TIDM58KN
RNS Number : 8233O
AT & T Inc.
23 August 2017
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 June 30, 2017
or
o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definition of "accelerated
filer," "large accelerated filer," "smaller reporting company" and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated [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 July 31, 2017, there were 6,140 million common shares
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
------------------------------------------------------------------------------------
Three months
ended Six months ended
June 30, June 30,
2017 2016 2017 2016
----------------------------------------- ------- ------- ---------- -------
Operating Revenues
Service $36,538 $37,142 $ 72,994 $74,243
Equipment 3,299 3,378 6,208 6,812
------------------------------------------ ------ ------ ------ ------
Total operating revenues 39,837 40,520 79,202 81,055
------------------------------------------ ------ ------ ------ ------
Operating Expenses
Cost of services and sales
Equipment 4,138 4,260 7,986 8,635
Broadcast, programming and operations 4,898 4,701 9,872 9,330
Other cost of services (exclusive
of depreciation and
amortization shown separately
below) 9,218 9,514 18,283 18,910
Selling, general and administrative 8,113 8,909 16,600 17,350
Depreciation and amortization 6,147 6,576 12,274 13,139
------------------------------------------ ------ ------ ------ ------
Total operating expenses 32,514 33,960 65,015 67,364
------------------------------------------ ------ ------ ------ ------
Operating Income 7,323 6,560 14,187 13,691
------------------------------------------ ------ ------ ------ ------
Other Income (Expense)
Interest expense (1,395) (1,258) (2,688) (2,465)
Equity in net income (loss) of
affiliates 14 28 (159) 41
Other income (expense) - net 128 91 108 161
------------------------------------------ ------ ------ ------ ------
Total other income (expense) (1,253) (1,139) (2,739) (2,263)
------------------------------------------ ------ ------ ------ ------
Income Before Income Taxes 6,070 5,421 11,448 11,428
Income tax expense 2,056 1,906 3,860 4,028
------------------------------------------ ------ ------ ------ ------
Net Income 4,014 3,515 7,588 7,400
------------------------------------------ ------ ------ ------ ------
Less: Net Income Attributable
to Noncontrolling Interest (99) (107) (204) (189)
------------------------------------------ ------ ------ ------ ------
Net Income Attributable to AT&T $ 3,915 $ 3,408 $ 7,384 $ 7,211
========================================== ====== ====== ====== ======
Basic Earnings Per Share Attributable
to AT&T $ 0.63 $ 0.55 $ 1.19 $ 1.17
Diluted Earnings Per Share Attributable
to AT&T $ 0.63 $ 0.55 $ 1.19 $ 1.17
------------------------------------------ ------ ------ ------ ------
Weighted Average Number of Common
Shares
Outstanding - Basic (in millions) 6,165 6,174 6,166 6,173
Weighted Average Number of Common
Shares
Outstanding - with Dilution
(in millions) 6,184 6,195 6,185 6,193
Dividends Declared Per Common
Share $ 0.49 $ 0.48 $ 0.98 $ 0.96
========================================== ====== ====== ====== ======
See Notes to Consolidated Financial
Statements.
2
AT&T INC.
------------------------------------------ ------ ------ ---------- -------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Dollars in millions
(Unaudited)
------------------------------------------ ------ ------ ---------- -------
Three months
ended Six months ended
June 30, June 30,
2017 2016 2017 2016
------------------------------------------ ------ ------ ---------- -------
Net income $4,014 $3,515 $ 7,588 $ 7,400
Other comprehensive income (loss),
net of tax:
Foreign currency:
Foreign currency translation
adjustment (includes $(10),
$0, $(4) and $0 attributable
to noncontrolling interest),
net of taxes of $115, $136,
$506 and $126 (33) 218 339 174
Available-for-sale securities:
Net unrealized gains (losses),
net of taxes of $29, $2, $44
and $(13) 50 5 83 (21)
Reclassification adjustment
included in net income, net of
taxes of $(7), $2, $(4) and
$0 (12) 3 (7) -
Cash flow hedges:
Net unrealized gains (losses),
net of taxes of $(279), $(208),
$(272) and $(141) (517) (387) (504) (263)
Reclassification adjustment
included in net income, net of
taxes of $5, $5, $10 and $10 9 9 19 19
Defined benefit postretirement
plans:
Net prior service credit arising
during period, net of
taxes of $594, $0, $594 and
$0 969 - 969 -
Amortization of net prior service
credit included in net
income, net of taxes of $(151),
$(131), $(290) and $(262) (247) (214) (475) (429)
------------------------------------------- ----- ----- ------ ------
Other comprehensive income (loss) 219 (366) 424 (520)
------------------------------------------- ----- ----- ------ ------
Total comprehensive income 4,233 3,149 8,012 6,880
Less: Total comprehensive income
attributable to
noncontrolling interest (89) (107) (200) (189)
------------------------------------------- ----- ----- ------ ------
Total Comprehensive Income Attributable
to AT&T $4,144 $3,042 $ 7,812 $ 6,691
=========================================== ===== ===== ====== ======
See Notes to Consolidated Financial
Statements.
3
AT&T INC.
-------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
-------------------------------------------------------------------------------
December
June 30, 31,
2017 2016
--------------------------------------------------- ------------- ---------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 25,617 $ 5,788
Accounts receivable - net of allowances for
doubtful accounts of $732 and $661 14,997 16,794
Prepaid expenses 1,371 1,555
Other current assets 11,562 14,232
---------------------------------------------------- --------- --------
Total current assets 53,547 38,369
---------------------------------------------------- --------- --------
Property, plant and equipment 323,098 319,648
Less: accumulated depreciation and amortization (196,914) (194,749)
---------------------------------------------------- --------- --------
Property, Plant and Equipment - Net 126,184 124,899
---------------------------------------------------- --------- --------
Goodwill 105,546 105,207
Licenses 95,864 94,176
Customer Lists and Relationships - Net 12,414 14,243
Other Intangible Assets - Net 7,980 8,441
Investments in Equity Affiliates 1,615 1,674
Other Assets 17,645 16,812
---------------------------------------------------- --------- --------
Total Assets $ 420,795 $ 403,821
==================================================== ========= ========
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 10,831 $ 9,832
Accounts payable and accrued liabilities 26,471 31,138
Advanced billing and customer deposits 4,371 4,519
Accrued taxes 3,331 2,079
Dividends payable 3,008 3,008
---------------------------------------------------- --------- --------
Total current liabilities 48,012 50,576
---------------------------------------------------- --------- --------
Long-Term Debt 132,824 113,681
---------------------------------------------------- --------- --------
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 61,926 60,128
Postemployment benefit obligation 31,422 33,578
Other noncurrent liabilities 20,753 21,748
---------------------------------------------------- --------- --------
Total deferred credits and other noncurrent
liabilities 114,101 115,454
---------------------------------------------------- --------- --------
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000
authorized at June 30, 2017 and
December 31, 2016: issued 6,495,231,088 at
June 30, 2017 and December 31, 2016) 6,495 6,495
Additional paid-in capital 89,471 89,604
Retained earnings 36,067 34,734
Treasury stock (355,448,811 at June 30, 2017
and 356,237,141
at December 31, 2016, at cost) (12,697) (12,659)
Accumulated other comprehensive income 5,389 4,961
Noncontrolling interest 1,133 975
---------------------------------------------------- --------- --------
Total stockholders' equity 125,858 124,110
---------------------------------------------------- --------- --------
Total Liabilities and Stockholders' Equity $ 420,795 $ 403,821
==================================================== ========= ========
See Notes to Consolidated Financial Statements.
4
AT&T INC.
-----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
------------------------------------------------------- -------- --------
Six months ended
June 30,
2017 2016
------------------------------------------------------- -------- --------
Operating Activities
Net income $ 7,588 $ 7,400
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,274 13,139
Undistributed loss (earnings) from investments
in equity affiliates 167 (22)
Provision for uncollectible accounts 795 705
Deferred income tax expense 964 1,767
Net loss (gain) from sale of investments,
net of impairments 12 (85)
Actuarial loss (gain) on pension and postretirement
benefits (259) -
Changes in operating assets and liabilities:
Accounts receivable 119 (364)
Other current assets 471 2,229
Accounts payable and other accrued liabilities (2,761) (3,032)
Equipment installment receivables and related
sales 907 464
Deferred fulfillment costs (796) (1,190)
Retirement benefit funding (280) (280)
Other - net (1,041) (2,524)
-------------------------------------------------------- ------- -------
Total adjustments 10,572 10,807
-------------------------------------------------------- ------- -------
Net Cash Provided by Operating Activities 18,160 18,207
-------------------------------------------------------- ------- -------
Investing Activities
Capital expenditures:
Purchase of property and equipment (10,750) (9,702)
Interest during construction (473) (437)
Acquisitions, net of cash acquired 1,224 (485)
Dispositions 51 107
Sale of securities, net - 500
-------------------------------------------------------- ------- -------
Net Cash Used in Investing Activities (9,948) (10,017)
-------------------------------------------------------- ------- -------
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less (2) -
Issuance of long-term debt 24,115 10,140
Repayment of long-term debt (6,118) (9,129)
Purchase of treasury stock (458) (197)
Issuance of treasury stock 24 119
Dividends paid (6,021) (5,899)
Other 77 (1,137)
-------------------------------------------------------- ------- -------
Net Cash Provided by (Used in) Financing Activities 11,617 (6,103)
-------------------------------------------------------- ------- -------
Net increase in cash and cash equivalents 19,829 2,087
Cash and cash equivalents beginning of year 5,788 5,121
-------------------------------------------------------- ------- -------
Cash and Cash Equivalents End of Period $ 25,617 $ 7,208
======================================================== ======= =======
Cash paid during the six months ended June
30 for:
Interest $ 3,095 $ 2,914
Income taxes, net of refunds $ 1,470 $ 2,468
See Notes to Consolidated Financial Statements.
5
AT&T INC.
----------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
----------------------------------------------------------------------------
June 30, 2017
------------------
Shares Amount
------------------------------------------------------- ------- --------
Common Stock
Balance at beginning of year 6,495 $ 6,495
Issuance of stock - -
------------------------------------------------------- ------ -------
Balance at end of period 6,495 $ 6,495
========================================================= ====== =======
Additional Paid-In Capital
Balance at beginning of year $ 89,604
Issuance of treasury stock 4
Share-based payments (137)
--------------------------------------------------------- ------ -------
Balance at end of period $ 89,471
========================================================= ====== =======
Retained Earnings
Balance at beginning of year $ 34,734
Net income attributable to AT&T ($1.19 per
diluted share) 7,384
Dividends to stockholders ($0.98 per share) (6,053)
Other 2
--------------------------------------------------------- ------ -------
Balance at end of period $ 36,067
========================================================= ====== =======
Treasury Stock
Balance at beginning of year (356) $(12,659)
Repurchase and acquisition of common stock (13) (504)
Issuance of treasury stock 14 466
--------------------------------------------------------- ------ -------
Balance at end of period (355) $(12,697)
========================================================= ====== =======
Accumulated Other Comprehensive Income Attributable
to AT&T, net of tax
Balance at beginning of year $ 4,961
Other comprehensive income attributable to
AT&T 428
--------------------------------------------------------- ------ -------
Balance at end of period $ 5,389
========================================================= ====== =======
Noncontrolling Interest
Balance at beginning of year $ 975
Net income attributable to noncontrolling interest 204
Distributions (174)
Acquisition of noncontrolling interest 132
Translation adjustments attributable to noncontrolling
interest, net of taxes (4)
--------------------------------------------------------- ------ -------
Balance at end of period $ 1,133
========================================================= ====== =======
Total Stockholders' Equity at beginning of
year $124,110
========================================================= ====== =======
Total Stockholders' Equity at end of period $125,858
========================================================= ====== =======
See Notes to Consolidated Financial Statements.
6
AT&T INC.
JUNE 30, 2017
For ease of reading, AT&T Inc. is referred to as "we,"
"AT&T" or the "Company" throughout this document, and the names
of the particular subsidiaries and affiliates providing the
services generally have been omitted. AT&T is a holding company
whose subsidiaries and affiliates operate in the communications and
digital entertainment services industry. Our subsidiaries and
affiliates provide services and equipment that deliver voice, video
and broadband services both domestically and internationally. You
should read this document in conjunction with the consolidated
financial statements and accompanying notes included in our Annual
Report on Form 10-K for the year ended December 31, 2016. The
results for the interim periods are not necessarily indicative of
those for the full year.
In the tables throughout this document, percentage increases and
decreases that are not considered meaningful are denoted with a
dash.
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 subsidiaries
and affiliates over which we exercise control.
All significant intercompany transactions are eliminated in the
consolidation process. Investments in unconsolidated subsidiaries
and partnerships where we have significant influence are accounted
for under the equity method. Earnings from certain investments
accounted for using the equity method are included for periods
ended within up to one quarter of our period end. We also record
our proportionate share of our equity method investees' other
comprehensive income (OCI) items, including cumulative translation
adjustments.
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles (GAAP) requires management
to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes, including
estimates of probable losses and expenses. Actual results could
differ from those estimates.
Recently Adopted Accounting Standards
Income Taxes As of January 1, 2017, we adopted Accounting
Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU
2016-16), with modified retrospective application, resulting in our
recognition of an immaterial adjustment to retained earnings. Under
ASU 2016-16, we recognize the income tax effects of intercompany
sales or transfers of assets other than inventory (e.g.,
intellectual property or property, plant and equipment) during the
period of intercompany sale or transfer instead of the period of
either sale or transfer to a third party or recognition of
depreciation or impairment.
New Accounting Standards
Pension and Other Postretirement Benefits In March 2017, the
Financial Accounting Standards Board (FASB) issued ASU No. 2017-07,
"Compensation - Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost" (ASU 2017-07), which changes the
presentation of periodic benefit cost components. Under ASU
2017-07, we will continue to present service costs within our
operating expenses but present amortization of prior service
credits and other components of our net periodic benefit cost in
"other income (expense) - net" in our consolidated statements of
income. ASU 2017-07 is effective for annual reporting periods
beginning after December 15, 2017. See Note 5 for our components of
net periodic benefit cost.
Revenue Recognition In May 2014, the FASB issued ASU No.
2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASC
606), and has modified the standard thereafter. This standard
replaces existing revenue recognition rules with a comprehensive
revenue measurement and recognition standard and expanded
disclosure requirements. ASC 606, as amended, becomes effective for
annual reporting periods beginning after December 15, 2017, at
which point we plan to adopt the standard using the "modified
retrospective method." Under that method, we will apply the rules
to all contracts existing as of January 1, 2018, recognizing in
beginning retained earnings an adjustment for the cumulative effect
of the change and providing additional disclosures comparing
results to previous accounting standards.
