
------------------ ------ -------- ---- -------- ------ ---------
AT&T Operating
Income 6,201 (3) - 640 637 5,564
------------------ ------ -------- ---- -------- ------ ---------
AT&T Mobility 5,158 82 - 337 419 4,739
40
AT&T INC.
MARCH 31, 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
Consumer Mobility
Supplemental Segment Results
----------------------------------- ------ ----- -------- ------ -----
First Quarter
---------------------------------------------------
Historical
Impact
Reported of Method Percent
2018 ASC 606 2018 2017 Change
----------------------------------- ---------- --------- ------------ ------- ---------
Segment operating revenues
Service $ 11,612 $ (612) $ 12,224 $12,465 (1.9)%
Equipment 3,374 331 3,043 2,341 30.0
----------------------------------- ------ ----- -------- ------
Total Segment Operating
Revenues 14,986 (281) 15,267 14,806 3.1
----------------------------------- ------ ----- -------- ------
Segment operating expenses
Operations and support 8,524 (650) 9,174 8,560 7.2
----------------------------------- ------ ----- -------- ------
EBITDA 6,462 369 6,093 6,246 (2.4)
----------------------------------- ------ ----- -------- ------
Depreciation and amortization 1,807 - 1,807 1,716 5.3
----------------------------------- ------ ----- -------- ------
Total Segment Operating
Expenses 10,331 (650) 10,981 10,276 6.9
----------------------------------- ------ ----- -------- ------
Segment Operating Income 4,655 369 4,286 4,530 (5.4)
Equity in Net Income of
Affiliates - - - - -
----------------------------------- ------ ----- -------- ------
Segment Contribution $ 4,655 $ 369 $ 4,286 $ 4,530 (5.4)%
=================================== ====== ===== ======== ====== =====
Operating Income Margin 31.1% 28.1% 30.6% (250) BP
EBITDA Margin 43.1% 39.9% 42.2% (230) BP
EBITDA Service Margin 55.6% 49.8% 50.1% (30) BP
Business Solutions
Supplemental Segment Results
----------------------------------- -------- ----- -------- ----- -------
First Quarter
---------------------------------------------------
Historical
Impact
Reported of Method Percent
2018 ASC 606 2018 2017 Change
----------------------------------- --------- --------- ------------ ------ -------
Segment operating revenues
Wireless service $ 1,791 $ (203) $ 1,994 $2,003 (0.4)%
Strategic services 3,138 (2) 3,140 2,974 5.6
Legacy voice and data
services 2,839 (267) 3,106 3,549 (12.5)
Other service and equipment 839 (69) 908 878 3.4
Wireless equipment 578 190 388 288 34.7
----------------------------------- -------- ----- -------- -----
Total Segment Operating
Revenues 9,185 (351) 9,536 9,692 (1.6)
----------------------------------- -------- ----- -------- -----
Segment operating expenses
Operations and support 5,638 (423) 6,061 6,040 0.3
----------------------------------- -------- ----- -------- -----
EBITDA 3,547 72 3,475 3,652 (4.8)
----------------------------------- -------- ----- -------- -----
Depreciation and amortization 1,462 - 1,462 1,465 (0.2)
----------------------------------- -------- ----- -------- -----
Total Segment Operating
Expenses 7,100 (423) 7,523 7,505 0.2
----------------------------------- -------- ----- -------- -----
Segment Operating Income 2,085 72 2,013 2,187 (8.0)
Equity in Net Income of
Affiliates (1) - (1) - -
----------------------------------- -------- ----- -------- -----
Segment Contribution $ 2,084 $ 72 $ 2,012 $2,187 (8.0)%
=================================== ======== ===== ======== ===== =======
Operating Income Margin 22.7% 21.1% 22.6% (150) BP
EBITDA Margin 38.6% 36.4% 37.7% (130) BP
41
AT&T INC.
MARCH 31, 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
Entertainment Group
Supplemental Segment Results
------------------------------------ --------- ------- -------- ------ -------
First Quarter
-----------------------------------------------------------------
Historical
Impact
Reported of Method Percent
2018 ASC 606 2018 2017 Change
------------------------------------ ------------- ------- ------------ ---------- -------
Segment operating revenues
Video entertainment $ 8,359$ (106) $ 8,465$ 9,020 (6.2)%
High-speed internet 1,878 - 1,878 1,941 (3.2)
Legacy voice and data services 819 (35) 854 1,031 (17.2)
Other service and equipment 521 (72) 593 609 (2.6)
------------------------------------ --------- ------- -------- ------
Total Segment Operating
Revenues 11,577 (213) 11,790 12,601 (6.4)
------------------------------------ --------- ------- -------- ------
Segment operating expenses
Operations and support 8,939 (414) 9,353 9,605 (2.6)
------------------------------------ --------- ------- -------- ------
EBITDA 2,638 201 2,437 2,996 (18.7)
------------------------------------ --------- ------- -------- ------
Depreciation and amortization 1,312 - 1,312 1,420 (7.6)
------------------------------------ --------- ------- -------- ------
Total Segment Operating
Expenses 10,251 (414) 10,665 11,025 (3.3)
------------------------------------ --------- ------- -------- ------
Segment Operating Income 1,326 201 1,125 1,576 (28.6)
Equity in Net Income (Loss)
of Affiliates 9 - 9 (6) -
------------------------------------ --------- ------- -------- ------
Segment Contribution $ 1,335$ 201 $ 1,134$ 1,570 (27.8)%
==================================== ========= ======= ======== ====== =======
Operating Income Margin 11.5% 9.5% 12.5% (300) BP
EBITDA Margin 22.8% 20.7% 23.8% (310) BP
International
Supplemental Segment Results
------------------------------------------ ------ ------- -------- ----- -----
First Quarter
-----------------------------------------------------
Historical
Impact
Reported of Method Percent
2018 ASC 606 2018 2017 Change
------------------------------------------ ---------- -------
Segment operating revenues
Video entertainment $ 1,354 $ - $ 1,354 $1,341 1.0%
Wireless service 404 (50) 454 475 (4.4)
Wireless equipment 267 10 257 113 -
Total Segment Operating Revenues 2,025 (40) 2,065 1,929 7.1
Segment operating expenses
Operations and support 1,804 (35) 1,839 1,759 4.5
EBITDA 221 (5) 226 170 32.9
Depreciation and amortization 332 - 332 290 14.5
Total Segment Operating Expenses 2,136 (35) 2,171 2,049 6.0
Segment Operating Income (Loss) (111) (5) (106) (120) 11.7
Equity in Net Income (Loss) of Affiliates - - - 20 -
Segment Contribution $ (111) $ (5) $ (106) $(100) (6.0)%
Operating Income Margin -5.5% -5.1% -6.2% 110 BP
EBITDA Margin 10.9% 10.9% 8.8% 210 BP
42
AT&T INC.
