Company Announcements

Half-year Report 10-Q

Source: RNS
RNS Number : 7286H
AT & T Inc.
19 August 2016
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

                                                       


(Mark One)

 

x

 

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

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" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

[X]


Accelerated filer

[   ]

Non-accelerated filer

[   ]

(Do not check if a smaller reporting company)

Smaller reporting company

[   ]

 

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, 2016 there were 6,152 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,




2016



2015



2016



2015















Operating Revenues













Service


$

37,142



$

29,541



$

74,243



$

58,503


Equipment



3,378




3,474




6,812




7,088


Total operating revenues



40,520




33,015




81,055




65,591



















Operating Expenses

















Cost of services and sales

















   Equipment



4,260




4,353




8,635




8,899


   Broadcast, programming and operations



4,701




1,148




9,330




2,270


   Other cost of services (exclusive of depreciation and

         amortization shown separately below)



9,514




9,578




18,910




18,390


Selling, general and administrative



8,909




7,467




17,350




15,428


Depreciation and amortization



6,576




4,696




13,139




9,274


Total operating expenses



33,960




27,242




67,364




54,261


Operating Income



6,560




5,773




13,691




11,330


Other Income (Expense)

















Interest expense



(1,258

)



(932

)



(2,465

)



(1,831

)

Equity in net income of affiliates



28




33




41




33


Other income (expense) - net



91




48




161




118


Total other income (expense)



(1,139

)



(851

)



(2,263

)



(1,680

)

Income Before Income Taxes



5,421




4,922




11,428




9,650


Income tax expense



1,906




1,738




4,028




3,127


Net Income



3,515




3,184




7,400




6,523


Less: Net Income Attributable to Noncontrolling Interest



(107

)



(102

)



(189

)



(178

)

Net Income Attributable to AT&T


$

3,408



$

3,082



$

7,211



$

6,345


Basic Earnings Per Share Attributable to AT&T


$

0.55



$

0.59



$

1.17



$

1.22


Diluted Earnings Per Share Attributable to AT&T


$

0.55



$

0.59



$

1.17



$

1.22


Weighted Average Number of Common Shares

















   Outstanding - Basic (in millions)



6,174




5,204




6,173




5,204


Weighted Average Number of Common Shares

















   Outstanding - with Dilution (in millions)



6,195




5,220




6,193




5,220


Dividends Declared Per Common Share


$

0.48



$

0.47



$

0.96



$

0.94


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,




2016



2015



2016



2015


Net income


$

3,515



$

3,184



$

7,400



$

6,523


Other comprehensive income (loss), net of tax:

















    Foreign Currency:

















        Foreign currency translation adjustment, net of taxes of

           $136, $1, $126 and $(103)



218




1




174




(185

)

    Available-for-sale securities:

















        Net unrealized gains (losses), net of taxes of $2, $0,

           $(13) and $19



5




1




(21

)



34


        Reclassification adjustment included in net income,

           net of taxes of $2, $(2), $0 and $(5)



3




(4

)



-




(9

)

     Cash flow hedges:

















        Net unrealized gains (losses), net of taxes of $(208),

           $(52), $(141) and $(242)



(387

)



(95

)



(263

)



(449

)

        Reclassification adjustment included in net income,

           net of taxes of $5, $5, $10 and $9



9




10




19




17


     Defined benefit postretirement plans:

















        Amortization of net prior service credit included in

           net income, net of taxes of $(131), $(131), $(262)

           and $(262)



(214

)



(214

)



(429

)



(429

)

Other comprehensive income (loss)



(366

)



(301

)



(520

)



(1,021

)

Total comprehensive income



3,149




2,883




6,880




5,502


Less: Total comprehensive income attributable to

     noncontrolling interest



(107

)



(102

)



(189

)



(178

)

Total Comprehensive Income Attributable to AT&T


$

3,042



$

2,781



$

6,691



$

5,324


See Notes to Consolidated Financial Statements.

















 

3

 

 

 



 

AT&T INC.