7
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and
diluted earnings per share for the three months and six months
ended June 30, 2017 and 2016, is shown in the table below:
Three months
ended Six months ended
June 30, June 30,
2017 2016 2017 2016
---------------------------------------- ------ ------ ---------- -------
Numerators
Numerator for basic earnings
per share:
Net Income $4,014 $3,515 $ 7,588 $ 7,400
Less: Net income attributable
to noncontrolling interest (99) (107) (204) (189)
----------------------------------------- ----- ----- ------ ------
Net Income attributable to AT&T 3,915 3,408 7,384 7,211
Dilutive potential common shares:
Share-based payment 2 2 6 6
----------------------------------------- ----- ----- ------ ------
Numerator for diluted earnings
per share $3,917 $3,410 $ 7,390 $ 7,217
========================================= ===== ===== ====== ======
Denominators (000,000)
Denominator for basic earnings
per share:
Weighted average number of common
shares outstanding 6,165 6,174 6,166 6,173
Dilutive potential common shares:
Share-based payment (in shares) 19 21 19 20
----------------------------------------- ----- ----- ------ ------
Denominator for diluted earnings
per share 6,184 6,195 6,185 6,193
========================================= ===== ===== ====== ======
Basic earnings per share attributable
to AT&T $ 0.63 $ 0.55 $ 1.19 $ 1.17
Diluted earnings per share attributable
to AT&T $ 0.63 $ 0.55 $ 1.19 $ 1.17
========================================= ===== ===== ====== ======
8
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in
accumulated other comprehensive income (accumulated OCI) are
presented below. All amounts are net of tax and exclude
noncontrolling interest.
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 343 83 (504) 969 891
Amounts
reclassified
from accumulated
OCI - 1 (7) 1 19 2 (475) 3 (463)
------------------- --------- ----------------- ---------- ------------ -------------
Net other
comprehensive
income (loss) 343 76 (485) 494 428
------------------- --------- ----------------- ---------- ------------ -------------
Balance as of
June 30, 2017 $ (1,652) $ 617 $ 259 $ 6,165 $ 5,389
=================== ========= ================= ========== ============ =============
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,
2015 $ (1,198) $ 484 $ 16 $ 6,032 $ 5,334
Other comprehensive
income
(loss) before
reclassifications 174 (21) (263) - (110)
Amounts
reclassified
from accumulated
OCI - 1 - 1 19 2 (429) 3 (410)
------------------- --------- ----------------- ---------- ------------ -------------
Net other
comprehensive
income (loss) 174 (21) (244) (429) (520)
------------------- --------- ----------------- ---------- ------------ -------------
Balance as of
June 30, 2016 $ (1,024) $ 463 $ (228) $ 5,603 $ 4,814
=================== ========= ================= ========== ============ =============
1 (Gains) losses are included in Other income (expense)
- net in the consolidated statements of income.
2 (Gains) losses are included in Interest expense in the
consolidated statements of income. See Note 6 for additional
information.
3 The amortization of prior service credits associated with
postretirement benefits, net of amounts capitalized as part
of construction
labor, are included in Cost of services and sales and Selling,
general and administrative in the consolidated statements
of income
(see Note 5).
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products
and services to different customer segments over various technology
platforms and/or in different geographies that are managed
accordingly. We analyze our segments based on Segment Contribution,
which consists of operating income, excluding acquisition-related
costs and other significant items (as discussed below), and equity
in net income (loss) of affiliates for investments managed within
each segment. We have four reportable segments: (1) Business
Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4)
International.
We also evaluate segment performance based on EBITDA and/or
EBITDA margin, which is defined as Segment Contribution excluding
equity in net income (loss) of affiliates and depreciation and
amortization. We believe EBITDA to be a relevant and useful
measurement to our investors as it is part of our internal
management reporting and planning processes and it is an important
metric that management uses to evaluate segment operating
performance. EBITDA does not give effect to cash used for debt
service requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses. EBITDA
margin is EBITDA divided by total revenues.
9
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The Business Solutions segment provides services to business
customers, including multinational companies; governmental and
wholesale customers; and individual subscribers who purchase
wireless services through employer-sponsored plans. We provide
advanced IP-based services including Virtual Private Networks
(VPN); Ethernet-related products and broadband, collectively
referred to as fixed strategic services; as well as traditional
data and voice products. We utilize our wireless and wired networks
to provide a complete communications solution to our business
customers.
The Entertainment Group segment provides video, internet, voice
communication, and interactive and targeted advertising services to
customers located in the United States or in U.S. territories. We
utilize our copper and IP-based wired network and our satellite
technology.
The Consumer Mobility segment provides nationwide wireless
service to consumers, wholesale and resale wireless subscribers
located in the United States or in U.S. territories. We utilize our
network to provide voice and data services, including high-speed
internet, video and home monitoring services over wireless
devices.
The International segment provides entertainment services in
Latin America and wireless services in Mexico. Video entertainment
services are provided to primarily residential customers using
satellite technology. We utilize our regional and national networks
in Mexico to provide consumer and business customers with wireless
data and voice communication services. Our international
subsidiaries conduct business in their local currency, and
operating results are converted to U.S. dollars using official
exchange rates.
In reconciling items to consolidated operating income and income
before income taxes, Corporate and Other includes: (1) operations
that are not considered reportable segments and that are no longer
integral to our operations or which we no longer actively market,
and (2) impacts of corporate-wide decisions for which the
individual segments are not being evaluated, including interest
costs and expected return on plan assets for our pension and
postretirement benefit plans.
Certain operating items are not allocated to our business
segments, and those include:
-- Acquisition-related items which consists of (1) items associated
with the merger and integration of acquired businesses
and (2) the noncash amortization of intangible assets acquired
in acquisitions.
-- Certain significant items which consists of (1) noncash
actuarial gains and losses from pension and other postretirement
benefits, (2) employee separation charges associated with
voluntary and/or strategic offers, (3) losses resulting
from abandonment or impairment of assets and (4) other
items for which the segments are not being evaluated.
Interest expense and other income (expense) - net, are managed
only on a total company basis and are, accordingly, reflected only
in consolidated results.
Our operating assets are utilized by multiple segments and
consist of our wireless and wired networks as well as our satellite
fleet. We manage our assets to provide for the most efficient,
effective and integrated service to our customers, not by segment,
and, therefore, asset information and capital expenditures by
segment are not presented. Depreciation is allocated based on asset
utilization by segment.
10
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2017
--------------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ---------- ----------- ------- ------------ ----------- ------------ --------------
Business Solutions $ 17,107 $ 10,313 $ 6,794 $ 2,335 $ 4,459 $ - $ 4,459
Entertainment
Group 12,682 9,558 3,124 1,458 1,666 (11) 1,655
Consumer Mobility 7,791 4,520 3,271 871 2,400 - 2,400
International 2,026 1,772 254 311 (57) 25 (32)
--------------------- ------ ---------- ------ ----------- ------- -------- --- ---------
Segment Total 39,606 26,163 13,443 4,975 8,468 $ 14 $ 8,482
--------------------- ------ ---------- ------ ----------- ------- -------- --- ---------
Corporate
and Other 231 87 144 2 142
Acquisition-related
items - 281 (281) 1,170 (1,451)
Certain significant
items - (164) 164 - 164
--------------------- ------ ---------- ------ ----------- -------
AT&T Inc. $ 39,837 $ 26,367 $13,470 $ 6,147 $ 7,323
===================== ====== ========== ====== =========== =======
For the six months ended June 30, 2017
--------------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ---------- ----------- ------- ------------ ----------- ------------ --------------
Business Solutions $ 33,955 $ 20,489 $13,466 $ 4,647 $ 8,819 $ - $ 8,819
Entertainment
Group 25,305 19,159 6,146 2,877 3,269 (17) 3,252
Consumer Mobility 15,531 9,048 6,483 1,744 4,739 - 4,739
International 3,955 3,531 424 601 (177) 45 (132)
--------------------- ------ ---------- ------ ----------- ------- -------- --- ---------
Segment Total 78,746 52,227 26,519 9,869 16,650 $ 28 $ 16,678
--------------------- ------ ---------- ------ ----------- ------- -------- --- ---------
Corporate
and Other 456 308 148 33 115
Acquisition-related
items - 488 (488) 2,372 (2,860)
Certain significant
items - (282) 282 - 282
--------------------- ------ ---------- ------ ----------- -------
AT&T Inc. $ 79,202 $ 52,741 $26,461 $ 12,274 $ 14,187
===================== ====== ========== ====== =========== =======
11
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2016
--------------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ---------- ----------- ------- ------------ ----------- ------------ --------------
Business Solutions $ 17,579 $ 10,857 $ 6,722 $ 2,521 $ 4,201 $ - $ 4,201
Entertainment
Group 12,711 9,569 3,142 1,489 1,653 (2) 1,651
Consumer Mobility 8,186 4,680 3,506 932 2,574 - 2,574
International 1,828 1,723 105 298 (193) 9 (184)
--------------------- ------ ---------- ------ ----------- ------- -------- --- ---------
Segment Total 40,304 26,829 13,475 5,240 8,235 $ 7 $ 8,242
--------------------- ------ ---------- ------ ----------- ------- -------- --- ---------
Corporate
and Other 216 293 (77) 20 (97)
Acquisition-related
items - 233 (233) 1,316 (1,549)
Certain significant
items - 29 (29) - (29)
--------------------- ------ ---------- ------ ----------- -------
AT&T Inc. $ 40,520 $ 27,384 $13,136 $ 6,576 $ 6,560
===================== ====== ========== ====== =========== =======
For the six months ended June 30, 2016
--------------------------------------------------------------------------------------------------------------------
Equity
in Net
Income
Operations Depreciation Operating (Loss)
and Support and Income of Segment
Revenues Expenses EBITDA Amortization (Loss) Affiliates Contribution
-------------------- ---------- ----------- ------- ------------ ----------- ------------ --------------
Business Solutions $ 35,188 $ 21,659 $13,529 $ 5,029 $ 8,500 $ - $ 8,500
Entertainment
Group 25,369 19,147 6,222 2,977 3,245 1 3,246
Consumer Mobility 16,514 9,592 6,922 1,854 5,068 - 5,068
International 3,495 3,311 184 575 (391) 23 (368)
--------------------- ------ ---------- ------ ----------- ------- -------- --- ---------
Segment Total 80,566 53,709 26,857 10,435 16,422 $ 24 $ 16,446
--------------------- ------ ---------- ------ ----------- ------- -------- --- ---------
Corporate
and Other 489 670 (181) 37 (218)
Acquisition-related
items - 528 (528) 2,667 (3,195)
Certain significant
items - (682) 682 - 682
--------------------- ------ ---------- ------ ----------- -------
AT&T Inc. $ 81,055 $ 54,225 $26,830 $ 13,139 $ 13,691
===================== ====== ========== ====== =========== =======
12
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The following table is a reconciliation of Segment Contribution
to "Income Before Income Taxes" reported on our consolidated
statements of income.
Second Quarter Six Month Period
----------------- --------------------
2017 2016 2017 2016
----------------------------------------- ------- ------- ---------- -------
Business Solutions $ 4,459 $ 4,201 $ 8,819 $ 8,500
Entertainment Group 1,655 1,651 3,252 3,246
Consumer Mobility 2,400 2,574 4,739 5,068
International (32) (184) (132) (368)
------------------------------------------ ------ ------ ------ ------
Segment Contribution 8,482 8,242 16,678 16,446
------------------------------------------ ------ ------ ------ ------
Reconciling Items:
Corporate and Other 142 (97) 115 (218)
Merger and integration charges (281) (233) (488) (528)
Amortization of intangibles
acquired (1,170) (1,316) (2,372) (2,667)
Actuarial gain (loss) 259 - 259 -
Employee separation costs (60) (29) (60) (54)
Gain on wireless spectrum transactions 63 - 181 736
Venezuela devaluation (98) - (98) -
Segment equity in net (income)
loss of affiliates (14) (7) (28) (24)
------------------------------------------ ------ ------ ------ ------
AT&T Operating Income 7,323 6,560 14,187 13,691
------------------------------------------ ------ ------ ------ ------
Interest expense 1,395 1,258 2,688 2,465
Equity in net income (loss) of
affiliates 14 28 (159) 41
Other income (expense) - net 128 91 108 161
------------------------------------------ ------ ------ ------ ------
Income Before Income Taxes $ 6,070 $ 5,421 $ 11,448 $11,428
========================================== ====== ====== ====== ======
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory
pension plans. We also provide certain medical, dental, life
insurance and death benefits to certain retired employees under
various plans and accrue actuarially determined postretirement
benefit costs. Our objective in funding these plans, in combination
with the standards of the Employee Retirement Income Security Act
of 1974, as amended (ERISA), is to accumulate assets sufficient to
provide benefits described in the plans to employees upon their
retirement.
In 2013, we made a voluntary contribution of a preferred equity
interest in AT&T Mobility II LLC, the primary holding company
for our domestic wireless business, to the trust used to pay
pension benefits under our qualified pension plans. The preferred
equity interest had a value of $8,294 at June 30, 2017. The trust
is entitled to receive cumulative cash distributions of $560 per
annum, which are distributed quarterly by AT&T Mobility II LLC
to the trust, in equal amounts and accounted for as contributions.
We distributed $280 to the trust during the six months ended June
30, 2017. So long as we make the distributions, we will have no
limitations on our ability to declare a dividend or repurchase
shares. This preferred equity interest is a plan asset under ERISA
and is recognized as such in the plan's separate financial
statements. However, because the preferred equity interest is not
unconditionally transferable to an unrelated party, it is not
reflected in plan assets in our consolidated financial statements
and instead has been eliminated in consolidation.
We recognize actuarial gains and losses on pension and
postretirement plan assets in our operating results at our annual
measurement date of December 31, unless earlier remeasurements are
required. During the second quarter of 2017, a substantive plan
change involving the frequency of considering potential health
reimbursement account 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 $1,563. Such credits will be amortized through
earnings over a period approximating the average service period to
full eligibility. Upon our adoption of ASU 2017-07, the
amortization of these prior service credits will be recorded in
other income (expense) - net. The plan change also triggered a
remeasurement of our postretirement benefit obligation, resulting
in an actuarial gain of $259 recognized in the second quarter of
2017.
13
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
The following table details pension and postretirement benefit
costs included in operating expenses in the accompanying
consolidated statements of income. A portion of these expenses is
capitalized as part of internal construction projects, providing a
small reduction in the net expense recorded. Service costs and
prior service credits are reported in our segment results while
interest costs and expected return on plan assets are included with
Corporate and Other (see Note 4).
Three months
ended Six months ended
June 30, June 30,
2017 2016 2017 2016
------------------------------------------- -------- ----- ---------- -------
Pension cost:
Service cost - benefits earned
during the period $ 282 $ 278 $ 564 $ 556
Interest cost on projected
benefit obligation 484 495 968 990
Expected return on assets (784) (780) (1,567) (1,558)
Amortization of prior service
credit (31) (25) (62) (51)
-------------------------------------------- ---- ---- ------ ------
Net pension (credit) cost $ (49) $ (32) $ (97) $ (63)
============================================ ==== ==== ====== ======
Postretirement cost:
Service cost - benefits earned
during the period $ 34 $ 48 $ 75 $ 96
Interest cost on accumulated
postretirement benefit obligation 202 243 424 486
Expected return on assets (79) (89) (159) (178)
Amortization of prior service
credit (366) (319) (702) (638)
Actuarial (gain) loss (259) - (259) -
-------------------------------------------- ---- ---- ------ ------
Net postretirement (credit)
cost $ (468) $(117) $ (621) $ (234)
============================================ ==== ==== ====== ======
Combined net pension and postretirement
(credit) cost $ (517) $(149) $ (718) $ (297)
============================================ ==== ==== ====== ======
The decrease in the combined net pension and postretirement
costs in the second quarter and first six months reflects higher
amortization of prior service credits as well as decreasing
corporate bond rates, which contributed to lower interest
costs.