MARCH 31, 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
AT&T Mobility Supplemental Results
--------
First Quarter
Historical
Impact
Reported of Method Percent
2018 ASC 606 2018 2017 Change
---------
Operating revenues
Service $ 13,403 $ (814) $ 14,217 $14,468 (1.7)%
Equipment 3,952 521 3,431 2,629 30.5
Total Operating Revenues 17,355 (293) 17,648 17,097 3.2
Operating expenses
Operations and support 10,102 (712) 10,814 9,885 9.4
EBITDA 7,253 419 6,834 7,212 (5.2)
Depreciation and amortization 2,095 - 2,095 1,992 5.2
Total Operating Expenses 12,197 (712) 12,909 11,877 8.7
Operating Income $ 5,158 $ 419 $ 4,739 $ 5,220 (9.2)%
Operating Income Margin 29.7% 26.9% 30.5% (360) BP
EBITDA Margin 41.8% 38.7% 42.2% (350) BP
EBITDA Service Margin 54.1% 48.1% 49.8% (170) BP
OTHER BUSINESS MATTERS
Time Warner Inc. Acquisition In October 2016, we announced an
agreement (Merger Agreement) to acquire Time Warner in a 50% cash
and 50% stock transaction for $107.50 per share of Time Warner
common stock, or approximately $85,400 at the date of the
announcement (Merger). Each share of Time Warner common stock will
be exchanged for $53.75 per share in cash and a number of shares of
AT&T common stock equal to the exchange ratio. See "Liquidity"
for a discussion of our financing arrangements.
In November 2017, the United States Department of Justice filed
a complaint in the U.S. District Court, District of Columbia
seeking a permanent injunction to prevent AT&T from acquiring
Time Warner, alleging that the effect of the transaction "may be
substantially to lessen competition" in violation of federal
antitrust law. AT&T disputes the government allegations, and
believes the merger is pro-consumer and pro-competition, and
ultimately will be approved. The trial began in late March 2018,
with oral arguments concluding on April 30, 2018. In light of the
trial date and allowing time for a decision, both AT&T and Time
Warner elected to further extend the termination date of the merger
agreement to June 21, 2018.
Litigation Challenging DIRECTV's NFL SUNDAY TICKET More than two
dozen putative class actions were filed in the U.S. District Courts
for the Central District of California and the Southern District of
New York against DIRECTV and the National Football League (NFL).
These cases were brought by residential and commercial DIRECTV
subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs
allege that (i) the 32 NFL teams have unlawfully agreed not to
compete with each other in the market for nationally televised NFL
football games and instead have "pooled" their broadcasts and
assigned to the NFL the exclusive right to market them; and (ii)
the NFL and DIRECTV have entered into an unlawful exclusive
distribution agreement that allows DIRECTV to charge
"supra-competitive" prices for the NFL SUNDAY TICKET package. The
complaints seek unspecified treble damages and attorneys' fees
along with injunctive relief. The first complaint, Abrahamian v.
National Football League, Inc., et al., was served in June 2015. In
December 2015, the Judicial Panel on Multidistrict Litigation
transferred the cases outside the Central District of California to
that court for consolidation and management of pre-trial
proceedings. We vigorously dispute the allegations the complaints
have asserted. In August 2016, DIRECTV filed a motion to compel
arbitration and the NFL defendants filed a motion to dismiss the
complaint. In June 2017, the court granted the NFL defendants'
motion to dismiss the complaint without leave to amend, finding
that: (1) the plaintiffs did not plead a viable market; (2) the
plaintiffs did not plead facts supporting the contention that the
exclusive agreement between the NFL and DIRECTV harms competition;
(3) the claims failed to overcome the fact that the NFL and its
teams must cooperate to sell broadcasts; and (4) the plaintiffs do
not have standing to challenge the
43
AT&T INC.
MARCH 31, 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
horizontal agreement among the NFL and the teams. In light of
the order granting the motion to dismiss, the court denied
DIRECTV's motion to compel arbitration as moot. In July 2017,
plaintiffs filed an appeal in the U.S. Court of Appeals for the
Ninth Circuit, which is pending. We anticipate that, following the
briefing, the oral argument will occur in the fall of 2018.
Federal Trade Commission Litigation Involving DIRECTV In March
2015, the Federal Trade Commission (FTC) filed a civil suit in the
U.S. District Court for the Northern District of California against
DIRECTV seeking injunctive relief and money damages under Section 5
of the Federal Trade Commission Act and Section 4 of the Restore
Online Shoppers' Confidence Act. The FTC's allegations concern
DIRECTV's advertising, marketing and sale of programming packages.
The FTC alleges that DIRECTV did not adequately disclose all
relevant terms. We vigorously dispute these allegations. A bench
trial began in August 2017, and was suspended after the FTC rested
its case, so that the court could consider DIRECTV's motion for
judgment. The hearing on the motion occurred in October 2017, and
the judge took it under advisement.