CONSOLIDATED BALANCE SHEETS


Dollars in millions except per share amounts




June 30,



December 31,




2016



2015


Assets


(Unaudited)





Current Assets







Cash and cash equivalents


$

7,208



$

5,121


Accounts receivable - net of allowances for doubtful accounts of $642 and $704



15,830




16,532


Prepaid expenses



1,197




1,072


Other current assets



11,770




13,267


Total current assets



36,005




35,992


Property, plant and equipment



313,018




306,227


   Less: accumulated depreciation and amortization



(189,481

)



(181,777

)

Property, Plant and Equipment - Net



123,537




124,450


Goodwill



105,252




104,568


Licenses



94,098




93,093


Customer Lists and Relationships - Net



16,259




18,208


Other Intangible Assets - Net



9,107




9,409


Investments in Equity Affiliates



1,677




1,606


Other Assets



15,873




15,346


Total Assets


$

401,808



$

402,672











Liabilities and Stockholders' Equity









Current Liabilities









Debt maturing within one year


$

9,528



$

7,636


Accounts payable and accrued liabilities



26,746




30,372


Advanced billing and customer deposits



4,465




4,682


Accrued taxes



2,773




2,176


Dividends payable



2,953




2,950


Total current liabilities



46,465




47,816


Long-Term Debt



117,308




118,515


Deferred Credits and Other Noncurrent Liabilities









Deferred income taxes



58,216




56,181


Postemployment benefit obligation



34,023




34,262


Other noncurrent liabilities



21,425




22,258


Total deferred credits and other noncurrent liabilities



113,664




112,701











Stockholders' Equity









Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2016 and









   December 31, 2015: issued 6,495,231,088 at June 30, 2016 and December 31, 2015)



6,495




6,495


Additional paid-in capital



89,486




89,763


Retained earnings



34,950




33,671


Treasury stock (343,397,505 at June 30, 2016 and 350,291,239









   at December 31, 2015, at cost)



(12,343

)



(12,592

)

Accumulated other comprehensive income



4,814




5,334


Noncontrolling interest



969




969


Total stockholders' equity



124,371




123,640


Total Liabilities and Stockholders' Equity


$

401,808



$

402,672


See Notes to Consolidated Financial Statements.









 

4

 

 

 



 

AT&T INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


Dollars in millions


(Unaudited)









Six months ended




June 30,




2016



2015


Operating Activities







Net income


$

7,400



$

6,523


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









   Depreciation and amortization



13,139




9,274


   Undistributed earnings from investments in equity affiliates



(22

)



(23

)

   Provision for uncollectible accounts



705




535


   Deferred income tax expense



1,767




1,244


   Net gain from sale of investments, net of impairments



(85

)



(50

)

Changes in operating assets and liabilities:









   Accounts receivable



543




434


   Other current assets



1,069




732


   Accounts payable and accrued liabilities



(3,059

)



(1,125

)

Retirement benefit funding



(280

)



(455

)

Other - net



(2,970

)



(1,191

)

Total adjustments



10,807




9,375


Net Cash Provided by Operating Activities



18,207




15,898











Investing Activities









Capital expenditures:









   Purchase of property and equipment



(9,702

)



(8,328

)

   Interest during construction



(437

)



(339

)

Acquisitions, net of cash acquired



(485

)



(20,954

)

Dispositions



107




72


Sale of securities, net



500




1,890


Other



-




(1

)

Net Cash Used in Investing Activities



(10,017

)



(27,660

)










Financing Activities









Issuance of long-term debt



10,140




33,958


Repayment of long-term debt



(9,129

)



(2,919

)

Purchase of treasury stock



(197

)



-


Issuance of treasury stock



119




20


Dividends paid



(5,899

)



(4,873

)

Other



(1,137

)



(2,071

)

Net Cash (Used in) Provided by Financing Activities



(6,103

)



24,115


Net increase in cash and cash equivalents



2,087




12,353


Cash and cash equivalents beginning of year



5,121




8,603


Cash and Cash Equivalents End of Period


$

7,208



$

20,956


Cash paid (received) during the six months ended June 30 for:









   Interest


$

2,914



$

2,178


   Income taxes, net of refunds


$

2,468



$

(71

)

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, 2016




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






$

89,763


Issuance of treasury stock







(43

)

Share-based payments







(258

)

Change related to acquisition of interests held by noncontrolling owners







24


Balance at end of period






$

89,486











Retained Earnings









Balance at beginning of year






$

33,671


Net income attributable to AT&T ($1.17 per diluted share)







7,211


Dividends to stockholders ($0.96 per share)







(5,932

)

Balance at end of period






$

34,950











Treasury Stock









Balance at beginning of year



(350

)


$

(12,592

)

Repurchase and acquisition of common stock



(7

)



(294

)

Issuance of treasury stock



14




543


Balance at end of period



(343

)


$

(12,343

)










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









Balance at beginning of year






$

5,334


Other comprehensive loss attributable to AT&T







(520

)

Balance at end of period






$

4,814











Noncontrolling Interest









Balance at beginning of year






$

969


Net income attributable to noncontrolling interest







189


Distributions







(164

)

Acquisition of interest held by noncontrolling owners







(25

)

Balance at end of period






$

969











Total Stockholders' Equity at beginning of year






$

123,640


Total Stockholders' Equity at end of period






$

124,371


See Notes to Consolidated Financial Statements.









 

6

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

 

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

 

Basis of Presentation  Throughout this document, AT&T Inc. is referred to as "AT&T," "we" or the "Company." 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 results for the interim periods are not necessarily indicative of those for the full year. 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, 2015.

 

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates, including the results of DIRECTV and wireless properties in Mexico for the period from acquisition to the reporting date. Our subsidiaries and affiliates operate in the communications and digital entertainment services industry, providing services and equipment that deliver voice, video and broadband services domestically and internationally.

 

All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including cumulative translation adjustments.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain prior period amounts have been conformed to the current period's presentation, including our 2015 change in accounting to capitalize customer set-up and installation costs and amortize them over the expected economic life of the customer relationship. The consolidated statements of income also include revisions to present "Equipment" and "Broadcast, programming and operations" costs separately from "Other cost of services."

 

Leases  In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, "Leases (Topic 842)" (ASU 2016-02), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding "right-of-use" assets. Leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP.

 

Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition appears similar to our current methodology.

 

ASU 2016-02 becomes effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. We have just begun our evaluation of the impact on our financial statements, as well as available adoption methods, but we believe our implementation of the revenue recognition standard discussed below could influence the timing of our adoption of ASU 2016-02.

 

Revenue Recognition  In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09) and has since modified the standard four times. These standards replace existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard.

 

The FASB allows two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company 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 rules ("modified retrospective method"). We continue to evaluate the available adoption methods.

 

7

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. We are still in the process of evaluating these impacts. As a result of our accounting policy change for customer set-up and installation costs in 2015, we believe under the new standard that the requirement to defer such costs will not result in a significant change to our results. However, the requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will result in the recognition of a deferred charge on our balance sheets. We cannot currently estimate the impact of this change upon adoption, as the industry continues to undergo changes in how devices and services are sold to customers.

 

Customer Fulfillment Costs  During the second quarter of 2016, we updated our analysis of the economic lives of customer relationships, which included a review of satellite customer data following the DIRECTV acquisition. As of April 1, 2016, to better reflect the estimated economic lives of satellite and certain business customer relationships, we extended the period to approximately 4.5 years. This change in accounting estimate decreased other cost of services and impacted net income $82, or $0.01 per diluted share, in the second quarter of 2016.