As part of our second-quarter 2017 remeasurement, we decreased
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 4.50% and 3.30%, respectively. Including the
effects 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 last half of 2017 is $764
($474 net of tax) for postretirement benefits.
We also provide senior- and middle-management employees with
nonqualified, unfunded supplemental retirement and savings plans.
For the second quarter ended 2017 and 2016, net supplemental
pension benefits costs not included in the table above were $23 and
$24. For the first six months of 2017 and 2016, net supplemental
pension benefit costs were $45 and $47.
14
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a
three-tiered fair value hierarchy that gives highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy are described below:
Level 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, 2016.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term
debt, including current maturities, and other financial
instruments, are summarized as follows:
December 31,
June 30, 2017 2016
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------- --------- -------- -------- --------
Notes and debentures 1 $142,816 $151,338 $122,381 $128,726
Bank borrowings 2 2 4 4
Investment securities 2,556 2,556 2,587 2,587
========================================= ======= ======= ======= =======
1 Includes credit agreement borrowings.
The carrying amount of debt with an original maturity of less
than one year approximates market value. The fair value
measurements used for notes and debentures are considered Level 2
and are determined using various methods, including quoted prices
for identical or similar securities in both active and inactive
markets.
15
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Following is the fair value leveling for available-for-sale
securities and derivatives as of June 30, 2017 and December 31,
2016:
June 30, 2017
-----------------------------------------
Level Level Level
1 2 3 Total
----------------------------------- ---------- ---------- ------- -------
Available-for-Sale Securities
Domestic equities $ 1,276 $ - $ - $ 1,276
International equities 659 - - 659
Fixed income bonds - 370 - 370
Asset Derivatives 1
Interest rate swaps - 57 - 57
Cross-currency swaps - 294 - 294
Interest rate locks - 3 - 3
Liability Derivatives 1
Interest rate swaps - (42) - (42)
Cross-currency swaps - (2,631) - (2,631)
Interest rate locks - (82) - (82)
==================================== ====== ====== === ======
1 Derivatives designated as hedging instruments are reflected
as "Other assets," "Other noncurrent liabilities" and, for
a portion of interest rate swaps, "Other current assets"
in our consolidated balance sheets.
December 31, 2016
-----------------------------------------
Level Level Level
1 2 3 Total
----------------------------------- ---------- ---------- ------- -------
Available-for-Sale Securities
Domestic equities $ 1,215 $ - $ - $ 1,215
International equities 594 - - 594
Fixed income bonds - 508 - 508
Asset Derivatives 1
Interest rate swaps - 79 - 79
Cross-currency swaps - 89 - 89
Liability Derivatives 1
Interest rate swaps - (14) - (14)
Cross-currency swaps - (3,867) - (3,867)
==================================== ====== ====== === ======
1 Derivatives designated as hedging instruments are reflected
as "Other assets," "Other noncurrent liabilities" and, for
a portion of interest rate swaps, "Other current assets"
in our consolidated balance sheets.
Investment Securities
Our investment securities include equities, fixed income bonds
and other securities. A substantial portion of the fair values of
our available-for-sale securities was estimated based on quoted
market prices. Investments in securities not traded on a national
securities exchange are valued using pricing models, quoted prices
of securities with similar characteristics or discounted cash
flows. Realized gains and losses on securities are included in
"Other income (expense) - net" in the consolidated statements of
income using the specific identification method. Unrealized gains
and losses, net of tax, on available-for-sale securities are
recorded in accumulated OCI. Unrealized losses that are considered
other than temporary are recorded in "Other income (expense) - net"
with the corresponding reduction to the carrying basis of the
investment. Fixed income investments of $220 have maturities of
less than one year, $33 within one to three years, $32 within three
to five years and $85 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.
16
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Derivative Financial Instruments
We enter into derivative transactions to manage certain market
risks, primarily interest rate risk and foreign currency exchange
risk. This includes the use of interest rate swaps, interest rate
locks, foreign exchange forward contracts and combined interest
rate foreign exchange contracts (cross-currency swaps). We do not
use derivatives for trading or speculative purposes. We record
derivatives on our consolidated balance sheets at fair value that
is derived from observable market data, including yield curves and
foreign exchange rates (all of our derivatives are Level 2). Cash
flows associated with derivative instruments are presented in the
same category on the consolidated statements of cash flows as the
item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest
rate swaps as fair value hedges. The purpose of these swaps is to
manage interest rate risk by managing our mix of fixed-rate and
floating-rate debt. These swaps involve the receipt of fixed-rate
amounts for floating interest rate payments over the life of the
swaps without exchange of the underlying principal amount. Accrued
and realized gains or losses from interest rate swaps impact
interest expense in the consolidated statements of income.
Unrealized gains on interest rate swaps are recorded at fair market
value as assets, and unrealized losses on interest rate swaps are
recorded at fair market value as liabilities. Changes in the fair
values of the interest rate swaps are exactly offset by changes in
the fair value of the underlying debt. Gains or losses realized
upon early termination of our fair value hedges are recognized in
interest expense. In the six months ended June 30, 2017 and June
30, 2016, no ineffectiveness was measured on interest rate swaps
designated as fair value hedges .
Cash Flow Hedging We designate our cross-currency swaps as cash
flow hedges. We have entered into multiple cross-currency swaps to
hedge our exposure to variability in expected future cash flows
that are attributable to foreign currency risk generated from the
issuance of our Euro, British pound sterling, Canadian dollar and
Swiss franc denominated debt. These agreements include initial and
final exchanges of principal from fixed foreign currency
denominated amounts to fixed U.S. dollar denominated amounts, to be
exchanged at a specified rate that is usually determined by the
market spot rate upon issuance. They also include an interest rate
swap of a fixed or floating foreign currency-denominated rate to a
fixed U.S. dollar denominated interest rate.
Unrealized gains on derivatives designated as cash flow hedges
are recorded at fair value as assets, and unrealized losses on
derivatives designated as cash flow hedges are recorded at fair
value as liabilities. For derivative instruments designated as cash
flow hedges, the effective portion is reported as a component of
accumulated OCI until reclassified into interest expense in the
same period the hedged transaction affects earnings. The gain or
loss on the ineffective portion is recognized as "Other income
(expense) - net" in the consolidated statements of income in each
period. We evaluate the effectiveness of our cross-currency swaps
each quarter. In the six months ended June 30, 2017 and June 30,
2016, no ineffectiveness was measured on cross-currency swaps
designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks to
partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during the
period leading up to the probable issuance of fixed-rate debt. We
designate our interest rate locks as cash flow hedges. Gains and
losses when we settle our interest rate locks are amortized into
income over the life of the related debt, except where a material
amount is deemed to be ineffective, which would be immediately
reclassified to "Other income (expense) - net" in the consolidated
statements of income. Over the next 12 months, we expect to
reclassify $59 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation
of highly probable foreign currency-denominated transactions. In
anticipation of these transactions, we often enter into foreign
exchange contracts to provide currency at a fixed rate. Gains and
losses at the time we settle or take delivery on our designated
foreign exchange contracts are amortized into income in the same
period the hedged transaction affects earnings, except where an
amount is deemed to be ineffective, which would be immediately
reclassified to "Other income (expense) - net" in the consolidated
statements of income. In the six months ended June 30, 2017 and
June 30, 2016, no ineffectiveness was measured on foreign exchange
contracts designated as cash flow hedges.
17
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
Collateral and Credit-Risk Contingency We have entered into
agreements with our derivative counterparties establishing
collateral thresholds based on respective credit ratings and
netting agreements. At June 30, 2017, we had posted collateral of
$2,297 (a deposit asset) and held collateral of $13 (a receipt
liability). Under the agreements, if AT&T's credit rating had
been downgraded one rating level by Fitch Ratings, before the final
collateral exchange in June, we would have been required to post
additional collateral of $133. If DIRECTV Holdings LLC's credit
rating had been downgraded below BBB- (S&P), we would have been
required to post additional collateral of $239. At December 31,
2016, we had posted collateral of $3,242 (a deposit asset) and held
no collateral. We do not offset the fair value of collateral,
whether the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable) exists, against
the fair value of the derivative instruments.
Following are the notional amounts of our outstanding derivative
positions:
June December
30, 31,
2017 2016
--------------------- ------- ----------
Interest rate swaps $10,775 $ 9,650
Cross-currency swaps 38,694 29,642
Interest rate locks 5,000 -
---------------------- ------ ------
Total $54,469 $ 39,292
====================== ====== ======
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 Six months ended
-------------------------------------------
June 30, June 30,
2017 2016 2017 2016
----------- ------ ---------- ------
Interest rate swaps (Interest
expense):
Gain (Loss) on interest rate
swaps $ (23) $ 5 $ (48) $ 71
Gain (Loss) on long-term debt 23 (5) 48 (71)
============================================ === ===== ====== =====
In addition, the net swap settlements that accrued and settled
in the quarter ended June 30 were offset against interest
expense.
Three months
ended Six months ended
June 30, June 30,
Cash Flow Hedging Relationships 2017 2016 2017 2016
-------------------------------------------- --------- ----- ---------- ------
Cross-currency swaps:
Gain (Loss) recognized in accumulated
OCI $ (717) $(595) $ (697) $ (404)
Interest rate locks:
Gain (Loss) recognized in accumulated
OCI (79) - (79) -
Interest income (expense) reclassified
from
accumulated OCI into income (14) (14) (29) (29)
============================================= ==== ==== ====== =====
18
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Auction 1000 On April 13, 2017, the Federal Communications
Commission (FCC) announced that we were the successful bidder for
$910 of spectrum in 18 markets. We provided the FCC an initial
deposit of $2,348 in July 2016 and received a refund of $1,438 in
April 2017.
Dispositions
YP Holdings LLC In June 2017, YP Holdings LLC was acquired by
Dex Media. Our second-quarter results include a gain of $36 for our
portion of the proceeds.
Pending Acquisitions
Time Warner Inc. On October 22, 2016, we entered into and
announced a merger agreement (Merger Agreement) to acquire Time
Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction
for $107.50 per share of Time Warner common stock, or approximately
$85,400 at the date of the announcement (Merger). Combined with
Time Warner's net debt at March 31, 2017, the total transaction
value is approximately $107,160. Each share of Time Warner common
stock will be exchanged for $53.75 per share in cash and a number
of shares of AT&T common stock equal to the exchange ratio. If
the average stock price (as defined in the Merger Agreement) at the
time of closing the Merger is between (or equal to) $37.411 and
$41.349 per share, the exchange ratio will be the quotient of
$53.75 divided by the average stock price. If the average stock
price is greater than $41.349, the exchange ratio will be 1.300. If
the average stock price is less than $37.411, the exchange ratio
will be 1.437. Post-transaction, Time Warner shareholders will own
between 14.4% and 15.7% of AT&T shares on a fully-diluted basis
based on the number of AT&T shares outstanding. The cash
portion of the purchase price will be financed with new debt and
cash.
Time Warner is a global leader in media and entertainment whose
major businesses encompass an array of some of the most respected
and successful media brands. The deal combines Time Warner's vast
library of content and ability to create new premium content for
audiences around the world with our extensive customer
relationships and distribution, one of the world's largest pay-TV
subscriber bases and leading scale in TV, mobile and broadband
distribution.
The Merger Agreement was approved by Time Warner shareholders on
February 15, 2017 and remains subject to review by the U.S.
Department of Justice and certain foreign jurisdictions. The FCC
has stated that it does not believe it will need to review the deal
as no licenses are involved. It is also a condition to closing that
necessary consents from foreign governmental entities must be
obtained. The transaction is expected to close before year-end
2017. If the Merger is terminated as a result of reaching the
termination date (and at that time one or more of the conditions
relating to certain regulatory approvals have not been satisfied)
or there is a final, non-appealable order preventing the
transaction relating to antitrust laws, communications laws,
utilities laws or foreign regulatory laws, then under certain
circumstances, we would be obligated to pay Time Warner $500.
Other Events
FirstNet On March 30, 2017, the First Responder Network
Authority (FirstNet) announced its selection of AT&T to build
and manage the first nationwide broadband network dedicated to
America's first responders. FirstNet expects to provide 20 MHz of
valuable telecommunications spectrum and success-based payments of
$6,500 over the next five years to support network buildout. The
actual reach of the network and our investment over the 25-year
period will be determined by the number of individual states
electing to participate in FirstNet. As of July 31, 2017, seven
states have opted-in to the program. We do not expect FirstNet to
materially impact our 2017 results.
19
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless
devices in installments over a period of up to 30 months and, in
many cases, they have the right to trade in the original equipment
for a new device within a set period and have the remaining unpaid
balance satisfied. As of June 30, 2017 and December 31, 2016, gross
equipment installment receivables of $3,920 and $5,665 were
included on our consolidated balance sheets, of which $2,230 and
$3,425 are notes receivable that are included in "Accounts
receivable - net."
In 2014, we entered into an uncommitted agreement pertaining to
the sale of equipment installment receivables and related security
with Citibank and various other relationship banks as purchasers
(collectively, the Purchasers). Under this agreement, we transfer
certain receivables to the Purchasers for cash and additional
consideration upon settlement of the receivables, referred to as
the deferred purchase price. In June 2017, we modified the
agreement with the Purchasers such that we receive more upfront
cash consideration at the time the receivables are transferred to
the Purchasers. Additionally, in the event a customer trades in a
device prior to the end of the installment contract period, we
agree to make a payment to the Purchasers equal to any outstanding
remaining installment receivable balance. Accordingly, we record a
guarantee obligation to the Purchasers for this estimated amount at
the time the receivables are transferred. Under the terms of the
agreement, we continue to bill and collect the payments from our
customers on behalf of the Purchasers. Since inception, cash
proceeds received, net of remittances (excluding amounts returned
as deferred purchase price), were $3,946.
The following table sets forth a summary of equipment
installment receivables sold during the three and six months ended
June 30, 2017 and 2016:
Three months
ended Six months ended
June 30, June 30,
2017 2016 2017 2016
------------------------------------ ----------- ------ ----------- -------
Gross receivables sold $ 1,752 $1,845 $ 4,598 $ 4,327
Net receivables sold 1 1,599 1,671 4,220 3,927
Cash proceeds received 1,415 1,126 2,847 2,647
Deferred purchase price recorded 293 563 1,482 1,282
Guarantee obligation recorded 74 - 74 -
===================================== ====== ===== ======= ======
1 Receivables net of allowance, imputed interest and trade-in
right guarantees.