Unlimited Data Plan Claims In October 2014, the FTC filed a
civil suit in the U.S. District Court for the Northern District of
California against AT&T Mobility, LLC seeking injunctive relief
and unspecified money damages under Section 5 of the Federal Trade
Commission Act. The FTC's allegations concern the application of
AT&T's Maximum Bit Rate (MBR) program to customers who enrolled
in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces
in certain instances the download speeds of a small portion of our
legacy Unlimited Data Plan customers each month after the customer
exceeds a designated amount of data during the customer's billing
cycle. MBR is an industry-standard practice that is designed to
affect only the most data-intensive applications (such as video
streaming). Texts, emails, tweets, social media posts, internet
browsing and many other applications are typically unaffected.
Contrary to the FTC's allegations, our MBR program is permitted by
our customer contracts, was fully disclosed in advance to our
Unlimited Data Plan customers, and was implemented to protect the
network for the benefit of all customers. In March 2015, our motion
to dismiss the litigation on the grounds that the FTC lacked
jurisdiction to file suit was denied. In May 2015, the Court
granted our motion to certify its decision for immediate appeal.
The United States Court of Appeals for the Ninth Circuit
subsequently granted our petition to accept the appeal, and, on
August 29, 2016, issued its decision reversing the district court
and finding that the FTC lacked jurisdiction to proceed with the
action. The FTC asked the Court of Appeals to reconsider the
decision " en banc, " which the Court agreed to do. The en banc
hearing was held in September 2017. On February 26, 2018, the Court
issued its en banc decision, finding that the FTC had jurisdiction
to proceed with the lawsuit. In addition to the FTC case, several
class actions were filed challenging our MBR program. We secured
dismissals in each of these cases except Roberts v. AT&T
Mobility LLC , which is ongoing.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United
States are subject to federal and state regulatory authorities.
AT&T subsidiaries operating outside the United States are
subject to the jurisdiction of national and supranational
regulatory authorities in the markets where service is
provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress
established a national policy framework intended to bring the
benefits of competition and investment in advanced
telecommunications facilities and services to all Americans by
opening all telecommunications markets to competition and reducing
or eliminating regulatory burdens that harm consumer welfare. Since
the Telecom Act was passed, the Federal Communications Commission
(FCC) and some state regulatory commissions have maintained or
expanded certain regulatory requirements that were imposed decades
ago on our traditional wireline subsidiaries when they operated as
legal monopolies. The new leadership at the FCC is charting a more
predictable and balanced regulatory course that will encourage
long-term investment and benefit consumers. Based on its public
statements, we expect the FCC to continue to eliminate antiquated,
unnecessary regulations and streamline processes. In addition, we
are pursuing, at both the state and federal levels, additional
legislative and regulatory measures to reduce regulatory burdens
that are no longer appropriate in a competitive telecommunications
market and that inhibit our ability to compete more effectively and
offer services wanted and needed by our customers, including
initiatives to transition services from traditional networks to all
IP-based networks. At the same time, we also seek to ensure that
legacy regulations are not further extended to broadband or
wireless services, which are subject to vigorous competition.
On April 20, 2017, the FCC adopted an order that maintains light
touch pricing regulation of packet-based services, extends such
light touch pricing regulation to high-speed Time Division
Multiplex (TDM) transport services and to most of our TDM channel
termination services, based on a competitive market test for such
services. For those services that do not qualify for
44
AT&T INC.
MARCH 31, 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
light touch regulation, the order allows companies to offer
volume and term discounts, as well as contract tariffs. Several
parties appealed the FCC's decision. These appeals were
consolidated in the U.S. Court of Appeals for the Eighth Circuit,
where they remain pending.
In October 2016, a sharply divided FCC adopted new rules
governing the use of customer information by providers of broadband
internet access service. Those rules were more restrictive in
certain respects than those governing other participants in the
internet economy, including so-called "edge" providers such as
Google and Facebook. On April 3, 2017, the President signed a
resolution passed by Congress repealing the new rules under the
Congressional Review Act, which prohibits the issuance of a new
rule that is substantially the same as a rule repealed under its
provisions, or the reissuance of the repealed rule, unless the new
or reissued rule is specifically authorized by a subsequent act of
Congress.
In February 2015, the FCC released an order classifying both
fixed and mobile consumer broadband internet access services as
telecommunications services, subject to Title II of the
Communications Act. The Order, which represented a departure from
longstanding bipartisan precedent, significantly expanded the FCC's
authority to regulate broadband internet access services, as well
as internet interconnection arrangements. AT&T and several
other parties appealed the FCC's order. In June 2016, a divided
panel of the District of Columbia Court of Appeals upheld the FCC's
rules by a 2-1 vote, and petitions for rehearing en banc were
denied in May 2017. Petitions for a writ of Certiorari at the U.S.
Supreme Court remain pending. Meanwhile, on December 14, 2017, the
FCC reversed its 2015 decision by reclassifying fixed and mobile
consumer broadband services as information services and repealing
most of the rules that were adopted in 2015. In lieu of broad
conduct prohibitions, the order requires internet service providers
to disclose information about their network practices and terms of
service, including whether they block or throttle internet traffic
or offer paid prioritization. Several parties, including several
state Attorneys General, net neutrality advocacy groups and others,
have appealed the FCC's December 2017 decision. Those appeals,
which initially were consolidated in the U.S. Court of Appeals for
the Ninth Circuit, were transferred at the request of the parties
to the D.C. Circuit. In addition, although the FCC order expressly
preempted inconsistent state or local measures, a number of states
are considering or have adopted legislation that would reimpose the
very rules the FCC repealed, and in some cases, establish
additional requirements that go beyond the FCC's February 2015
order. Additionally, some state governors have issued executive
orders that effectively reimpose the repealed requirements.