 

NOTE 2. EARNINGS PER SHARE

 

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and six months ended June 30, 2016 and 2015, is shown in the table below:

 



Three months ended



Six months ended




June 30,



June 30,




2016



2015



2016



2015


Numerators













Numerator for basic earnings per share:













   Net Income


$

3,515



$

3,184



$

7,400



$

6,523


   Less:  Net income attributable to noncontrolling interest



(107

)



(102

)



(189

)



(178

)

   Net Income attributable to AT&T



3,408




3,082




7,211




6,345


   Dilutive potential common shares:

















      Share-based payment



2




2




6




6


Numerator for diluted earnings per share


$

3,410



$

3,084



$

7,217



$

6,351


Denominators (000,000)

















Denominator for basic earnings per share:

















   Weighted average number of common shares outstanding



6,174




5,204




6,173




5,204


   Dilutive potential common shares:

















      Share-based payment (in shares)



21




16




20




16


Denominator for diluted earnings per share



6,195




5,220




6,193




5,220


Basic earnings per share attributable to AT&T


$

0.55



$

0.59



$

1.17



$

1.22


Diluted earnings per share attributable to AT&T


$

0.55



$

0.59



$

1.17



$

1.22


 

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.

 

Following our 2015 acquisitions of DIRECTV and wireless businesses in Mexico, we have additional foreign operations that are exposed to fluctuations in the exchange rates used to convert operations, assets and liabilities into U.S. dollars. Since December 31, 2015, when compared to the U.S. dollar, the Brazilian real exchange rate has appreciated 18.9%, the Argentine peso exchange rate has depreciated 16.4% and the Mexican peso exchange rate has depreciated 6.2%.

 

8

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 


Foreign

Currency

Translation

Adjustment


Net Unrealized

 Gains (Losses)

on Available-

for-Sale

Securities


Net Unrealized

Gains (Losses)

on Cash Flow

Hedges


Defined Benefit

Postretirement

Plans


Accumulated

Other

Comprehensive

Income

Balance as of December 31, 2015

$

 (1,198)


$

 484 


$

 16 


$

 6,032 


$

 5,334 

Other comprehensive income

   (loss) before reclassifications


 174 



 (21)



 (263)



 -   



 (110)

Amounts reclassified

   from accumulated OCI


 -   

 


 -   

 


 19 

 


 (429)

 


 (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 


















Foreign

Currency

Translation

Adjustment


Net Unrealized

Gains (Losses)

on Available-

for-Sale

Securities


Net Unrealized

Gains (Losses)

on Cash Flow

Hedges


Defined Benefit

Postretirement

Plans


Accumulated

Other

Comprehensive

Income

Balance as of December 31, 2014

$

 (26)


$

 499 


$

 741 


$

 6,847 


$

 8,061 

Other comprehensive income

   (loss) before reclassifications


 (185)



 34 



 (449)



 -   



 (600)

Amounts reclassified

   from accumulated OCI


 -   

 


 (9)

 


 17 

 


 (429)

 


 (421)

Net other comprehensive

   income (loss)


 (185)



 25 



 (432)



 (429)



 (1,021)

Balance as of June 30, 2015

$

 (211)


$

 524 


$

 309 


$

 6,418 


$

 7,040 

Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.

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

(Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.

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. Due to organizational changes and our July 24, 2015 acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we revised our operating segments to align with our new management structure and organizational responsibilities. We analyze our operating 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 operating 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 Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. 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, 2016

 

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 strategic business services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as "wired" or "wireline") 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 U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.

 

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

 

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 wireless 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 operating 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 consist of (1) operations and support items associated with the merger and integration of newly acquired businesses and (2) the noncash amortization of intangible assets acquired in acquisitions.

 

·

Certain significant items which consist 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 an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by operating segment, and, therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.

 

10

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended June 30, 2016




Revenue



Operations

and Support

Expenses



EBITDA



Depreciation

and

Amortization



Operating

Income (Loss)



Equity in Net

Income (Loss) of

Affiliates



Segment

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




Revenue



Operations

and Support

Expenses



EBITDA



Depreciation

and

Amortization



Operating

Income (Loss)



Equity in Net

Income (Loss) of

Affiliates



Segment

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










 






























 

11

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

For the three months ended June 30, 2015




Revenue



Operations

and Support

Expenses



EBITDA



Depreciation

and

Amortization



Operating

Income (Loss)