The deferred purchase price and guarantee obligation are
initially recorded at estimated fair value and subsequently carried
at the lower of cost or net realizable value. The estimation of
their fair values is based on remaining installment payments
expected to be collected and the expected timing and value of
device trade-ins. The estimated value of the device trade-ins
considers prices offered to us by independent third parties that
contemplate changes in value after the launch of a device model.
The fair value measurements used for the deferred purchase price
and the guarantee obligation are considered Level 3 under the Fair
Value Measurement and Disclosure framework (see Note 6).
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
and six months ended June 30, 2017 and 2016:
Three months
ended Six months ended
June 30, June 30,
2017 2016 2017 2016
---------------------------------------------- ------------- ------ ---------- ----------
Fair value of repurchased receivables $ 337 $ - $ 714 $ 532
Carrying value of deferred purchase
price 301 - 640 539
----------------------------------------------- ---- ------ ------ ------
Gain (loss) on repurchases 1 $ 36 $ - $ 74 $ (7)
=============================================== ==== ====== ====== ======
1 These gains (losses) are included in "Selling, general
and administrative" in the consolidated statements of income.
20
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
Continued
Dollars in millions except per share amounts
At June 30, 2017 and December 31, 2016, our deferred purchase
price receivable was $3,648 and $3,090, respectively, of which
$2,232 and $1,606 are included in "Other current assets" on our
consolidated balance sheets, with the remainder in "Other Assets."
Our maximum exposure to loss as a result of selling these equipment
installment receivables is limited to the 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 the cash flows related to the arrangement as operating
activities in our consolidated statements of cash flows because the
cash received from the Purchasers upon both the sale of the
receivables and the collection of the deferred purchase price is
not subject to significant interest rate risk.
Derecognized Installment Receivables
The following table sets forth a summary of equipment
installment receivables that were sold to Purchasers and are no
longer considered our assets.
2017
--------------------------------------------------- -------
Outstanding derecognized receivables at January 1, $ 7,232
Gross receivables sold 4,598
Collections on cash purchase price (2,337)
Collections on deferred purchase price (382)
Fees (48)
Trade ins and other (141)
Fair value of repurchased receivables (714)
---------------------------------------------------- ------
Outstanding derecognized receivables at June 30, $ 8,208
==================================================== ======
NOTE 9. SUBSEQUENT EVENT
On July 27, 2017, we initiated a debt offering for $22,500 that
will be completed on August 7, 2017. The proceeds will be used for
general corporate purposes, including funding the cash
consideration for the Time Warner acquisition. Upon settlement of
the debt offering, we expect to terminate our bridge loan credit
agreement.
Details for the offering are as follows:
-- $750 of floating rate notes due 2023.
-- $1,750 of 2.850% global notes due 2023.
-- $3,000 of 3.400% global notes due 2024.
-- $5,000 of 3.900% global notes due 2027.
-- $4,500 of 4.900% global notes due 2037.
-- $5,000 of 5.150% global notes due 2050.
-- $2,500 of 5.300% global notes due 2058.
The notes detailed above, along with $7,301 of floating rate and
global notes issued in June 2017, are subject to a special
mandatory redemption feature. If we do not consummate the Time
Warner acquisition pursuant to the merger agreement on or prior to
April 22, 2018, or, if prior to such date, the merger agreement is
terminated, then in either case, we must redeem the notes at a
redemption price equal to 101% of the principal amount of the
notes, plus accrued but unpaid interest.
In conjunction with this offering, we settled our interest rate
locks.
21
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Dollars in millions except per share and per subscriber
amounts
RESULTS OF OPERATIONS
AT&T is a holding company whose subsidiaries and affiliates
operate in the communications and digital entertainment services
industry. Our subsidiaries and affiliates provide services and
equipment that deliver voice, video and broadband services both
domestically and internationally. You should read this discussion
in conjunction with the consolidated financial statements and
accompanying notes. A reference to a "Note" in this section refers
to the accompanying Notes to Consolidated Financial Statements.
Consolidated Results Our financial results in the second quarter
and for the first six months of 2017 and 2016 are summarized as
follows:
Second Quarter Six-Month Period
------------------------- -------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
------- ------- ------- ------- ------- -------
Operating Revenues
Service $36,538 $37,142 (1.6)% $72,994 $74,243 (1.7)%
Equipment 3,299 3,378 (2.3) 6,208 6,812 (8.9)
------------------------ ------ ------ ------ ------
Total Operating
Revenues 39,837 40,520 (1.7) 79,202 81,055 (2.3)
------------------------ ------ ------ ------ ------
Operating expenses
Cost of services
and sales
Equipment 4,138 4,260 (2.9) 7,986 8,635 (7.5)
Broadcast,
programming
and operations 4,898 4,701 4.2 9,872 9,330 5.8
Other cost of
services 9,218 9,514 (3.1) 18,283 18,910 (3.3)
Selling, general
and administrative 8,113 8,909 (8.9) 16,600 17,350 (4.3)
Depreciation
and amortization 6,147 6,576 (6.5) 12,274 13,139 (6.6)
------------------------ ------ ------ ------ ------
Total Operating
Expenses 32,514 33,960 (4.3) 65,015 67,364 (3.5)
------------------------ ------ ------ ------ ------
Operating Income 7,323 6,560 11.6 14,187 13,691 3.6
Income Before
Income Taxes 6,070 5,421 12.0 11,448 11,428 0.2
Net Income 4,014 3,515 14.2 7,588 7,400 2.5
Net Income Attributable
to AT&T $ 3,915 $ 3,408 14.9% $ 7,384 $ 7,211 2.4%
======================== ====== ====== ======= ====== ====== =======
Overview
Operating revenues decreased $683, or 1.7%, in the second
quarter and $1,853, or 2.3%, for the first six months of 2017.
Service revenues decreased $604, or 1.6%, in the second quarter
and $1,249, or 1.7%, for the first six months of 2017. The
decreases were primarily due to continued declines in legacy
wireline voice and data products and lower wireless service
revenues reflecting increased adoption of unlimited plans. These
were partially offset by increased revenues from video and
strategic business services.
Equipment revenues decreased $79, or 2.3%, in the second quarter
and $604, or 8.9%, for the first six months of 2017. The decreases
were primarily due to lower wireless handset sales, driven by a
continuing low rate of customer device upgrades and strong Bring
Your Own Device (BYOD) participation. Equipment revenue is becoming
increasingly unpredictable as many customers are choosing to
upgrade devices less frequently or are bringing their own.
Operating expenses decreased $1,446, or 4.3%, in the second
quarter and $2,349, or 3.5%, for the first six months of 2017.
Equipment expenses decreased $122, or 2.9%, in the second
quarter and $649, or 7.5%, for the first six months of 2017. The
decreases were driven by a decline in devices sold reflecting a
change in customer buying habits.
22
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Broadcast, programming and operations expenses increased $197,
or 4.2%, in the second quarter and $542, or 5.8%, for the first six
months of 2017, reflecting annual content cost increases.
Other cost of services expenses decreased $296, or 3.1%, in the
second quarter and $627, or 3.3%, for the first six months of 2017.
The decreases reflect our continued focus on cost management and
the utilization of automation and digitalization where appropriate.
Also contributing to the decreases were lower Federal Universal
Service Fund (USF) rates and fees and an actuarial gain due to
remeasurement of our postretirement benefit obligation. These
expense declines were partially offset by an increase in
amortization of deferred customer fulfillment cost.
Selling, general and administrative expenses decreased $796, or
8.9%, in the second quarter and $750, or 4.3%, for the first six
months of 2017. The decreases were attributable to our disciplined
cost management, lower advertising costs and an actuarial gain due
to remeasurement of our postretirement benefit obligation. The
decrease in the first six months was partially offset by lower
gains on wireless spectrum transactions during 2017 than in the
comparable period of 2016.
Depreciation and amortization expense decreased $429, or 6.5%,
in the second quarter and $865, or 6.6%, for the first six months
of 2017. Depreciation expense decreased $281, or 5.3%, in the
second quarter and $569, or 5.4%, for the first six months of 2017.
The decreases were primarily due to our fourth-quarter 2016 change
in estimated useful lives and salvage values of certain assets
associated with our transition to an IP-based network, which
accounted for $327 of the decrease in the second quarter and $654
of the decrease for the first six months. These decreases were
partially offset by increases resulting from ongoing capital
spending for upgrades and expansion.
Amortization expense decreased $148, or 11.2%, in the second
quarter and $296, or 11.1%, for the first six months of 2017 due to
lower amortization of intangibles for the customer lists associated
with acquisitions.
Operating income increased $763, or 11.6%, in the second quarter
and $496, or 3.6%, for the first six months of 2017. Our operating
income margin in the second quarter increased from 16.2% in 2016 to
18.4% in 2017, and the first six months increased from 16.9% in
2016 to 17.9% in 2017.
Interest expense increased $137, or 10.9%, in the second quarter
and $223, or 9.0%, for the first six months of 2017. The increases
were primarily due to higher debt balances and average interest
rates when compared to the prior year. Fees paid to secure
financing for pending acquisitions also contributed to higher
expenses in 2017.
Equity in net income (loss) of affiliates decreased $14 in the
second quarter and $200 for the first six months of 2017,
predominantly from losses from our legacy publishing business
(which we sold in June 2017), partially offset by income from our
investments in video-related businesses.
Other income (expense) - net increased $37, or 40.7%, in the
second quarter and decreased $53, or 32.9%, for the first six
months. The increase in the second quarter was primarily due to
growth in interest and dividend income of $54, including interest
on tax-related settlements, and net gains from the sale of
non-strategic assets and investments of $8. These increases were
partially offset by foreign exchange pressure.
The decrease for the first six months was primarily due to
additional net losses from the sale of non-strategic assets
totaling $97 and foreign exchange pressure, partially offset by
growth in interest and dividend income of $55.
Income taxes increased $150, or 7.9%, in the second quarter of
2017 and decreased $168, or 4.2%, for the first six months of 2017.
Our effective tax rate was 33.9% for the second quarter and 33.7%
for the first six months of 2017, as compared to 35.2% for the
second quarter and 35.2% for the first six months of 2016. The
increase in income tax expense for the second quarter was primarily
due to higher income before income taxes in 2017. The decrease in
income tax expense for the first six months of 2017 was primarily
due to the recognition of tax benefits related to the restructuring
of a portion of our wireless business, which also resulted in
decreases in our effective tax rate for the second quarter and the
first six months of 2017.
23
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Selected Financial and Operating Data
------------------------------------------------------ -------- -------
June 30,
Subscribers and connections in (000s) 2017 2016
------------------------------------------------------ -------- -------
Domestic wireless subscribers 136,500 131,805
Mexican wireless subscribers 13,082 9,955
-------------------------------------------------------- ------- -------
North American wireless subscribers 149,582 141,760
======================================================== ======= =======
North American branded subscribers 104,421 99,557
North American branded net additions 1,626 2,596
Domestic satellite and over-the-top video subscribers 21,347 20,454
AT&T U-verse(R) (U-verse) video subscribers 3,853 4,869
Latin America satellite video subscribers 1 13,622 12,523
-------------------------------------------------------- ------- -------
Total video subscribers 38,822 37,846
======================================================== ======= =======
Total domestic broadband connections 15,686 15,641
Network access lines in service 12,791 15,284
U-verse VoIP connections 5,853 5,593
Debt ratio 2 53.3% 50.5%
Net debt ratio 3 43.8% 47.6%
Ratio of earnings to fixed charges 4 3.84 4.01
Number of AT&T employees 260,480 277,200
======================================================== ======= =======
1 Excludes subscribers of our International segment equity
investments in SKY Mexico, in which we own a 41% stake. At March
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)
Business Solutions, (2) Entertainment Group, (3) Consumer Mobility
and (4) International.
We also evaluate segment performance based on EBITDA and/or
EBITDA margin, which is defined as Segment Contribution, excluding
equity in net income (loss) of affiliates and depreciation and
amortization. We believe EBITDA to be a relevant and useful
measurement to our investors as it is part of our internal
management reporting and planning processes and it is an important
metric that management uses to evaluate operating performance.
EBITDA does not give effect to cash used for debt service
requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses. EBITDA
margin is EBITDA divided by total revenues.
24
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The Business Solutions segment provides services to business
customers, including multinational companies; governmental and
wholesale customers; and individual subscribers who purchase
wireless services through employer-sponsored plans. We provide
advanced IP-based services including Virtual Private Networks
(VPN); Ethernet-related products and broadband, collectively
referred to as fixed strategic services; as well as traditional
data and voice products. We utilize our wireless and wired networks
to provide a complete integrated communications solution to our
business customers.
The Entertainment Group segment provides video, internet, voice
communication, and interactive and targeted advertising services to
customers located in the United States or in U.S. territories. We
utilize our copper and IP-based wired network and our satellite
technology.
The Consumer Mobility segment provides nationwide wireless
service to consumers, wholesale and resale wireless subscribers
located in the United States or in U.S. territories. We utilize our
networks to provide voice and data services, including high-speed
internet, video and home monitoring services over wireless
devices.
The International segment provides entertainment services in
Latin America and wireless services in Mexico. Video entertainment
services are provided to primarily residential customers using
satellite technology. We utilize our regional and national networks
in Mexico to provide consumer and business customers with wireless
data and voice communication services. Our international
subsidiaries conduct business in their local currency, and
operating results are converted to U.S. dollars using official
exchange rates. Our International segment is subject to foreign
currency fluctuations.
Our operating assets are utilized by multiple segments and
consist of our wireless and wired networks as well as an
international satellite fleet. We manage our assets to provide for
the most efficient, effective and integrated service to our
customers, not by segment, and therefore asset information and
capital expenditures by segment are not presented. Depreciation is
allocated based on asset utilization by segment.
Business Solutions
Segment Results
----------------------- ------- ------- ------- ------- ------- -------
Second Quarter Six-Month Period
------------------------- -------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
------- ------- ------- ------- ------- -------
Segment operating
revenues
Wireless service $ 8,006 $ 7,963 0.5% $15,935 $15,818 0.7%
Fixed strategic
services 3,028 2,805 8.0 6,002 5,556 8.0
Legacy voice and
data services 3,508 4,162 (15.7) 7,138 8,535 (16.4)
Other service
and equipment 844 874 (3.4) 1,661 1,733 (4.2)
Wireless equipment 1,721 1,775 (3.0) 3,219 3,546 (9.2)
------------------------ ------ ------ ------ ------
Total Segment Operating
Revenues 17,107 17,579 (2.7) 33,955 35,188 (3.5)
------------------------ ------ ------ ------ ------
Segment operating
expenses
Operations and
support 10,313 10,857 (5.0) 20,489 21,659 (5.4)
Depreciation and
amortization 2,335 2,521 (7.4) 4,647 5,029 (7.6)
------------------------ ------ ------ ------ ------
Total Segment Operating
Expenses 12,648 13,378 (5.5) 25,136 26,688 (5.8)
------------------------ ------ ------ ------ ------
Segment Operating
Income 4,459 4,201 6.1 8,819 8,500 3.8
Equity in Net Income
of Affiliates - - - - - -
----------------------- ------ ------ ------ ------
Segment Contribution $ 4,459 $ 4,201 6.1% $ 8,819 $ 8,500 3.8%
======================== ====== ====== ======= ====== ====== =======
25
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The following tables highlight other key measures of performance
for the Business Solutions segment:
June 30, Percent
(in 000s) 2017 2016 Change
------------------------------------------ --------- ------- -------
Business Wireless Subscribers
Postpaid/Branded 51,111 49,433 3.4%
Reseller 72 51 41.2
Connected devices 1 33,611 28,061 19.8
-------------------------------------------- -------- -------
Total Business Wireless Subscribers 84,794 77,545 9.3
============================================ ======== =======
Business IP Broadband Connections 992 948 4.6%
============================================ ======== ======= =======
1 Includes data-centric devices such as session-based tablets,
monitoring devices and automobile systems. Excludes postpaid
tablets.