AT&T expects that these measures could result in further
litigation. We will continue to support congressional action to
codify a set of standard consumer rules for the internet.
We provide satellite video service through our subsidiary
DIRECTV, whose satellites are licensed by the FCC. The
Communications Act of 1934 and other related acts give the FCC
broad authority to regulate the U.S. operations of DIRECTV. In
addition, states representing a majority of our local service
access lines have adopted legislation that enables us to provide
IP-based service through a single statewide or state-approved
franchise (as opposed to the need to acquire hundreds or even
thousands of municipal-approved franchises) to offer a competitive
video product. We also are supporting efforts to update and improve
regulatory treatment for our services. Regulatory reform and
passage of legislation is uncertain and depends on many
factors.
We provide wireless services in robustly competitive markets,
but are subject to substantial governmental regulation. Wireless
communications providers must obtain licenses from the FCC to
provide communications services at specified spectrum frequencies
within specified geographic areas and must comply with the FCC
rules and policies governing the use of the spectrum. While
wireless communications providers' prices and offerings are
generally not subject to state or local regulation, states
sometimes attempt to regulate or legislate various aspects of
wireless services, such as in the areas of consumer protection and
the deployment of cell sites and equipment. The anticipated
industry-wide deployment of 5G technology, which is needed to
satisfy extensive demand for video and internet access, will
involve significant deployment of "small cell" equipment and
therefore increase the need for local permitting processes that
allow for the placement of small cell equipment on reasonable
timelines and terms. Federal regulations also can delay and impede
broadband services, including small cell equipment. On March 22,
2018, the FCC adopted an order to streamline the wireless
infrastructure review process in order to facilitate deployment of
next-generation wireless facilities. Among other actions, the order
excludes most small cell facilities from federal review under the
National Environmental Policy Act and the National Historic
Preservation Act, while clarifying and streamlining the process for
tribal participation in historic preservation reviews where such
review is still required.
Also facilitating the deployment of next-generation wireless
facilities, in May 2014, the FCC issued an order revising its
policies governing mobile spectrum holdings. The FCC rejected the
imposition of caps on the amount of spectrum any carrier
45
AT&T INC.
MARCH 31, 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
could acquire, retaining its case-by-case review policy.
Moreover, it increased the amount of spectrum that could be
acquired before exceeding an aggregation "screen" that would
automatically trigger closer scrutiny of a proposed transaction. On
the other hand, it indicated that it will separately consider an
acquisition of "low band" spectrum that exceeds one-third of the
available low band spectrum as presumptively harmful to
competition. The spectrum screen (including the low band screen)
recently increased by 23 MHz. On balance, the order and the
spectrum screen should allow AT&T to obtain additional spectrum
to meet our customers' needs.
As the wireless industry has matured, future wireless growth
will increasingly depend on our ability to offer innovative
services, plans and devices and to provide these services in
bundled product offerings to best utilize a wireless network that
has sufficient spectrum and capacity to support these innovations
on as broad a geographic basis as possible. We continue to invest
significant capital in expanding our network capacity, as well as
to secure and utilize spectrum that meets our long-term needs. To
that end, we have:
-- Submitted winning bids for 251 Advanced Wireless Services
(AWS) spectrum licenses for a near-nationwide contiguous
block of high-quality spectrum in the AWS-3 Auction.
-- Redeployed spectrum previously used for basic 2G services
to support more advanced mobile internet services on our
3G and 4G networks.
-- Secured the First Responder Network Authority (FirstNet)
contract, which provides us with access to 20 MHz of nationwide
low band spectrum.
-- Invested in 5G and millimeter-wave technologies with our
acquisition of Fiber-Tower Corporation, which holds significant
amounts of spectrum in the millimeter wave bands (28 GHz
and 39 GHz) that the FCC recently reallocated for mobile
broadband services. These bands will help to accelerate
our entry into 5G services.
Connect America Fund Phase II Auction (Auction 903) The FCC
plans to conduct a reverse auction to award government funding to
the lowest bidders in exchange for providing broadband service to
rural, high-cost areas in the U.S. where it is uneconomic for
carriers to offer broadband. This is the first time the FCC will
award universal service funding through an auction.
LIQUIDITY AND CAPITAL RESOURCES
In anticipation of the Time Warner transaction closing, we had
$48,872 in cash and cash equivalents available at March 31, 2018, a
portion of which will now be used to fund the redemption price for
those bonds that were subject to mandatory redemption as a result
of the acquisition not having been completed by April 22, 2018.
Cash and cash equivalents included cash of $3,851 and money market
funds and other cash equivalents of $45,021. Approximately $1,906
of our cash and cash equivalents resided in foreign jurisdictions,
some of which may be subject to restrictions on repatriation.
Cash and cash equivalents decreased $1,626 since December 31,
2017. In the first three months of 2018, cash inflows were
primarily provided by the cash receipts from operations, including
cash from our sale and transfer of certain wireless equipment
installment receivables to third parties, issuance of long-term
debt, and collateral received from banks and other participants in
our derivative arrangements. These inflows were offset by cash used
to meet the needs of the business, including, but not limited to,
payment of operating expenses, funding capital expenditures, debt
repayments, dividends to stockholders, and the acquisition of
wireless spectrum and other operations. We actively manage our
vendor relationships and the timing of working capital
disbursements to optimize the use of our cash, which contributes to
the period cash flows. We discuss many of these factors in detail
below.
On December 22, 2017, federal tax reform was enacted into law.
Beginning with 2018, the Act reduces the U.S. federal corporate tax
rate from 35% to 21% and permits immediate deductions for certain
new assets. As a result, cash taxes will be significantly lower
than they would have been in 2018 and beyond without federal tax
reform.