Equity in Net

Income (Loss) of

Affiliates



Segment

Contribution


 

Business Solutions


$

17,664



$

10,972



$

6,692



$

2,460



$

4,232



$

-



$

4,232


 

Entertainment Group



5,782




4,913




869




1,065




(196

)



(12

)



(208

)

 

Consumer Mobility



8,755




5,202




3,553




934




2,619




-




2,619


 

International



491




529




(38

)



93




(131

)



-




(131

)

 

Segment Total



32,692




21,616




11,076




4,552




6,524



$

(12

)


$

6,512


 

Corporate and Other



323




236




87




24




63










 

Acquisition-related items



-




694




(694

)



120




(814

)









 

Certain significant items



-




-




-




-




-










 

AT&T Inc.


$

33,015



$

22,546



$

10,469



$

4,696



$

5,773










 






























 

For the six months ended June 30, 2015




Revenue



Operations

and Support

Expenses



EBITDA



Depreciation

and

Amortization



Operating

Income (Loss)



Equity in Net

Income (Loss) of

Affiliates



Segment

Contribution


 

Business Solutions


$

35,221



$

22,045



$

13,176



$

4,802



$

8,374



$

-



$

8,374


 

Entertainment Group



11,442




9,772




1,670




2,130




(460

)



(18

)



(478

)

 

Consumer Mobility



17,533




10,743




6,790




1,936




4,854




-




4,854


 

International



727




747




(20

)



121




(141

)



-




(141

)

 

Segment Total



64,923




43,307




21,616




8,989




12,627



$

(18

)


$

12,609


 

Corporate and Other



668




470




198




44




154










 

Acquisition-related items



-




993




(993

)



241




(1,234

)









 

Certain significant items



-




217




(217

)



-




(217

)









 

AT&T Inc.


$

65,591



$

44,987



$

20,604



$

9,274



$

11,330










 

 

12

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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




2016



2015



2016



2015


Business Solutions 


$

4,201



$

4,232



$

8,500



$

8,374


Entertainment Group 



1,651




(208

)



3,246




(478

)

Consumer Mobility 



2,574




2,619




5,068




4,854


International 



(184

)



(131

)



(368

)



(141

)

Segment Contribution 



8,242




6,512




16,446




12,609


Reconciling Items: 

















  Corporate and Other 



(97

)



63




(218

)



154


  Merger and integration charges 



(233

)



(694

)



(528

)



(993

)

  Amortization of intangibles acquired 



(1,316

)



(120

)



(2,667

)



(241

)

  Employee separation charges 



(29

)



-




(54

)



(217

)

  Gain on wireless spectrum transactions 



-




-




736




-


  Segment equity in net (income) loss

    of affiliates 



(7

)



12




(24

)



18


AT&T Operating Income 



6,560




5,773




13,691




11,330


Interest expense 



1,258




932




2,465




1,831


Equity in net income of affiliates 



28




33




41




33


Other income (expense) - net 



91




48




161




118


Income Before Income Taxes 


$

5,421



$

4,922



$

11,428



$

9,650


 

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

 

Substantially all 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 $8,704 at June 30, 2016. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts and accounted for as contributions. We distributed $280 to the trust during the six months ended June 30, 2016. 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 also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2015.

 

We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included within Corporate and Other (see Note 4).

 

13

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 



Three months ended



Six months ended




June 30,



June 30,




2016



2015



2016



2015


Pension cost:













   Service cost - benefits earned during the period


$

278



$

300



$

556



$

599


   Interest cost on projected benefit obligation



495




473




990




947


   Expected return on assets



(780

)



(826

)



(1,558

)



(1,652

)

   Amortization of prior service credit



(25

)



(26

)



(51

)



(52

)

   Net pension (credit) cost


$

(32

)


$

(79

)


$

(63

)


$

(158

)


















Postretirement cost:

















   Service cost - benefits earned during the period


$

48



$

56



$

96



$

111


   Interest cost on accumulated postretirement benefit obligation



243




241




486




483


   Expected return on assets



(89

)



(105

)



(178

)



(210

)

   Amortization of prior service credit



(319

)



(319

)



(638

)



(639

)

   Net postretirement (credit) cost


$

(117

)


$

(127

)


$

(234

)


$

(255

)


















   Combined net pension and postretirement (credit) cost


$

(149

)


$

(206

)


$

(297

)


$

(413

)

 

The decrease in the combined net pension and postretirement credit of $57 in the second quarter and $116 for the first six months of 2016 is primarily due to a lower expected return on assets resulting from a decrease in the value in the plan assets.