Second Quarter Six-Month Period
------------------------------ -----------------------------
2017 2016 Percent 2017 2016 Percent
------ ----- ----- -----
(in 000s) Change Change
------------------- ------- -------
Business Wireless
Net Additions
1, 4
Postpaid/Branded 36 185 (80.5)% (89) 318 -%
Reseller (5) (13) 61.5 1 (35) -
Connected devices
2 2,170 1,199 81.0 4,723 2,777 70.1
---------------------- ----- ----- ----- -----
Business Wireless
Net Subscriber 2,201 1,371 60.5 4,635 3,060 51.5
===== ===== ===== =====
Additions
===================
Business Wireless
Postpaid Churn
1, 3, 4 0.97% 0.91% 6 BP 1.02% 0.97% 5 BP
====================== ===== ===== ===== =====
Business IP Broadband
Net Additions 12 20 (40.0)% 16 37 (56.8)%
====================== ===== ===== ======= ===== ===== =======
1 Excludes migrations between AT&T segments and/or subscriber
categories and acquisition-related additions during the period.
2 Includes data-centric devices such as session-based tablets,
monitoring devices and automobile systems. Excludes postpaid
tablets.
3 Calculated by dividing the aggregate number of wireless
subscribers who canceled service during a period divided
by the total number
of wireless subscribers at the beginning of that period.
The churn rate for the period is equal to the average of
the churn rate for
each month of that period.
4 2017 excludes the impact of the 2G shutdown, which was
reflected in beginning of period subscribers.
Operating Revenues decreased $472, or 2.7%, in the second
quarter and $1,233, or 3.5%, for the first six months of 2017.
Revenue declines reflect technological shifts away from legacy
products, as well as decreasing wireless equipment revenues
resulting from changes in customer buying habits. These decreases
were partially offset by continued growth in wireless services and
fixed strategic services, which represent 41% of non-wireless
revenues. Our revenues continue to be pressured by slower fixed
business investment.
Wireless service revenues increased $43, or 0.5%, in the second
quarter and $117, or 0.7%, for the first six months of 2017. The
revenue increases are primarily due to the migration of customers
from our Consumer Mobility segment.
At June 30, 2017, we served 84.8 million subscribers, an
increase of 9.3% from the prior year. Postpaid subscribers
increased 3.4% from the prior year reflecting the addition of new
customers as well as migrations from our Consumer Mobility segment,
partially offset by continuing competitive pressures in the
industry. Connected devices, which have lower average revenue per
average subscriber (ARPU) and churn, increased 19.8% 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 called the Internet of Things (IoT) .
26
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The effective management of subscriber churn is critical to our
ability to maximize revenue growth and to maintain and improve
margins. In the second quarter, business wireless postpaid churn
increased to 0.97% in 2017 from 0.91% in 2016, and for the first
six months increased to 1.02% in 2017 from 0.97% in 2016.
Fixed strategic services revenues increased $223, or 8.0%, in
the second quarter and $446, or 8.0%, for the first six months of
2017. Our revenues increased in the second quarter and first six
months of 2017 primarily due to: Ethernet of $93 and $166;
Dedicated Internet services of $45 and $104; and VoIP of $61 and
$118, respectively.
Legacy wired voice and data service revenues decreased $654, or
15.7%, in the second quarter and $1,397, or 16.4%, for the first
six months of 2017. In the second quarter and first six months of
2017, legacy voice billings decreased $342 and $744 and traditional
data billings decreased $312 and $653, respectively. These
decreases were primarily due to lower demand, as customers continue
to shift to our more advanced IP-based offerings or to
competitors.
Wireless equipment revenues decreased $54, or 3.0%, in the
second quarter and $327, or 9.2%, for the first six months of 2017.
While equipment revenue is becoming increasingly unpredictable as
many customers are choosing to upgrade devices less frequently or
bring their own, equipment revenues improved sequentially in the
second quarter as compared to the first quarter of 2017 due to
customers choosing to purchase higher priced devices and lower
promotional activity in the quarter.
Operations and support expenses decreased $544, or 5.0%, in the
second quarter and $1,170, or 5.4%, for the first six months of
2017. Operations and support expenses consist of costs incurred to
provide our products and services, including costs of operating and
maintaining our networks and personnel costs, such as compensation
and benefits.
Decreased operations and support expenses in the second quarter
and first six months were primarily due to efforts to automate and
digitize our support activities, improving results approximately
$230 and $397, and lower equipment sales and wireless upgrade
transactions, decreasing equipment costs by $148 and $396,
respectively. Expense reductions also reflect lower administrative
costs, contributing to a reduction in expenses of $149 and $164,
and fewer traffic compensation and wireless interconnect costs,
resulting in declines of $60 and $111, respectively, in access and
interconnect costs. USF rates and fees also contributed to lower
expenses for the first six months.
Depreciation expense decreased $186, or 7.4%, in the second
quarter and $382, or 7.6%, for the first six months of 2017. The
decreases were primarily due to our fourth-quarter 2016 change in
estimated useful lives and salvage value of certain network assets.
Also contributing to lower depreciation expenses were network
assets becoming fully depreciated, partially offset by ongoing
capital spending for network upgrades and expansion.
Operating income increased $258, or 6.1%, in the second quarter
and $319, or 3.8%, for the first six months of 2017. Our Business
Solutions segment operating income margin in the second quarter
increased from 23.9% in 2016 to 26.1% in 2017, and for the first
six months increased from 24.2% in 2016 to 26.0% in 2017. Our
Business Solutions EBITDA margin in the second quarter increased
from 38.2% in 2016 to 39.7% in 2017, and for the first six months
increased from 38.4% in 2016 to 39.7% in 2017.
27
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Entertainment Group
Segment Results
-------------------- ------- ------- ------- ------- ------- -------
Second Quarter Six-Month Period
--------------------------- --------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
------- ------- ------- ------- ------- -------
Segment operating
revenues
Video
entertainment $ 9,153 $ 8,963 2.1% $18,173 $17,867 1.7%
High-speed
internet 1,927 1,867 3.2 3,868 3,670 5.4
Legacy voice and
data services 1,005 1,244 (19.2) 2,061 2,557 (19.4)
Other service
and equipment 597 637 (6.3) 1,203 1,275 (5.6)
--------------------- ------ ------ ------ ------
Total Segment
Operating
Revenues 12,682 12,711 (0.2) 25,305 25,369 (0.3)
--------------------- ------ ------ ------ ------
Segment operating
expenses
Operations and
support 9,558 9,569 (0.1) 19,159 19,147 0.1
Depreciation and
amortization 1,458 1,489 (2.1) 2,877 2,977 (3.4)
--------------------- ------ ------ ------ ------
Total Segment
Operating
Expenses 11,016 11,058 (0.4) 22,036 22,124 (0.4)
--------------------- ------ ------ ------ ------
Segment Operating
Income 1,666 1,653 0.8 3,269 3,245 0.7
Equity in Net Income
(Loss) of Affiliates (11) (2) - (17) 1 -
--------------------- ------ ------ ------ ------
Segment Contribution $ 1,655 $ 1,651 0.2% $ 3,252 $ 3,246 0.2%
===================== ====== ====== ======= ====== ====== =======
The following tables highlight other key measures of performance
for the Entertainment Group segment:
June 30,
Percent
(in 000s) 2017 2016 Change
---------------------------------------- ------- ------ -------
Video Connections
Satellite 20,856 20,454 2.0%
U-verse 3,825 4,841 (21.0)
DIRECTV NOW 1 491 - -
------------------------------------------ ------ ------
Total Video Connections 25,172 25,295 (0.5)
========================================== ====== ======
Broadband Connections
IP 13,242 12,596 5.1
DSL 1,060 1,585 (33.1)
------------------------------------------ ------ ------
Total Broadband Connections 14,302 14,181 0.9
========================================== ====== ======
Retail Consumer Switched Access Lines 5,257 6,515 (19.3)
U-verse Consumer VoIP Connections 5,439 5,300 2.6
------------------------------------------ ------ ------
Total Retail Consumer Voice Connections 10,696 11,815 (9.5)%
========================================== ====== ====== =======
1 Consistent with industry practice, DIRECTV NOW includes
trial-period subscribers.
28
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Second Quarter Six-Month Period
----------------------- -------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
------ ---- ------- ----- ---- -------
(in 000s)
-------------------------
Video Net Additions
Satellite 1 (156) 342 -% (156) 670 -%
U-verse 1 (195) (391) 50.1 (428) (773) 44.6
DIRECTV NOW 2 152 - - 224 - -
--------------------------- ----- ---- ----- ----
Net Video Additions (199) (49) - (360) (103) -
=========================== ===== ==== ===== ====
Broadband Net Additions
IP 112 54 - 354 240 47.5
DSL (104) (164) 36.6 (231) (345) 33.0
--------------------------- ----- ---- ----- ----
Net Broadband Additions 8 (110) -% 123 (105) -%
=========================== ===== ==== ======= ===== ==== =======
1 Includes disconnections for customers that migrated to
DIRECTV NOW.
2 Consistent with industry practice, DIRECTV NOW includes
trial-period subscribers.
Operating revenues decreased $29, or 0.2%, in the second quarter
and $64, or 0.3%, for the first six months of 2017, largely due to
lower revenues from legacy voice and data products, offset by
growth in revenues from consumer IP broadband and satellite video
services.
As consumers continue to demand more mobile access to video, we
provide streaming access to our subscribers, including mobile
access for existing satellite and U-verse subscribers. In November
2016, we launched DIRECTV NOW, our newest video streaming option
that does not require either satellite or U-verse service (commonly
called over-the-top video service).
Video entertainment revenues increased $190, or 2.1%, in the
second quarter and $306, or 1.7%, for the first six months of 2017,
reflecting a 3.5% and 2.3% increase in average revenue per linear
(combined satellite and U-verse) video connection and increases of
$51 and $72 in advertising revenues, respectively. While linear
video losses have continued their recent trend, we are beginning to
see the impact of customers wanting mobile and over-the-top
offerings, which is contributing to growth in our DIRECTV NOW
connections and offsetting linear video subscriber losses. DIRECTV
NOW connections continue to grow as we add eligible devices and
increase content choices. While our ability to bundle services has
also positively impacted subscriber trends and churn, we did
experience an increase in churn for subscribers with linear video
but no wireless service through AT&T, partially due to pricing
increases associated with annual content cost increases and
involuntary churn.
High-speed internet revenues increased $60, or 3.2%, in the
second quarter and $198, or 5.4%, for the first six months of 2017,
reflecting a 5.1% increase in IP broadband subscribers when
compared to the prior year. Also contributing to higher revenues
was the increasing trend of subscribers to select higher-speed and
higher-rated plans. Average revenue per IP broadband connection
(ARPU) increased 0.7% in the first six months of 2017. To compete
more effectively against other broadband providers in the midst of
ongoing declines in DSL broadband subscribers, we continued to
deploy our all-fiber, high-speed wireline network, which has
improved customer retention rates.
Legacy voice and data service revenues decreased $239, or 19.2%,
in the second quarter and $496, or 19.4%, for the first six months
of 2017. For the six months ended June 30, 2017, legacy voice and
data services represented approximately 8% of our total
Entertainment Group revenue compared to 10% for the June 30, 2016
period, and reflect second quarter and year to date decreases of
$161 and $335 in local voice and long-distance, and $79 and $162 in
traditional data billings, respectively. The decreases reflect the
continued migration of customers to our more advanced IP-based
offerings or to competitors. At June 30, 2017, approximately 7% of
our broadband connections were DSL compared to 11% at June 30,
2016.
Operations and support expenses decreased $11, or 0.1%, in the
second quarter and increased $12, or 0.1%, for the first six months
of 2017. Operations and support expenses consist of costs
associated with providing video content, and expenses incurred to
provide our products and services, which include costs of operating
and maintaining our networks, as well as personnel charges for
compensation and benefits.
29
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Decreased operations and support expenses in the second quarter
were due to merger synergies and efforts to automate and digitize
our support activities. These reductions were mostly offset by
annual content cost increases and an increase in amortization of
deferred customer fulfillment cost.
Increased operations and support expenses for the first six
months of 2017 were primarily due to annual content cost increases,
deferred customer fulfillment cost amortization, and impacts of
storms and flooding on the West Coast that occurred earlier in
2017. Offsetting these increases were the impact of our ongoing
focus on cost efficiencies and merger synergies, as well as
workforce reductions and lower advertising costs.
Depreciation expense decreased $31, or 2.1%, in the second
quarter, and $100, or 3.4%, for the first six months of 2017. The
decreases were primarily due to our fourth-quarter 2016 change in
estimated useful lives and salvage value of certain assets. Also
contributing to lower depreciation expenses were network assets
becoming fully depreciated. These decreases were offset by ongoing
capital spending for network upgrades and expansion.
Operating income increased $13, or 0.8%, in the second quarter
and $24, or 0.7%, for the first six months of 2017. Our
Entertainment Group segment operating income margin in the second
quarter increased from 13.0% in 2016 to 13.1% in 2017, and for the
first six months increased from 12.8% in 2016 to 12.9% in 2017. Our
Entertainment Group segment EBITDA margin in the second quarter
decreased from 24.7% in 2016 to 24.6% in 2017, and for the first
six months decreased from 24.5% in 2016 to 24.3% in 2017.
Consumer Mobility
Segment Results
----------------------- ------ ------ ------- ------- ------- -------
Second Quarter Six-Month Period
----------------------- -------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
------ ------ ------- ------- ------- -------
Segment operating
revenues
Service $6,528 $6,948 (6.0)% $13,137 $13,891 (5.4)%
Equipment 1,263 1,238 2.0 2,394 2,623 (8.7)
------------------------ ----- ----- ------ ------
Total Segment
Operating Revenues 7,791 8,186 (4.8) 15,531 16,514 (6.0)
------------------------ ----- ----- ------ ------
Segment operating
expenses
Operations and
support 4,520 4,680 (3.4) 9,048 9,592 (5.7)
Depreciation
and amortization 871 932 (6.5) 1,744 1,854 (5.9)
------------------------ ----- ----- ------ ------
Total Segment
Operating Expenses 5,391 5,612 (3.9) 10,792 11,446 (5.7)
------------------------ ----- ----- ------ ------
Segment Operating
Income 2,400 2,574 (6.8) 4,739 5,068 (6.5)
Equity in Net
Income of Affiliates - - - - - -
----------------------- ----- ----- ------ ------
Segment Contribution $2,400 $2,574 (6.8)% $ 4,739 $ 5,068 (6.5)%
======================== ===== ===== ======= ====== ====== =======
30
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The following tables highlight other key measures of performance
for the Consumer Mobility segment:
June 30, Percent
(in 000s) 2017 2016 Change
--------------------------------------------- -------- ------- -------
Consumer Mobility Subscribers
Postpaid 26,290 27,862 (5.6)%
Prepaid 14,187 12,633 12.3
----------------------------------------------- ------- -------
Branded 40,477 40,495 -
Reseller 10,182 12,869 (20.9)
Connected devices 1 1,047 896 16.9
----------------------------------------------- ------- -------
Total Consumer Mobility Subscribers 51,706 54,260 (4.7)%
=============================================== ======= ======= =======
1 Includes data-centric devices such as session-based tablets,
monitoring devices and automobile systems. Excludes postpaid
tablets.