Cash Provided by or Used in Operating Activities
During the three months of 2018, cash provided by operating
activities was $8,947, compared to $8,965 for the three months of
2017. Slightly lower operating cash flows in 2018 were primarily
due to interest payments on higher debt balances resulting from
debt issued in anticipation of the Time Warner acquisition and the
timing of working capital transactions including higher payments
for handset sales, partially offset by net tax refunds.
46
AT&T INC.
MARCH 31, 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
Cash Used in or Provided by Investing Activities
For the first three months of 2018, cash used in investing
activities totaled $7,152 and consisted primarily of $5,957 for
capital expenditures, excluding interest during construction.
During the quarter, we also advanced approximately $1,000 to an
equity investment.
The majority of our capital expenditures are spent on our
networks, including product development and related support
systems. Capital expenditures, excluding interest during
construction, increased $173 in the first quarter and included
approximately $140 related to FirstNet. We did not receive any
reimbursements from the government for FirstNet during the first
quarter of 2018. We do not report capital expenditures at the
segment level.
In connection with capital improvements, we negotiate favorable
payment terms (referred to as vendor financing), which are excluded
from our investing activities and reported as financing activities.
For the first three months of 2018, vendor financing payments
related to capital investments were approximately $170.
The amount of capital expenditures is influenced by demand for
services and products, capacity needs and network enhancements. We
are also focused on ensuring DIRECTV merger commitments are met. As
of March 31, 2018, we market our fiber-to-the-premises network to
8.2 million customer locations and are on track to meet our FCC
commitment of 12.5 million locations by mid-2019.
Cash Provided by or Used in Financing Activities
For the first three months of 2018, cash used in financing
activities totaled $3,502 and included net proceeds of $2,565,
primarily resulting from drawing $2,250 on our Nova Scotia Credit
Agreement.
In anticipation of our Time Warner acquisition, during 2017, we
issued notes that were subject to mandatory redemption if our
acquisition of Time Warner was not completed by April 22, 2018. The
U.S. Dollar equivalent of all such notes issued was $30,372 as of
March 31, 2018. In light of the civil antitrust lawsuit challenging
the transaction, during the first quarter, we initiated two
exchanges, offering holders cash and similar global notes that are
not subject to mandatory redemption. In February 2018, we exchanged
EUR4,078 global notes and redeemed EUR18 global notes (combined
$5,048 U.S. dollar equivalent value as of March 31, 2018). In April
2018, we exchanged $3,868 global notes and redeemed $1,775.
Additionally, we repurchased $1,321 of these bonds on the open
market during the first quarter of 2018 and $1,995 through May 2,
2018. The remaining $16,365 of notes subject to mandatory
redemption are scheduled to be redeemed on May 23, 2018, at the
special mandatory redemption price equal to 101% of the principal
amount plus accrued but unpaid interest.
Our weighted average interest rate of our entire long-term debt
portfolio, including the impact of derivatives, was approximately
4.4% as of March 31, 2018 and December 31, 2017. We had $161,161 of
total notes and debentures outstanding at March 31, 2018, which
included Euro, British pound sterling, Swiss franc, Brazilian real,
Mexican peso and Canadian dollar denominated debt that totaled
approximately $38,924.
During the first three months of 2018, we redeemed $4,911 of
debt, primarily consisting of the following:
-- $2,500 of 5.500% notes due 2018.
-- $841 of 3.900% notes due 2018 (original maturity of 2027;
subject to special mandatory redemption).
-- $750 of 1.750% notes due 2018.
-- $431 of 3.400% notes due 2018 (original maturity of 2024;
subject to special mandatory redemption).
-- $300 of 6.450% notes due 2018.
-- $49 of 5.150% notes due 2018 (original maturity of 2050;
subject to special mandatory redemption).
At March 31, 2018, we had $29,322 of debt maturing within one
year, $29,128 of which was related to long-term debt issuances,
including notes subject to mandatory redemption on May 23, 2018.
Debt maturing within one year includes the following notes that may
be put back to us by the holders:
-- $1,000 of annual put reset securities issued by BellSouth
that may be put back to us each April until maturity in
2021. No such put was exercised during April 2018.
-- An accreting zero-coupon note that may be redeemed each
May until maturity in 2022. In May 2017, $1 was redeemed
by the holder for $1. If the remainder of the zero-coupon
note (issued for principal of $500 in 2007 and partially
exchanged in the 2017 debt exchange offers) is held to
maturity, the redemption amount will be $592.
47
AT&T INC.
MARCH 31, 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
In anticipation of our planned initial public offering (IPO) of
Vrio Corp. (Vrio), a consolidated holding company for our Latin
American digital entertainment services units, DIRECTV Latin
American and SKY Brasil, subsidiaries of Vrio entered into the
following long-term debt issuances:
-- April 5, 2018 issuance of $650 of 6.25% notes due 2023
and $350 of 6.875% notes due 2028.
-- April 11, 2018 borrowing of approximately $1,000 of debt
denominated in Brazilian reais that matures in 2023. The
floating rate for the facility is based upon the Brazil
interbank deposit rate annualized (DI Rate), plus 175 basis
points.
On April 19, 2018, we withdrew the planned IPO of Vrio. We have
an option to redeem these notes if the IPO does not close within
180 days.
At March 31, 2018, we had approximately 388 million shares
remaining from authorizations approved by the Board of Directors in
2013 and 2014. During the first three months of 2018, we did not
repurchase any shares under these authorizations.
We paid dividends of $3,070 during the first three months of
2018, compared with $3,009 for the first three months of 2017,
primarily reflecting the increase in the quarterly dividend
approved by our Board of Directors in December 2017. Dividends
declared by our Board of Directors totaled $0.50 per share in the
first three months of 2018 and $0.49 per share for the first three
months of 2017. Our dividend policy considers the expectations and
requirements of stockholders, capital funding requirements of
AT&T and long-term growth opportunities. It is our intent to
provide the financial flexibility to allow our Board of Directors
to consider dividend growth and to recommend an increase in
dividends to be paid in future periods. All dividends remain
subject to declaration by our Board of Directors.