 

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the second quarter ended 2016 and 2015, net supplemental pension benefits costs not included in the table above were $24 and $21. For the first six months of 2016 and 2015, net supplemental pension benefit costs were $47 and $41.

 

NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

 

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

 

Level 1

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

 

 

Level 2

Inputs to the valuation methodology include:

 

·

Quoted prices for similar assets and liabilities in active markets.

 

·

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

 

·

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

 

·

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

 

 

Level 3

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

 

·

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

 

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

 

14

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2015.

 

Long-Term Debt and Other Financial Instruments

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

 


June 30, 2016


December 31, 2015



Carrying


Fair


Carrying


Fair



Amount


Value


Amount


Value


Notes and debentures1

$

125,568



$

137,112



$

124,847



$

128,993


Bank borrowings


4




4




4




4


Investment securities


2,550




2,550




2,704




2,704


1 Includes credit agreement borrowings.
















 

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

 

Following is the fair value leveling for available-for-sale securities and derivatives as of June 30, 2016 and December 31, 2015:

 


June 30, 2016



Level 1



Level 2



Level 3



Total


 

Available-for-Sale Securities












 

   Domestic equities

$

1,111



$

-



$

-



$

1,111


 

   International equities


547




-




-




547


 

   Fixed income bonds


-




621




-




621


 

Asset Derivatives
















 

   Interest rate swaps


-




202




-




202


 

   Cross-currency swaps


-




100




-




100


 

Liability Derivatives
















 

   Cross-currency swaps


-




(3,821

)



-




(3,821

)

 

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.


 

15

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 


December 31, 2015



Level 1



Level 2



Level 3



Total


 

Available-for-Sale Securities












 

   Domestic equities

$

1,132



$

-



$

-



$

1,132


 

   International equities


569




-




-




569


 

   Fixed income bonds


-




680




-




680


 

Asset Derivatives
















 

   Interest rate swaps


-




136




-




136


 

   Cross-currency swaps


-




556




-




556


 

   Foreign exchange contracts


-




3




-




3


 

Liability Derivatives
















 

   Cross-currency swaps


-




(3,466

)



-




(3,466

)

 

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 $95 have maturities of less than one year, $287 within one to three years, $62 within three to five years and $177 for five or more years.

 

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

 

Derivative Financial Instruments

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

 

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the six months ended June 30, 2016 and June 30, 2015, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.

 

16

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

Cash Flow Hedging  We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominations 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, 2016 and June 30, 2015, 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, 2016 and June 30, 2015, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

 

Collateral and Credit-Risk Contingency  We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At June 30, 2016, we had posted collateral of $3,154 (a deposit asset) and held collateral of $8 (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 $151. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P) and below Baa3 (Moody's), we would owe an additional $275. At December 31, 2015, we had posted collateral of $2,343 (a deposit asset) and held collateral of $124 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

 

Following are the notional amounts of our outstanding derivative positions:

 



June 30,



December 31,




2016



2015


Interest rate swaps


$

7,050



$

7,050


Cross-currency swaps



29,642




29,642


Foreign exchange contracts



-




100


Total


$

36,692



$

36,792


 

17

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

 

 

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
















 

Effect of Derivatives on the Consolidated Statements of Income












 

Fair Value Hedging Relationships

Three months ended


Six months ended



 

June 30, 2016


June 30, 2015


June 30, 2016


June 30, 2015



 

Interest rate swaps (Interest expense):













 