Second Quarter Six-Month Period
------------------------------- ---------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
------ --- ----- ------- ---- ---- -------
(in 000s)
-----------------------
Consumer Mobility
Net Additions 1,
4
Postpaid 91 72 26.4% 25 68 (63.2)%
Prepaid 267 365 (26.8) 549 865 (36.5)
------------------------- ----- --- ----- ---- ----
Branded Net Additions 358 437 (18.1) 574 933 (38.5)
Reseller (363) (446) 18.6 (951) (824) (15.4)
Connected devices
2 86 (1) - 105 (27) -
------------------------- ----- --- ----- ---- ----
Consumer Mobility
Net Subscriber
Additions 81 (10) -% (272) 82 -%
========================= ===== === ===== ==== ====
Total Churn 1,
3, 4 2.15% 1.96% 19 BP 2.29% 2.04% 25 BP
Postpaid Churn
1, 3, 4 1.09% 1.09% - BP 1.16% 1.16% - BP
========================= ===== ===== ======= ==== ==== =======
1 Excludes migrations between AT&T segments and/or subscriber
categories and acquisition-related additions during the
period.
2 Includes data-centric devices such as session-based tablets,
monitoring devices and automobile systems. Excludes postpaid
tablets.
3 Calculated by dividing the aggregate number of wireless
subscribers who canceled service during a month divided
by the total number
of wireless subscribers at the beginning of that month.
The churn rate for the period is equal to the average of
the churn rate for each month of that period.
4 2017 excludes the impact of the 2G shutdown and a true-up
to the reseller subscriber base, which were reflected in
beginning of period subscribers.
Operating Revenues decreased $395, or 4.8%, in the second
quarter and $983, or 6.0%, for the first six months of 2017.
Decreased revenues reflect declines in postpaid service revenues
due to customers migrating to our Business Solutions segment and
choosing unlimited plans, partially offset by higher prepaid
service revenues. Our business wireless offerings allow for
individual subscribers to purchase wireless services through
employer-sponsored plans for a reduced price. The migration of
these subscribers to the Business Solutions segment negatively
impacted our consumer postpaid subscriber total and service revenue
growth.
Service revenue decreased $420, or 6.0%, in the second quarter
and $754, or 5.4%, for the first six months of 2017. The decreases
were largely due to the migration of subscribers to Business
Solutions and postpaid customers continuing to shift to discounted
monthly service charges under our unlimited plans. Revenues from
postpaid customers declined $496, or 9.9%, in the second quarter
and $1,003, or 9.9%, for the first six months of 2017. Without the
migration of customers to Business Solutions, postpaid wireless
revenues would have decreased approximately 5.4% for both the
second quarter and the first six months of 2017. The decreases were
partially offset by higher prepaid service revenues of $201, or
14.7%, in the second quarter and $440, or 16.5%, for the first six
months primarily from growth in Cricket and AT&T PREPAID SM
subscribers.
31
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Equipment revenue increased $25, or 2.0%, in the second quarter
and decreased $229, or 8.7%, for the first six months of 2017. The
increase in the second quarter equipment revenues resulted from
higher handset sales and upgrades, a substantial improvement over
the first quarter. As previously discussed, equipment revenue is
becoming increasingly unpredictable as customers are choosing to
upgrade devices less frequently or bring their own.
Operations and support expenses decreased $160, or 3.4%, in the
second quarter and $544, or 5.7%, for the first six months of 2017.
Operations and support expenses consist of costs incurred to
provide our products and services, including costs of operating and
maintaining our networks and personnel expenses, such as
compensation and benefits.
Decreased operations and support expenses for the second quarter
were primarily due to increased operational efficiencies and lower
marketing and advertising costs resulting from the timing of
scheduled ad campaigns and integrated advertising. These decreases
were partially offset by increased equipment costs due to higher
volumes of wireless equipment sales and upgrades.
Decreased operations and support expenses for the first six
months were primarily due to lower volumes of wireless equipment
sales and upgrades, which decreased equipment and selling and
commission costs, and lower marketing and advertising costs
resulting from the timing of scheduled ad campaigns and integrated
advertising.
Depreciation expense decreased $61, or 6.5%, in the second
quarter and $110, or 5.9%, for the first six months of 2017. The
decreases were primarily due to fully depreciated assets, partially
offset by ongoing capital spending for network upgrades and
expansion.
Operating income decreased $174, or 6.8%, in the second quarter
and $329, or 6.5%, for the first six months of 2017. Our Consumer
Mobility segment operating income margin in the second quarter
decreased from 31.4% in 2016 to 30.8% in 2017, and for the first
six months decreased from 30.7% in 2016 to 30.5% in 2017. Our
Consumer Mobility EBITDA margin in the second quarter decreased
from 42.8% in 2016 to 42.0% in 2017, and for the first six months
decreased from 41.9% in 2016 to 41.7% in 2017.
International
Segment Results
----------------------- ------ ------ ------- ------ ------ -------
Second Quarter Six-Month Period
------------------------- -------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
----------------------- ------ ------ ------- ------ ------ -------
Segment operating
revenues
Video entertainment $1,361 $1,222 11.4% $2,702 $2,352 14.9%
Wireless service 535 489 9.4 1,010 944 7.0
Wireless equipment 130 117 11.1 243 199 22.1
------------------------ ----- ----- ----- -----
Total Segment Operating
Revenues 2,026 1,828 10.8 3,955 3,495 13.2
------------------------ ----- ----- ----- -----
Segment operating
expenses
Operations and
support 1,772 1,723 2.8 3,531 3,311 6.6
Depreciation and
amortization 311 298 4.4 601 575 4.5
------------------------ ----- ----- ----- -----
Total Segment Operating
Expenses 2,083 2,021 3.1 4,132 3,886 6.3
------------------------ ----- ----- ----- -----
Segment Operating
Income (Loss) (57) (193) 70.5 (177) (391) 54.7
Equity in Net Income
(Loss) of Affiliates 25 9 - 45 23 95.7
------------------------ ----- ----- ----- -----
Segment Contribution $ (32) $ (184) 82.6% $ (132) $ (368) 64.1%
======================== ===== ===== ======= ===== ===== =======
32
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The following tables highlight other key measures of performance
for the International segment:
June 30, Percent
(in 000s) 2017 2016 Change
-------------------------------------------- ------- ------ -------
Mexican Wireless Subscribers
Postpaid 5,187 4,570 13.5%
Prepaid 7,646 5,059 51.1
---------------------------------------------- ------ ------
Branded 12,833 9,629 33.3
Reseller 249 326 (23.6)
---------------------------------------------- ------ ------
Total Mexican Wireless Subscribers 13,082 9,955 31.4
============================================== ====== ======
Latin America Satellite Subscribers
PanAmericana 8,103 7,175 12.9
SKY Brazil 1 5,519 5,348 3.2
---------------------------------------------- ------ ------
Total Latin America Satellite Subscribers 13,622 12,523 8.8%
============================================== ====== ====== =======
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 March 31, 2017 and 7.8 million
subscribers at June 30, 2016.
Second Quarter Six-Month Period
---------------------------- -----------------------
Percent Percent
(in 000s) 2017 2016 Change 2017 2016 Change
-------------------------- ----- ---- ------- ----- ----- -------
Mexican Wireless
Net Additions
Postpaid 92 165 (44.2)% 222 281 (21.0)%
Prepaid 402 614 (34.5) 919 1,064 (13.6)
---------------------------- ---- ---- ----- -----
Branded Net Additions 494 779 (36.6) 1,141 1,345 (15.2)
Reseller (18) (37) 51.4 (32) (74) 56.8
---------------------------- ---- ---- ----- -----
Mexican Wireless
Net Subscriber
Additions 476 742 (35.8) 1,109 1,271 (12.7)
============================ ==== ==== ===== =====
Latin America
Satellite Net
Additions 1
PanAmericana 13 81 (84.0) 65 109 (40.4)
SKY Brazil (69) 6 - (30) (95) 68.4
---------------------------- ---- ---- ----- -----
Latin America
Satellite
Net Subscriber
Additions 2 (56) 87 -% 35 14 -%
============================ ==== ==== ======= ===== ===== =======
1 In 2017, we updated the methodology used to account for
prepaid video connections, which were reflected in beginning
of period subscribers.
2 Excludes SKY Mexico net subscriber losses of 18,000 for
the quarter ended March 31, 2017 and additions of 398,000
for the quarter ended
March 31, 2016.
Operating Results
Our International segment consists of the Latin American
operations acquired with DIRECTV as well as our Mexican wireless
operations. Video entertainment services are provided to primarily
residential customers using satellite technology. 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 $198, or 10.8%, in the second
quarter and $460, or 13.2%, for the first six months of 2017. The
increases include $139 and $350 from video services in Latin
America due to price increases driven primarily by macroeconomic
conditions with mixed local currencies. Mexico wireless revenues
increased $59, or 9.7%, in the second quarter and $110, or 9.6%,
for the first six months of 2017, primarily due to an increase in
our subscriber base and higher equipment sales offset by
competition and lower ARPU (average revenue per average wireless
subscriber) and foreign currency pressures.
33
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Operations and support expenses increased $49, or 2.8%, in the
second quarter and $220, or 6.6%, for the first six months of 2017.
Operations and support expenses consist of costs incurred to
provide our products and services, including costs of operating and
maintaining our networks and providing video content and personnel
expenses, such as compensation and benefits.
The increases in Latin America in the second quarter and for the
first six months were primarily due to higher programming and other
operating costs. The second quarter was partially offset by
favorable foreign currency exchange rates and our reassessment of
operating tax contingencies in Brazil. The increases in Mexico in
the second quarter and for the first six months were primarily
driven by higher operational costs, including expenses associated
with our network expansion, partially offset by favorable foreign
currency exchange rates.
Depreciation expense increased $13, or 4.4%, in the second
quarter and $26, or 4.5%, for the first six months of 2017. The
increases were primarily due to updating the estimated asset lives
for video equipment in Latin America and higher capital spending in
Mexico.
Operating income increased $136, or 70.5%, in the second quarter
and $214, or 54.7%, for the first six months of 2017. Our
International segment operating income margin in the second quarter
increased from (10.6)% in 2016 to (2.8)% in 2017, and for the first
six months increased from (11.2)% in 2016 to (4.5)% in 2017. Our
International EBITDA margin in the second quarter increased from
5.7% in 2016 to 12.5% in 2017, and for the first six months
increased from 5.3% in 2016 to 10.7% in 2017.
34
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
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
--------------------- ------- ------- ------- ------- ------- -------
Second Quarter Six-Month Period
------------------------- -------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
------- ------- ------- ------- ------- -------
Operating revenues
Service $14,534 $14,911 (2.5)% $29,072 $29,709 (2.1)%
Equipment 2,984 3,013 (1.0) 5,613 6,169 (9.0)
---------------------- ------ ------ ------ ------
Total Operating
Revenues 17,518 17,924 (2.3) 34,685 35,878 (3.3)
---------------------- ------ ------ ------ ------
Operating expenses
Operations and
support 10,197 10,501 (2.9) 20,195 21,125 (4.4)
---------------------- ------ ------ ------ ------
EBITDA 7,321 7,423 (1.4) 14,490 14,753 (1.8)
---------------------- ------ ------ ------ ------
Depreciation
and amortization 1,992 2,081 (4.3) 3,989 4,137 (3.6)
---------------------- ------ ------ ------ ------
Total Operating
Expenses 12,189 12,582 (3.1) 24,184 25,262 (4.3)
---------------------- ------ ------ ------ ------
Operating Income $ 5,329 $ 5,342 (0.2)% $10,501 $10,616 (1.1)%
====================== ====== ====== ======= ====== ====== =======
The following tables highlight other key measures of performance
for AT&T Mobility:
Percent
June 30, Change
-------
(in 000s) 2017 2016
---------------------------------------------- -------- -------
Wireless Subscribers 1
Postpaid smartphones 59,178 58,508 1.1%
Postpaid feature phones and data-centric
devices 18,223 18,787 (3.0)
------------------------------------------------ ------- -------
Postpaid 77,401 77,295 0.1
Prepaid 14,187 12,633 12.3
------------------------------------------------ ------- -------
Branded 91,588 89,928 1.8
Reseller 10,254 12,920 (20.6)
Connected devices 2 34,658 28,957 19.7
------------------------------------------------ ------- -------
Total Wireless Subscribers 136,500 131,805 3.6
================================================ ======= =======
Branded Smartphones 71,818 69,058 4.0
Smartphones under our installment programs
at end of period 31,649 29,026 9.0%
================================================ ======= ======= =======
1 Represents 100% of AT&T Mobility wireless subscribers.
2 Includes data-centric devices such as session-based tablets,
monitoring devices and automobile systems. Excludes postpaid
tablets.
35
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Second Quarter Six-Month Period
------------------------------ -----------------------------
Percent Percent
2017 2016 Change 2017 2016 Change
------ ----- ------- ----- ----- -------
(in 000s)
----------------------
Wireless Net Additions
1, 4
Postpaid 127 257 (50.6)% (64) 386 -%
Prepaid 267 365 (26.8) 549 865 (36.5)
------------------------ ----- ----- ----- -----
Branded Net Additions 394 622 (36.7) 485 1,251 (61.2)
Reseller (368) (459) 19.8 (950) (859) (10.6)
Connected devices
2 2,256 1,198 88.3 4,828 2,750 75.6
------------------------ ----- ----- ----- -----
Wireless Net Subscriber
Additions 2,282 1,361 67.7 4,363 3,142 38.9
======================== ===== ===== ===== =====
Smartphones sold
under our installment
programs during
period 3,583 3,960 (9.5)% 7,084 8,095 (12.5)%
Total Churn 3,
4 1.28% 1.35% (7) BP 1.37% 1.38% (1) BP
Branded Churn
3, 4 1.57% 1.47% 10 BP 1.64% 1.55% 9 BP
Postpaid Churn
3, 4 1.01% 0.97% 4 BP 1.07% 1.04% 3 BP
Postpaid Phone
Only Churn 3,
4 0.79% 0.84% (5) BP 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 automobile systems. Excludes postpaid
tablets.