Credit Facilities
The following summary of our various credit and loan agreements
does not purport to be complete and is qualified in its entirety by
reference to each agreement filed as exhibits to our Annual Report
on Form 10-K.
We use credit facilities as a tool in managing our liquidity
status. At March 31, 2018, we had no amounts outstanding on our
five-year $12,000 revolving credit agreement.
On September 29, 2017, we entered into a five-year $2,250
syndicated term loan credit agreement containing (i) a $750 term
loan facility (the "Tranche A Facility"), (ii) a $750 term loan
facility (the "Tranche B Facility") and (iii) a $750 term loan
facility (the "Tranche C Facility"), with certain investment and
commercial banks and The Bank of Nova Scotia, as administrative
agent. We drew on the Tranche A Facility, the Tranche B Facility
and the Tranche C Facility during the first quarter of 2018, with
$2,250 advances outstanding as of March 31, 2018.
We also utilize other external financing sources, which include
various credit arrangements supported by government agencies to
support network equipment purchases, as well as a commercial paper
program.
In connection with our pending Merger with Time Warner, we
entered into a $10,000 term loan agreement ("Term Loan"). On
February 2, 2018, we amended the Term Loan to extend the commitment
termination date to December 31, 2018 and increased the commitments
to $16,175 from $10,000. No amounts will be borrowed under the Term
Loan prior to the closing of the Merger. Borrowings under the Term
Loan will be used solely to finance a portion of the cash to be
paid in the Merger, the refinancing of debt of Time Warner and its
subsidiaries and the payment of related expenses.
Each of our credit and loan agreements contains covenants that
are customary for an issuer with an investment grade senior debt
credit rating as well as a net debt-to-EBITDA financial ratio
covenant requiring AT&T to maintain, as of the last day of each
fiscal quarter, a ratio of not more than 3.5-to-1. As of March 31,
2018, we were in compliance with the covenants for our credit
facilities.
Collateral Arrangements
During the first three months of 2018, we received $2,075 of
additional cash collateral, on a net basis, from banks and other
participants in our derivative arrangements. Cash postings under
these arrangements vary with changes in credit ratings and netting
agreements. (See Note 7)
Other
Our total capital consists of debt (long-term debt and debt
maturing within one year) and stockholders' equity. Our capital
structure does not include debt issued by our equity method
investments. At March 31, 2018, our debt ratio was 52.6%, compared
to 51.6% at March 31, 2017, and 53.6% at December 31, 2017. Our net
debt ratio was 36.8% at March 31, 2018,
48
AT&T INC.
MARCH 31, 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
compared to 45.8% at March 31, 2017 and 37.2% at December 31,
2017. The debt ratio is affected by the same factors that affect
total capital, and reflects our recent debt issuances and
repayments.
During the first three months of 2018, we received $2,458 from
the monetization of various assets, primarily the sale of certain
equipment installment receivables. We plan to continue to explore
similar opportunities.
In 2013, we made a voluntary contribution of a preferred equity
interest in AT&T Mobility II LLC (Mobility), the holding
company for our U.S. wireless operations, to the trust used to pay
pension benefits under our qualified pension plans. The preferred
equity interest had a value of $8,944 as of March 31, 2018, and
$9,155 as of December 31, 2017, does not have any voting rights and
has a liquidation value of $8,000. The trust is entitled to receive
cumulative cash distributions of $560 per annum, which are
distributed quarterly in equal amounts. We distributed $140 to the
trust during the first three months of 2018. So long as we make the
distributions, the terms of the preferred equity interest will not
impose any limitations on our ability to declare a dividend or
repurchase shares.
49
AT&T INC.
MARCH 31, 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
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE
We believe the following measure is relevant and useful
information to investors as it is used by management as a method of
comparing performance with that of many of our competitors. This
supplemental measure should be considered in addition to, but not
as a substitute of, our consolidated and segment financial
information.
Supplemental Operational Measure
We provide a supplemental discussion of our domestic wireless
operations that is calculated by combining our Consumer Mobility
and Business Solutions segments, and then adjusting to remove
non-wireless operations. The following table presents a
reconciliation of our supplemental AT&T Mobility results.
Supplemental Operational Measure
Three Months Ended
March 31, 2018 March 31, 2017
Consumer Business Adjustments AT&T Consumer Business Adjustments AT&T
Mobility Solutions 1 Mobility Mobility Solutions 1 Mobility
------------- -------------
Operating
Revenues
Wireless
service $ 11,612 $ 1,791 $ - $ 13,403 $ 12,465 $ 2,003 $ - $ 14,468
Strategic
services - 3,138 (3,138) - - 2,974 (2,974) -
Legacy voice
and data
services - 2,839 (2,839) - - 3,549 (3,549) -
Other service
and equipment - 839 (839) - - 878 (878) -
Wireless
equipment 3,374 578 - 3,952 2,341 288 - 2,629
Total Operating
Revenues 14,986 9,185 (6,816) 17,355 14,806 9,692 (7,401) 17,097
Operating
Expenses
Operations and
support 8,524 5,638 (4,060) 10,102 8,560 6,040 (4,715) 9,885
EBITDA 6,462 3,547 (2,756) 7,253 6,246 3,652 (2,686) 7,212
Depreciation
and
amortization 1,807 1,462 (1,174) 2,095 1,716 1,465 (1,189) 1,992
Total Operating
Expense 10,331 7,100 (5,234) 12,197 10,276 7,505 (5,904) 11,877
Operating Income $ 4,655 $ 2,085 $ (1,582) $ 5,158 $ 4,530 $ 2,187 $ (1,497) $ 5,220
1 Business wireline operations reported in Business Solutions segment.
50
AT&T INC.