     Gain (Loss) on interest rate swaps

$

5



$

(30

)


$

71



$

11



 

     Gain (Loss) on long-term debt


(5

)



30




(71

)



(11

)


 

 

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


Cash Flow Hedging Relationships


June 30, 2016



June 30, 2015



June 30, 2016



June 30, 2015


Cross-currency swaps:













     Gain (Loss) recognized in accumulated OCI


$

(595

)


$

(102

)


$

(404

)


$

(330

)


















Interest rate locks:

















     Gain (Loss) recognized in accumulated OCI



-




(45

)



-




(361

)

     Interest income (expense) reclassified from

        accumulated OCI into income



(14

)



(15

)



(29

)



(26

)

 

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

 

Acquisitions

 

DIRECTV  In July 2015, we completed our acquisition of DIRECTV, a leading provider of digital television entertainment services in both the United States and Latin America. For accounting purposes, the transaction was valued at $47,409. Our operating results include the results of DIRECTV following the acquisition date.

 

The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 under the Fair Value Measurement and Disclosure framework, other than long-term debt assumed in the acquisition (see Note 6). The income approach was primarily used to value the intangible assets, consisting of acquired customer relationships, orbital slots and trade names. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used primarily for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.

 

Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition.

 

18

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

  The following table summarizes the fair values of the DIRECTV assets acquired and liabilities assumed and related deferred income taxes that existed as of the acquisition date.

 

Assets acquired




Cash


$

4,797


Accounts receivable



2,038


All other current assets



1,534


Property, plant and equipment



9,320


Intangible assets not subject to amortization





   Orbital slots



11,946


   Trade name



1,371


Intangible assets subject to amortization





   Customer lists and relationships



19,508


   Trade name



2,915


   Other



445


Investments and other assets



2,375


Goodwill



34,619


Total assets acquired



90,868







Liabilities assumed





Current liabilities, excluding current portion of long-term debt



5,645


Long-term debt



20,585


Other noncurrent liabilities



16,875


Total liabilities assumed



43,105


Net assets acquired



47,763


Noncontrolling interest



(354

)

Aggregate value of consideration paid


$

47,409


 

Purchased goodwill is not expected to be deductible for tax purposes. The goodwill was allocated to our Entertainment Group and International segments.

 

Nextel Mexico  In April 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, including approximately $427 of net debt and other adjustments. The subsidiaries offered service under the name Nextel Mexico.

 

The purchase price allocation of assets acquired was: $376 in licenses, $1,167 in property, plant and equipment, $128 in customer lists and $193 of goodwill. The goodwill was allocated to our International segment.

 

GSF Telecom  In January 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, including net debt of approximately $700. GSF Telecom offered service under both the Iusacell and Unefon brand names in Mexico.

 

The purchase price allocation of assets acquired was: $735 in licenses, $658 in property, plant and equipment, $378 in customer lists, $26 in trade names and $956 of goodwill. The goodwill was allocated to our International segment.

 

AWS-3 Auction  In January 2015, we submitted winning bids of $18,189 in the Advanced Wireless Service (AWS)-3 Auction (FCC Auction 97), a portion of which represented spectrum clearing and First Responder Network Authority funding. We provided the Federal Communications Commission (FCC) an initial down payment of $921 in October 2014 and paid the remaining $17,268 in the first quarter of 2015.

 

19

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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, 2016 and December 31, 2015, gross equipment installment receivables of $4,427 and $5,719 were included on our consolidated balance sheets, of which $2,512 and $3,239 are notes receivable that are included in "Accounts receivable - net."

 

In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. To date, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $3,673.

 

The following table sets forth a summary of equipment installment receivables sold during the three months and six months ended June 30, 2016 and 2015:

 


Three months ended


Six months ended



June 30,


June 30,



2016


2015


2016


2015


Gross receivables sold


$

1,845



$

1,728



$

4,327



$

4,363


Net receivables sold



1,671




1,555




3,927




3,936


Cash proceeds received



1,126




1,049




2,647




2,573


Deferred purchase price recorded



563




505




1,282




1,363


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


 

The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).