3 Calculated by dividing the aggregate number of wireless
subscribers who canceled service during a month divided
by the total number
of wireless subscribers at the beginning of that month.
The churn rate for the period is equal to the average of
the churn rate for each month of that period.
4 2017 excludes the impact of the 2G shutdown and a true-up
to the reseller subscriber base, which were reflected in
beginning of period subscribers.
Operating income decreased $13, or 0.2%, in the second quarter
and $115, or 1.1%, for the first six months of 2017. The
second-quarter operating income margin of AT&T Mobility
increased from 29.8% in 2016 to 30.4% in 2017 and for the first six
months increased from 29.6% in 2016 to 30.3% in 2017. AT&T
Mobility's second-quarter EBITDA margin increased from 41.4% in
2016 to 41.8% in 2017 and for the first six months increased from
41.1% in 2016 to 41.8% in 2017. AT&T Mobility's second-quarter
EBITDA service margin increased from 49.8% in 2016 to 50.4% in 2017
and for the first six months increased from 49.7% in 2016 to 49.8%
in 2017 (EBITDA service margin is operating income before
depreciation and amortization, divided by total service
revenues).
Subscriber Relationships
As the wireless industry continues to mature, future wireless
growth will become increasingly dependent on our ability to offer
innovative services, plans and devices and 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 maturing market, we have launched a wide variety
of plans, including unlimited, as well as equipment installment
programs. Beginning in the first quarter of 2017, we expanded our
unlimited wireless data plans to make them available to customers
that do not subscribe to our video services.
ARPU
Postpaid phone-only ARPU was $58.30 for the second quarter and
$58.20 for the first six months of 2017, compared to $59.80 and
$59.66 in 2016. Postpaid phone-only ARPU plus equipment installment
billings was $69.04 for the second quarter and $68.93 for the first
six months of 2017, compared to $69.97 and $69.75 in 2016. ARPU has
been affected by customers shifting to unlimited plans, which
decreases overage revenues; however, customers are adding
additional devices helping to offset that decline.
36
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Churn
The effective management of subscriber churn is critical to our
ability to maximize revenue growth and to maintain and improve
margins. Total churn was lower for the second quarter and first six
months of 2017. Postpaid churn was higher for the second quarter
and first six months of 2017, reflecting higher tablet churn.
Postpaid phone-only churn was lower in the second quarter and first
six months of 2017, despite competitive pressure in the
industry.
Branded Subscribers
Branded subscribers increased 0.4% in the second quarter of 2017
when compared to March 31, 2017 and increased 1.8% when compared to
June 30, 2016. The sequential increase reflects growth of 0.1% and
2.5% in postpaid and prepaid subscribers and the year-over-year
rise includes increases of 0.1% and 12.3% in postpaid and prepaid
subscribers, respectively.
At June 30, 2017, 92% of our postpaid phone subscriber base used
smartphones, compared to 89% at June 30, 2016, with more than 95%
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. Device connections on our Mobile Share and unlimited
wireless data plans now represent 86% of our postpaid customer
base, compared to 82% at June 30, 2016. 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, including AT&T
Next, allow for postpaid subscribers to purchase certain devices in
installments over a period of up to 30 months. Additionally, after
a specified period of time, AT&T Next subscribers also have the
right to trade in the original device for a new device with a new
installment plan and have the remaining unpaid balance satisfied.
For installment programs, we recognize equipment revenue at the
time of the sale for the amount of the customer receivable, net of
the fair value of the trade-in right guarantee and imputed
interest. 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. At June 30, 2017, about 53% of the postpaid smartphone
base is on an equipment installment program compared to 50% at June
30, 2016. Over 90% of postpaid smartphone gross adds and upgrades
for all periods presented were either equipment installment plans
or 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 automobile systems.
Connected device subscribers increased 7.0% during the second
quarter when compared to March 31, 2017 and 19.7% when compared to
June 30, 2016. During the second quarter and first six months of
2017, we added approximately 1.5 million and 3.2 million
"connected" cars, respectively, 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.
OTHER BUSINESS MATTERS
Time Warner Inc. Acquisition In October 2016, we announced an
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). 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. The
cash portion of the purchase price will be financed with new debt
and cash. The transaction remains subject to review by the U.S.
Department of Justice and certain foreign jurisdictions, but is
expected to close before year-end 2017. See Note 7 for additional
details of the transaction and "Liquidity" for a discussion of our
financing arrangements.
FirstNet On March 30, 2017, the First Responder Network
Authority (FirstNet) announced its selection of AT&T to build
and manage the first nationwide broadband network dedicated to
America's first responders. FirstNet expects to provide 20 MHz of
valuable telecommunications spectrum and success-based payments of
$6,500 over the next five years to support network buildout. We
expect to spend about $40,000 over the life of the 25-year contract
to build, deploy, operate and maintain the network.
37
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
The actual reach of the network and our investment over the
25-year period will be determined by the number of individual
states electing to participate in FirstNet. Individual states are
currently reviewing participation plans, and as of July 31, 2017,
seven states have opted-in to the program. We do not expect
FirstNet to materially impact our 2017 results.
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. In June 2016, the plaintiffs filed a consolidated
amended complaint. 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. The court held a hearing on both motions on February
13, 2017. On June 30, 2017, the court granted the NFL defendants'
motion to dismiss the complaint without leave to amend, finding
that: (1) the plaintiffs did not plead a viable market; (2) the
plaintiffs did not plead facts supporting the contention that the
exclusive agreement between the NFL and DIRECTV harms competition;
(3) the claims failed to overcome the fact that the NFL and its
teams must cooperate to sell broadcasts; and (4) the plaintiffs do
not have standing to challenge the horizontal agreement among the
NFL and the teams. In light of the order granting the motion to
dismiss, the court denied DIRECTV's motion to compel arbitration as
moot.
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 unspecified 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. On April 4, 2017, we reported to the court that we had
reached a written settlement with the FTC Bureau of Consumer
Protection. Commission approval is still required. The court
scheduled trial to begin on August 14, 2017, if Commission approval
has not been secured by that date.
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. On May 9, 2017, the Ninth Circuit Court of Appeals
granted the FTC's petition for en banc review, which will be
conducted by an eleven-judge panel. The court set oral argument for
the week of September 18, 2017, in San Francisco. In addition to
the FTC case, several class actions have been filed also
challenging our MBR program. We vigorously dispute the allegations
the complaints have asserted.
38
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Labor Contracts As of June 30, 2017, we employed approximately
260,000 persons. Approximately 46% of our employees are represented
by the Communications Workers of America, the International
Brotherhood of Electrical Workers or other unions. After expiration
of the agreements, work stoppages or labor disruptions may occur in
the absence of new contracts or other agreements being reached.
A summary of labor contract negotiations, by region or employee
group, is as follows:
-- Approximately 20,000 traditional wireline employees in
the Southwest ratified a new contract in April 2017. The
new contract will expire in April 2021.
-- Approximately 5,000 traditional wireline employees primarily
in the Midwest ratified a new contract in May 2017. The
new contract will expire in June 2022.
-- Approximately 20,000 mobility employees across the country
are covered by a contract that expired in early 2017. We
continue to negotiate with labor representatives.
-- Approximately 15,000 traditional wireline employees in
our West region are covered by a contract that expired
in April 2016. In July, we reached a tentative agreement
on a new four-year contract that will expire in April 2020,
if ratified.
-- Approximately 11,000 former DIRECTV employees were eligible
for and chose union representation. Bargaining has resulted
in approximately 80% of these employees now being covered
under ratified contracts that expire between 2017 and 2021.
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. However, based on their public statements and
written opinions, we expect the new leadership at the FCC to chart
a more predictable and balanced regulatory course that will
encourage long-term investment and benefit consumers. In addition,
we are pursuing, at both the state and federal levels, additional
legislative and regulatory measures to reduce regulatory burdens
that are no longer appropriate in a competitive telecommunications
market and that inhibit our ability to compete more effectively and
offer services wanted and needed by our customers, including
initiatives to transition services from traditional networks to all
IP-based networks. At the same time, we also seek to ensure that
legacy regulations are not further extended to broadband or
wireless services, which are subject to vigorous competition.
In March 2017, the FCC circulated a draft order proposing to
significantly reduce regulation of the bulk data connections that
telecom companies provide to businesses, otherwise known as special
access services or business data services. That order, which was
adopted on April 20, 2017, maintains light touch pricing regulation
of packet-based services, extends such light touch pricing
regulation to high-speed TDM transport services and to most of our
TDM channel termination services, based on a competitive market
test for such services. For those services that do not qualify for
light touch regulation, the order allows companies to offer volume
and term discounts, as well as contract tariffs.
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 June 2017, the FCC released an order clarifying that
providers of broadband internet access service continue to be
subject to privacy
39
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
requirements under section 222 of The Communications Act of 1934
(Communications Act), but not the more restrictive rules that were
adopted in October 2016.
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 FCC's decision significantly expands its
authority to regulate the provision of fixed and mobile broadband
internet access services. AT&T and other providers of broadband
internet access services challenged the FCC's decision before the
U.S. Court of Appeals for the D.C. Circuit. In June 2016, a panel
of the Court of Appeals upheld the FCC's classification of
broadband internet access and the attendant rules by a 2-1 vote. In
July 2016, AT&T and several of the other parties that
challenged the rules filed petitions with the Court of Appeals
asking that the case be reheard either by the panel or by the full
Court of Appeals. On May 1, 2017, the Court of Appeals denied the
rehearing requests, and on July 20, 2017, the United States Supreme
Court extended to September 28, 2017 the deadline for filing
petitions for certiorari to review the Court of Appeals decision.
In May 2017, the FCC initiated a proceeding to reverse its 2015
decision to classify broadband internet access services as
telecommunications services. AT&T fully supports an open
internet and believes that Congress must pass bipartisan
legislation that codifies core principles of net neutrality while
maintaining a stable regulatory environment conducive to
investment, future innovation and economic growth.
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 a quick permitting process.
The FCC has recognized that the explosive growth of
bandwidth-intensive wireless data services requires the U.S.
government to make more spectrum available. The FCC finished its
most recent auction in April 2017 of certain spectrum that is
currently used by broadcast television licensees (the "600 MHz
Auction").
In May 2014, the FCC issued an order revising its policies
governing mobile spectrum holdings. The FCC rejected the imposition
of caps on the amount of spectrum any carrier could acquire,
retaining its case-by-case review policy. Moreover, it increased
the amount of spectrum that could be acquired before exceeding an
aggregation "screen" that would automatically trigger closer
scrutiny of a proposed transaction. On the other hand, it indicated
that it will separately consider an acquisition of "low band"
spectrum that exceeds one-third of the available low band spectrum
as presumptively harmful to competition. The spectrum screen
(including the low band screen) recently increased by 23 MHz. On
balance, the order and the spectrum screen should allow AT&T to
obtain additional spectrum to meet our customers' needs.
40
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
As the wireless industry continues to mature, future wireless
growth will become increasingly dependent on our ability to offer
innovative video and data services and a wireless network that has
sufficient spectrum and capacity to support these innovations. 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 FirstNet contract, which provides us with access
to a nationwide low band 20 MHz of spectrum, assuming all
states opt-in.
-- Invested in 5G and millimeter-wave technologies with our
in-process 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.
LIQUIDITY AND CAPITAL RESOURCES
In anticipation of the Time Warner transaction, we had $25,617
in cash and cash equivalents available at June 30, 2017. Cash and
cash equivalents included cash of $2,801 and money market funds and
other cash equivalents of $22,816. Approximately $866 of our cash
and cash equivalents resided in foreign jurisdictions and were in
foreign currencies; these funds are primarily used to meet working
capital requirements of foreign operations.
Cash and cash equivalents increased $19,829 since December 31,
2016. In the first six months of 2017, cash inflows were primarily
provided by the issuance of long-term debt, and cash receipts from
operations, including cash from our sale and transfer of certain
wireless equipment installment receivables to third parties. We
also received a $1,438 deposit refund from the FCC. 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 discuss many of these factors in detail below.
Cash Provided by or Used in Operating Activities
During the first six months of 2017, cash provided by operating
activities was $18,160, compared to $18,207 for the first six
months of 2016. Lower operating cash flows in 2017 were primarily
due to higher cash payments for legal and other settlements, and
the timing of working capital payments.
Cash Used in or Provided by Investing Activities
For the first six months of 2017, cash used in investing
activities totaled $9,948 and consisted primarily of $10,750 for
capital expenditures, excluding interest during construction.
Investing activities also include a refund from the FCC in the
amount of $1,438 in April 2017, resulting from the FCC's 600 MHz
Auction that concluded in April 2017. We submitted winning bids to
purchase spectrum licenses in 18 markets for which we paid
$910.
The majority of our capital expenditures are spent on our
networks, our video services and related support systems. Capital
expenditures, excluding interest during construction, increased
$1,048 in the first six months. The increase was primarily due to
our continued fiber buildout and timing of build schedules in 2017
compared with 2016. Additionally, in connection with capital
improvements, we negotiate favorable payment terms (referred to as
vendor financing). For the first six months of 2017, vendor
financing related to capital investments was $799. We do not report
capital expenditures at the segment level.
We continue to expect our 2017 capital expenditures to be in the
$22,000 range, and we expect our capital expenditures to be in the
15% range of service revenues or lower for each of the years 2017
through 2019. The amount of capital expenditures is influenced by
demand for services and products, capacity needs and network
enhancements. Our capital spending also takes into account existing
tax law and does not reflect anticipated tax reform. We are also
focused on ensuring DIRECTV merger commitments are met.
41
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Cash Provided by or Used in Financing Activities
For the first six months of 2017, cash provided by financing
activities totaled $11,617 and included net proceeds of $24,115
primarily from the following long-term debt issuances:
-- February issuance of $1,250 of 3.200% global notes due
2022.
-- February issuance of $750 of 3.800% global notes due 2024.
-- February issuance of $2,000 of 4.250% global notes due
2027.
-- February issuance of $3,000 of 5.250% global notes due
2037.
-- February issuance of $2,000 of 5.450% global notes due
2047.
-- February issuance of $1,000 of 5.700% global notes due
2057.
-- March issuance of $1,430 of 5.500% global notes due 2047.
-- March issuance of $800 floating rate global notes due 2020.
The floating rate for the notes is based upon the three-month
London Interbank Offered Rate (LIBOR), reset quarterly,
plus 65 basis points.
-- March draw of $300 on a private financing agreement with
Banco Nacional de Mexico, S.A. due March 2019. The agreement
contains terms similar to that provided under our syndicated
credit arrangements; the interest rate is a market rate.
-- May issuance of $1,500 floating rate global notes due 2021.
The floating rate for the notes is based upon the three-month
LIBOR, reset quarterly, plus 95 basis points.
-- May issuance of CAD$600 of 2.850% global notes due 2024
and CAD$750 of 4.850% global notes due 2047 (together,
equivalent to $994, when issued).
-- June issuance of GBP1,000 of 3.550% global notes due 2037,
subject to mandatory redemption (equivalent to $1,282 when
issued).