MARCH 31, 2018
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Dollars in millions except per share amounts
At March 31, 2018, we had interest rate swaps with a notional
value of $8,333 and a fair value of $(68).
We have fixed-to-fixed and floating-to-fixed cross-currency
swaps on foreign currency-denominated debt instruments with a U.S.
dollar notional value of $36,092 to hedge our exposure to changes
in foreign currency exchange rates. These derivatives have been
designated at inception and qualify as cash flow hedges with a net
fair value of $2,055 at March 31, 2018.
We have foreign exchange contracts with a U.S. dollar notional
value of $2,908 to provide currency at a fixed rate to hedge a
portion of the exchange risk involved in foreign
currency-denominated transactions. We expect to settle these
contracts on May 23, 2018, when we redeem the foreign-denominated
notes subject to mandatory redemption. These foreign exchange
contracts are amortized into income in the same period the hedged
transaction affects earnings and qualify as cash flow hedges with a
net fair value of $(3) at March 31, 2018. (See Note 7)
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed by
the registrant is recorded, processed, summarized, accumulated and
communicated to its management, including its principal executive
and principal financial officers, to allow timely decisions
regarding required disclosure, and reported within the time periods
specified in the Securities and Exchange Commission's rules and
forms. The chief executive officer and chief financial officer have
performed an evaluation of the effectiveness of the design and
operation of the registrant's disclosure controls and procedures as
of March 31, 2018. Based on that evaluation, the chief executive
officer and chief financial officer concluded that the registrant's
disclosure controls and procedures were effective as of March 31,
2018.
51
AT&T INC.
MARCH 31, 2018
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking
statements that are subject to risks and uncertainties, and actual
results could differ materially. Many of these factors are
discussed in more detail in the "Risk Factors" section. We claim
the protection of the safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of
1995.
The following factors could cause our future results to differ
materially from those expressed in the forward-looking
statements:
-- Adverse economic and/or capital access changes in the markets
served by us or in countries in which we have significant
investments, including the impact on customer demand and
our ability and our suppliers' ability to access financial
markets at favorable rates and terms.
-- Changes in available technology and the effects of such
changes, including product substitutions and deployment
costs.
-- Increases in our benefit plans' costs, including increases
due to adverse changes in the United States and foreign
securities markets, resulting in worse-than-assumed investment
returns and discount rates; adverse changes in mortality
assumptions; adverse medical cost trends; and unfavorable
or delayed implementation or repeal of healthcare legislation,
regulations or related court decisions.
-- The final outcome of FCC and other federal, state or foreign
government agency proceedings (including judicial review,
if any, of such proceedings) involving issues that are
important to our business, including, without limitation,
special access and business data services; intercarrier
compensation; interconnection obligations; pending Notices
of Apparent Liability; the transition from legacy technologies
to IP-based infrastructure, including the withdrawal of
legacy TDM-based services; universal service; broadband
deployment; wireless equipment siting regulations; E911
services; competition policy; privacy; net neutrality;
unbundled network elements and other wholesale obligations;
multi-channel video programming distributor services and
equipment; availability of new spectrum, on fair and balanced
terms; and wireless and satellite license awards and renewals.
-- The final outcome of state and federal legislative efforts
involving issues that are important to our business, including
deregulation of IP-based services, relief from Carrier
of Last Resort obligations and elimination of state commission
review of the withdrawal of services.
-- Enactment of additional state, local, federal and/or foreign
regulatory and tax laws and regulations, or changes to
existing standards and actions by tax agencies and judicial
authorities including the resolution of disputes with any
taxing jurisdictions, pertaining to our subsidiaries and
foreign investments, including laws and regulations that
reduce our incentive to invest in our networks, resulting
in lower revenue growth and/or higher operating costs.
-- U.S. and foreign laws and regulations regarding privacy,
personal data protection and user consent are complex and
rapidly evolving and could result in increased costs, claims
against us or otherwise harm our reputation.
-- Our ability to absorb revenue losses caused by increasing
competition, including offerings that use alternative technologies
or delivery methods (e.g., cable, wireless, VoIP and over-the-top
video service), subscriber reluctance to purchase new wireless
handsets, and our ability to maintain capital expenditures.
-- The extent of competition including from governmental networks
and other providers and the resulting pressure on customer
totals and segment operating margins.
-- Our ability to develop attractive and profitable product/service
offerings to offset increasing competition.
-- The ability of our competitors to offer product/service
offerings at lower prices due to lower cost structures
and regulatory and legislative actions adverse to us, including
state regulatory proceedings relating to unbundled network
elements and non-regulation of comparable alternative technologies
(e.g., VoIP).
-- The continued development and delivery of attractive and
profitable video and broadband offerings; the extent to
which regulatory and build-out requirements apply to our
offerings; our ability to match speeds offered by our competitors
and the availability, cost and/or reliability of the various
technologies and/or content required to provide such offerings.
-- Our continued ability to maintain margins, attract and
offer a diverse portfolio of video, wireless service and
devices and device financing plans.
-- The availability and cost of additional wireless spectrum
and regulations and conditions relating to spectrum use,
licensing, obtaining additional spectrum, technical standards
and deployment and usage, including network management
rules.
-- Our ability to manage growth in wireless video and data
services, including network quality and acquisition of
adequate spectrum at reasonable costs and terms.
-- The outcome of pending, threatened or potential litigation
(which includes arbitrations), including, without limitation,
patent and product safety claims by or against third parties.
-- The impact from major equipment failures on our networks,
including satellites operated by DIRECTV; the effect of
security breaches related to the network or customer information;
our inability to obtain handsets, equipment/software or
have handsets, equipment/software serviced in a timely
and cost-effective manner from suppliers; and in the case
of satellites launched, timely provisioning of services
from vendors; or severe weather conditions, natural disasters,
pandemics, energy shortages, wars or terrorist attacks.
-- The issuance by the Financial Accounting Standards Board
or other accounting oversight bodies of new accounting
standards or changes to existing standards.
-- Our ability to close our pending acquisition of Time Warner
Inc. and successfully reorganize our operations, including
the ability to manage various businesses in widely dispersed
business locations and with decentralized management.
-- Our ability to adequately fund our wireless operations,
including payment for additional spectrum, network upgrades
and technological advancements.
-- Our increased exposure to video competition and foreign
economies, including foreign exchange fluctuations as well
as regulatory and political uncertainty.
-- Changes in our corporate strategies, such as changing network-related
requirements or acquisitions and dispositions, which may
require significant amounts of cash or stock, to respond
to competition and regulatory, legislative and technological
developments.
-- The uncertainty surrounding further congressional action
to address spending reductions, which may result in a significant
decrease in government spending and reluctance of businesses
and consumers to spend in general.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
52
AT&T INC.
MARCH 31, 2018
PART II - OTHER INFORMATION
Dollars in millions except per share amounts
Item 1. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that
may materially affect our business. We use this section to update
this discussion to reflect material developments since our Form
10-K was filed. For the first quarter 2018, there were no such
material developments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the
first quarter of 2018 is as follows:
(a) (b) (c) (d)
Maximum Number
Total Number of (or Approximate
Shares (or Units) Dollar Value) of
Purchased as Part Shares (or Units)
of Publicly That May Yet Be
Total Number of Announced Plans Purchased
Shares (or Units) Average Price Paid Per or Programs Under The Plans
Period Purchased 1, 2, 3 Share (or Unit) 1 or Programs
January 1, 2018 -
January 31, 2018 882,386 $ 38.19 - 388,296,000
February 1, 2018 -
February 28, 2018 1,425,911 39.11 - 388,296,000
March 1, 2018 -
March 31, 2018 2,053,893 37.08 - 388,296,000
Total 4,362,190 $ 38.10 -
1 In March 2014, our Board of Directors approved an additional
authorization to repurchase up to 300 million shares of our
common
stock. In March 2013, our Board of Directors authorized
the repurchase of up to an additional 300 million shares
of our common stock.
The authorizations have no expiration date.
2 Of the shares repurchased, 3,798,282 shares were acquired
through the withholding of taxes on the vesting of restricted
stock
and performance shares or on the exercise price of options.
3 Of the shares repurchased, 563,908 shares were acquired
through reimbursements from AT&T maintained Voluntary Employee
Benefit
Association (VEBA) trusts.
53
AT&T INC.
MARCH 31, 2018
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as
a part of this report:
12 Computation of Ratios of Earnings to Fixed Charges
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1
Certification of Principal Executive Officer
31.2
Certification of Principal Financial Officer
32 Section 1350 Certifications
101 XBRL Instance Document
54
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AT&T Inc.
May 3, 2018 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
55
EXHIBIT
12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Three Months Ended
March 31, Year Ended December 31,
(Unaudited)
2018 2017 2017 2016 2015 2014 2013
Earnings:
Income from continuing
operations before
income taxes $ 6,141 $ 5,378 $15,139 $19,812 $20,692 $10,355 $28,050
Equity in net (income)
loss of affiliates
included above (9) 173 128 (98) (79) (175) (642)
Fixed charges 2,334 1,906 8,854 7,296 6,592 5,295 5,452
Distributed income of
equity affiliates 7 8 46 61 30 148 318
Interest capitalized (161) (231) (903) (892) (797) (234) (284)
Earnings,
as
adjusted $ 8,312 $ 7,234 $23,264 $26,179 $26,438 $15,389 $32,894
Fixed Charges:
Interest expense $ 1,771 $ 1,293 $ 6,300 $ 4,910 $ 4,120 $ 3,613 $ 3,940
Interest capitalized 161 231 903 892 797 234 284
Portion of rental
expense representative
of interest factor 402 382 1,651 1,494 1,675 1,448 1,228
Fixed
Charges $ 2,334 $ 1,906 $ 8,854 $ 7,296 $ 6,592 $ 5,295 $ 5,452
Ratio of Earnings to
Fixed Charges 3.56 3.80 2.63 3.59 4.01 2.91 6.03
Exhibit 31.1
CERTIFICATION
I, Randall Stephenson, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 3, 2018
/s/ Randall Stephenson
Randall Stephenson
Chairman of the Board,
Chief Executive Officer and President
Exhibit 31.2
CERTIFICATION
I, John J. Stephens, certify that:
1. I have reviewed this report on Form 10-Q of AT&T Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 3, 2018
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
Exhibit 32
Certification of Periodic Financial Reports
Pursuant to 18 U.S.C. Section 1350, each of the undersigned
officers of AT&T Inc. (the "Company") hereby certifies that the
Company's Quarterly Report on Form 10-Q for the three months ended
March 31, 2018 (the "Report") fully complies with the requirements
of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934 and that information contained in the Report
fairly presents, in all material respects, the financial condition
and results of operations of the Company.
May 3, 2018 May 3, 2018
By: /s/ Randall Stephenson By: /s/ John J. Stephens
Randall Stephenson John J. Stephens
Chairman of the Board, Chief Executive Officer Senior Executive Vice President
and President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant
to 18 U.S.C. Section 1350 and is not being filed as part of the
Report or as a separate disclosure document. This certification
shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 ("Exchange Act") or otherwise
subject to liability under that section. This certification shall
not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act except to the extent
this Exhibit 32 is expressly and specifically incorporated by
reference in any such filing.
A signed original of this written statement required by Section
906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the
electronic version of this written statement required by Section
906, has been provided to AT&T Inc. and will be retained by
AT&T Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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