-- June issuance of EUR750 of 1.050% global notes due 2023,
EUR1,750 of 1.800% global notes due 2026, EUR1,500 of 2.350%
global notes due 2029, EUR1,750 of 3.150% global notes
due 2036 and EUR1,250 of floating rate global notes due
2023, all except the 2036 global notes are subject to mandatory
redemption (together, equivalent to $7,883, when issued).
-- June issuance of EUR750 of 1.050% global notes due 2023,
EUR1,750 of 1.800% global notes due 2026, EUR1,500 of 2.350%
global notes due 2029, EUR1,750 of 3.150% global notes
due 2036 and EUR1,250 of floating rate global notes due
2023, all except the 2036 global notes are subject to mandatory
redemption (together, equivalent to $7,883, when issued).
On July 27, 2017, we initiated a debt offering for $22,500 that
will be completed on August 7, 2017. The proceeds will be used for
general corporate purposes, including funding the cash
consideration for the Time Warner acquisition and are subject to a
special mandatory redemption feature described below. Details for
the offering are as follows:
-- $750 of floating rate notes due 2023.
-- $1,750 of 2.850% global notes due 2023.
-- $3,000 of 3.400% global notes due 2024.
-- $5,000 of 3.900% global notes due 2027.
-- $4,500 of 4.900% global notes due 2037.
-- $5,000 of 5.150% global notes due 2050.
-- $2,500 of 5.300% global notes due 2058.
For notes subject to mandatory redemption if we do not
consummate the Time Warner acquisition pursuant to the merger
agreement on or prior to April 22, 2018, or, if prior to such date,
the merger agreement is terminated, then in either case, we must
redeem certain of the notes at a redemption price equal to 101% of
the principal amount of the notes, plus accrued but unpaid
interest.
During the first six months of 2017, we redeemed $6,118 of debt,
primarily consisting of the following:
-- $1,142 of 2.400% global notes due 2017.
-- $1,000 of 1.600% global notes due 2017.
-- $500 of floating rate notes due 2017.
-- GBP750 of 5.875% global notes due 2017.
-- $750 repayment of a private financing agreement with Export
Development Canada due 2017.
-- $1,150 of 1.700% global notes due 2017.
Our weighted average interest rate of our entire long-term debt
portfolio, including the impact of derivatives, was approximately
4.3% as of June 30, 2017, compared to 4.2% as of December 31, 2016.
We had $142,816
42
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
of total notes and debentures outstanding at June 30, 2017,
which included Euro, British pound sterling, Swiss franc, Brazilian
real, Mexican peso and Canadian dollar denominated debt that
totaled approximately $35,808.
As of June 30, 2017, we had approximately 388 million shares
remaining from 2013 and 2014 authorizations from our Board of
Directors to repurchase shares of our common stock. During the
first six months of 2017, we repurchased approximately 7 million
shares totaling $279 under these authorizations. In 2017, we intend
to use free cash flow (operating cash flows less construction and
capital expenditures) after dividends primarily to pay down
debt.
We paid dividends of $6,021 during the first six months of 2017,
compared with $5,899 for the first six months of 2016, primarily
reflecting the increase in the quarterly dividend approved by our
Board of Directors in October 2016. Dividends declared by our Board
of Directors totaled $0.49 per share in the second quarter and
$0.98 per share in the first six months of 2017 and $0.48 per share
in the second quarter and $0.96 for the first six months of 2016.
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.
At June 30, 2017, we had $10,831 of debt maturing within one
year, $10,662 of which was related to long-term debt issuances.
Debt maturing within one year includes the following notes that may
be put back to us by the holders:
-- $1,000 of annual put reset securities issued by BellSouth
that may be put back to us each April until maturity in
2021. No such put was exercised during April 2017.
-- 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) is held to
maturity, the redemption amount will be $1,029.
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. In December 2015, we entered into a five-year $12,000
revolving credit agreement of which no amounts are outstanding as
of June 30, 2017. We also have a $9,155 syndicated credit
agreement, of which $4,155 remains outstanding as of June 30, 2017
($2,286 of which is payable March 2018).
We also enter into various credit arrangements supported by
government agencies to support network equipment purchases.
In connection with our pending Merger with Time Warner, we have
also entered into a $30,000 bridge loan credit agreement ("Bridge
Loan") and a $10,000 term loan agreement ("Term Loan"). Following
the June issuances of EUR7,000 global notes and GBP1,000 global
notes, we reduced the commitments under the Bridge Loan to $21,000.
Upon settlement of our July 27, 2017, debt offering, we expect to
terminate our bridge loan credit agreement. 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 June 30,
2017, we were in compliance with the covenants for our credit
facilities.
Collateral Arrangements
During the first six months of 2017, we received $957 of
additional cash collateral, on a net basis, from banks and other
participants in our derivative arrangements. Subsequent to the end
of the quarter, approximately $1,336 of additional collateral has
been returned to AT&T. Cash postings under these arrangements
vary with changes in credit ratings and netting agreements. (See
Note 6)
43
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Other
Our total capital consists of debt (long-term debt and debt
maturing within one year) and stockholders' equity. Our capital
structure does not include debt issued by our equity method
investments. At June 30, 2017, our debt ratio was 53.3%, compared
to 50.5% at June 30, 2016, and 49.9% at December 31, 2016. Our net
debt ratio was 43.8% at June 30, 2017, compared to 47.6% at June
30, 2016 and 47.5% at December 31, 2016. The debt ratio is affected
by the same factors that affect total capital, and reflects our
recent debt issuances and repayments.
During the first six months of 2017, we received $2,906 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 $8,294 as of June 30, 2017, and
$8,477 as of December 31, 2016, does not have any voting rights and
has a liquidation value of $8,000. The trust is entitled to receive
cumulative cash distributions of $560 per annum, which are
distributed quarterly in equal amounts. We distributed $280 to the
trust during the first six months of 2017. 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.
44
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
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.
Three Months Ended
------------------------------------------------------------------------------------------------
June 30, 2017 June 30, 2016
----------------------------------------------- -----------------------------------------------
Consumer Business Adjustments AT&T Consumer Business Adjustments AT&T
Mobility Solutions 1 Mobility Mobility Solutions 1 Mobility
---------------- -------- --------- ------------- ---------- -------- --------- ------------- ----------
Operating
Revenues
Wireless
service $ 6,528 $ 8,006 $ - $ 14,534 $ 6,948 $ 7,963 $ - $ 14,911
Fixed
strategic
services - 3,028 (3,028) - - 2,805 (2,805) -
Legacy
voice and
data services - 3,508 (3,508) - - 4,162 (4,162) -
Other service
and equipment - 844 (844) - - 874 (874) -
Wireless
equipment 1,263 1,721 - 2,984 1,238 1,775 - 3,013
----------------- ------- -------- --------- ------ ------- -------- --------- ------
Total Operating
Revenues 7,791 17,107 (7,380) 17,518 8,186 17,579 (7,841) 17,924
----------------- ------- -------- --------- ------ ------- -------- --------- ------
Operating
Expenses
Operations
and support 4,520 10,313 (4,636) 10,197 4,680 10,857 (5,036) 10,501
EBITDA 3,271 6,794 (2,744) 7,321 3,506 6,722 (2,805) 7,423
Depreciation
and
amortization 871 2,335 (1,214) 1,992 932 2,521 (1,372) 2,081
----------------- ------- -------- --------- ------ ------- -------- --------- ------
Total Operating
Expense 5,391 12,648 (5,850) 12,189 5,612 13,378 (6,408) 12,582
----------------- ------- -------- --------- ------ ------- -------- --------- ------
Operating
Income $ 2,400 $ 4,459 $ (1,530) $ 5,329 $ 2,574 $ 4,201 $ (1,433) $ 5,342
================= ======= ======== ========= ====== ======= ======== ========= ======
1 Non-wireless (fixed) operations reported in Business Solutions
segment.
45
AT&T INC.
JUNE 30, 2017
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber
amounts
Six Months Ended
------------------------------------------------------------------------------------------------
June 30, 2017 June 30, 2016
----------------------------------------------- -----------------------------------------------
Consumer Business Adjustments AT&T Consumer Business Adjustments AT&T
Mobility Solutions 1 Mobility Mobility Solutions 1 Mobility
---------------- -------- --------- ------------- ---------- -------- --------- ------------- ----------
Operating
Revenues
Wireless
service $ 13,137 $ 15,935 $ - $ 29,072 $ 13,891 $ 15,818 $ - $ 29,709
Fixed
strategic
services - 6,002 (6,002) - - 5,556 (5,556) -
Legacy
voice and
data services - 7,138 (7,138) - - 8,535 (8,535) -
Other service
and equipment - 1,661 (1,661) - - 1,733 (1,733) -
Wireless
equipment 2,394 3,219 - 5,613 2,623 3,546 - 6,169
----------------- ------- -------- --------- ------ ------- -------- --------- ------
Total Operating
Revenues 15,531 33,955 (14,801) 34,685 16,514 35,188 (15,824) 35,878
----------------- ------- -------- --------- ------ ------- -------- --------- ------
Operating
Expenses
Operations
and support 9,048 20,489 (9,342) 20,195 9,592 21,659 (10,126) 21,125
EBITDA 6,483 13,466 (5,459) 14,490 6,922 13,529 (5,698) 14,753
Depreciation
and
amortization 1,744 4,647 (2,402) 3,989 1,854 5,029 (2,746) 4,137
----------------- ------- -------- --------- ------ ------- -------- --------- ------
Total Operating
Expense 10,792 25,136 (11,744) 24,184 11,446 26,688 (12,872) 25,262
----------------- ------- -------- --------- ------ ------- -------- --------- ------
Operating
Income $ 4,739 $ 8,819 $ (3,057) $ 10,501 $ 5,068 $ 8,500 $ (2,952) $ 10,616
================= ======= ======== ========= ====== ======= ======== ========= ======
1 Non-wireless (fixed) operations reported in Business Solutions
segment.
46
AT&T INC.
JUNE 30, 2017
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Dollars in millions except per share amounts
At June 30, 2017, we had interest rate swaps with a notional
value of $10,775 and a fair value of $15.
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 $38,694 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 $(2,337) at June 30, 2017.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed by
the registrant is recorded, processed, summarized, accumulated and
communicated to its management, including its principal executive
and principal financial officers, to allow timely decisions
regarding required disclosure, and reported within the time periods
specified in the Securities and Exchange Commission's rules and
forms. The chief executive officer and chief financial officer have
performed an evaluation of the effectiveness of the design and
operation of the registrant's disclosure controls and procedures as
of June 30, 2017. Based on that evaluation, the chief executive
officer and chief financial officer concluded that the registrant's
disclosure controls and procedures were effective as of June 30,
2017.
47
AT&T INC.
JUNE 30, 2017
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,
including the FCC's order classifying broadband as Title
II services subject to much more comprehensive regulation;
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.
-- 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 offerings through satellite and IP-based
networks; the extent to which regulatory and build-out
requirements apply to our offerings; 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 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 integrate our acquisition of DIRECTV.
-- Our ability to close our pending acquisition of Time Warner
Inc. and successfully integrate its operations.
-- 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.
-- The uncertainty and impact of anticipated regulatory and
corporate tax reform, which may impact the overall economy
and incentives for business investments.
Readers are cautioned that other factors discussed in this
report, although not enumerated here, also could materially affect
our future earnings.
48
AT&T INC.
JUNE 30, 2017
PART II - OTHER INFORMATION
Dollars in millions except per share amounts
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that
may materially affect our business. We use this section to update
this discussion to reflect material developments since our Form
10-K was filed. For the second quarter 2017, 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
second quarter of 2017 is as follows:
(d)
(c)
(a) Maximum Number
(b) (or
Total Number Approximate
of Dollar
Shares (or Value) of Shares
Total Number Units) (or
of Purchased Units) That
Shares (or Average Price as Part of May Yet Be
Units) Paid Publicly Announced Purchased Under
Purchased Per Share Plans or Programs The
Period 1, 2, 3 (or Unit) 1 Plans or Programs
----------------- ------------- ---------------- ------------------- ------------------
April 1, 2017
-
April 30, 2017 12,802 $ 41.46 - 395,550,000
May 1, 2017
-
May 31, 2017 7,272,174 38.43 7,254,000 388,296,000
June 1, 2017
-
June 30, 2017 642,772 38.84 - 388,296,000
----------------- ------------- ------------ ------------------- ------------------
Total 7,927,748 $ 38.43 7,254,000
================= ============= ============ =================== ==================
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, 46,300 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, 627,448 shares were acquired
through reimbursements from AT&T maintained Voluntary Employee
Benefit
Association (VEBA) trusts.
49
AT&T INC.
JUNE 30, 2017
Item 6. Exhibits
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission, are incorporated by reference
as exhibits hereto. Unless otherwise indicated, all exhibits so
incorporated are from File No. 1-8610.
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
50
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AT&T Inc.
August 3, 2017 /s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
51
EXHIBIT
12
AT&T, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in millions
Six Months Ended
June 30,
(Unaudited) Year Ended December 31,
--- --------------------------------- ---------------------------------------------------------------------------------
2017 2016 2016 2015 2014 2013 2012
--- ------------- -------------- ------------ ------------ ----------- ----------- -----------
Earnings:
Income from
continuing
operations
before income
taxes $ 11,448 $ 11,428 $ 19,812 $ 20,692 $ 10,355 $ 28,050 $ 10,496
Equity in
net (income)
loss of
affiliates
included
above 159 (41) (98) (79) (175) (642) (752)
Fixed
Charges 3,925 3,644 7,296 6,592 5,295 5,452 4,876
Distributed
income
of equity
affiliates 8 19 61 30 148 318 137
Interest
capitalized (473) (437) (892) (797) (234) (284) (263)
------------------------- ------------- -------------- ------------ ------------
Earnings, as
adjusted $ 15,067 $ 14,613 $ 26,179 $ 26,438 $ 15,389 $ 32,894 $ 14,494
Fixed Charges:
Interest
expense $ 2,688 $ 2,465 $ 4,910 $ 4,120 $ 3,613 $ 3,940 $ 3,444
Interest capitalized 473 437 892 797 234 284 263
Portion
of rental
expense
representative
of interest
factor 764 742 1,494 1,675 1,448 1,228 1,169
---------------- ------------- -------------- ------------ ------------
Fixed Charges $ 3,925 $ 3,644 $ 7,296 $ 6,592 $ 5,295 $ 5,452 $ 4,876
Ratio of Earnings to Fixed
Charges 3.84 4.01 3.59 4.01 2.91 6.03 2.97
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: August 3, 2017
/s/ Randall Stephenson
Randall Stephenson
Chairman of the Board,
Chief Executive Officer and President
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: August 3, 2017
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
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
June 30, 2017 (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.
August 3, 2017 August 3, 2017
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 company news service from the London Stock Exchange
END
IR OKNDQPBKDDFB
(END) Dow Jones Newswires
August 23, 2017 11:47 ET (15:47 GMT)
Grafico Azioni At&t Inc 5.500% (LSE:58KN)
Storico
Da Nov 2024 a Dic 2024
Grafico Azioni At&t Inc 5.500% (LSE:58KN)
Storico
Da Dic 2023 a Dic 2024