 

During the first quarter of 2016, we repurchased equipment installment receivables previously sold to the Purchasers, with a fair value of $532. These transactions reduced our current deferred purchase price receivable by $539, resulting in a loss of $7 during the first quarter. This loss is included in "Selling, general and administrative" in the consolidated statements of income.

 

At June 30, 2016 and December 31, 2015, our deferred purchase price receivable was $3,426 and $2,961, respectively, of which $1,901 and $1,772 is included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.

 

The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.

 

20

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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

 

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. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico, and the following discussion of changes in our operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from acquired businesses prior to acquisition are excluded. 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. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

 

Consolidated Results  Our financial results in the second quarter and for the first six months of 2016 and 2015 are summarized as follows:

 

                  



Second Quarter



Six-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


 


 

Operating Revenues



















 

   Service


$

37,142



$

29,541




25.7

%


$

74,243



$

58,503




26.9

%

 

   Equipment



3,378




3,474




(2.8

)



6,812




7,088




(3.9

)

 

Total Operating Revenues



40,520




33,015




22.7




81,055




65,591




23.6


 


























 

Operating expenses

























 

   Cost of services and sales

























 

      Equipment



4,260




4,353




(2.1

)



8,635




8,899




(3.0

)

 

      Broadcast, programming and

        operations



4,701




1,148




-




9,330




2,270




-


 

      Other cost of services



9,514




9,578




(0.7

)



18,910




18,390




2.8


 

   Selling, general and administrative



8,909




7,467




19.3




17,350




15,428




12.5


 

   Depreciation and amortization



6,576




4,696




40.0




13,139




9,274




41.7


 

Total Operating Expenses



33,960




27,242




24.7




67,364




54,261




24.1


 

Operating Income



6,560




5,773




13.6




13,691




11,330




20.8


 

Income Before Income Taxes



5,421




4,922




10.1




11,428




9,650




18.4


 

Net Income



3,515




3,184




10.4




7,400




6,523




13.4


 

Net Income Attributable to AT&T


$

3,408



$

3,082




10.6

%


$

7,211



$

6,345




13.6

%

 

 

Overview

 

Operating revenues increased $7,505, or 22.7%, in the second quarter and $15,464, or 23.6%, for the first six months of 2016.

 

Service revenues increased $7,601, or 25.7%, in the second quarter and $15,740, or 26.9%, for the first six months of 2016. The increases were primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic business services. These were partially offset by continued declines in our legacy wireline voice and data products and a true-up that increased the discounts recorded on Ethernet services. The second quarter revenues were also lower as a result of more customers choosing to purchase devices through installment payment agreements, which entitle them to lower monthly service rates under our wireless Mobile Share plans.

 

21

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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 revenues decreased $96, or 2.8%, in the second quarter and $276, or 3.9%, for the first six months of 2016. These declines reflect fewer wireless handset sales and additional promotional offers during 2016. Revenue declines were partially offset by the continuing trend of our wireless customers choosing to purchase higher priced devices and an increase in customers choosing to purchase devices on installment when compared to the prior year.

 

Operating expenses increased $6,718, or 24.7%, in the second quarter and $13,103, or 24.1%, for the first six months of 2016.

 

Equipment expenses decreased $93, or 2.1%, in the second quarter and $264, or 3.0%, for the first six months of 2016. The decreases were primarily due to the decline in devices sold to postpaid subscribers and vendor incentives, partially offset by increased sales volumes to our prepaid and international wireless customers.

 

Broadcast, programming and operations expenses increased $3,553 in the second quarter and $7,060 for the first six months of 2016 due to our acquisition of DIRECTV, slightly offset by fewer AT&T U-verse ®  (U-verse) subscribers.

 

Other cost of services expenses decreased $64, or 0.7%, in the second quarter and increased $520, or 2.8%, for the first six months of 2016. The decrease in the second quarter was primarily attributable to higher 2015 expenses of $364 of network rationalization charges and merger-related expenses, combined with lower network and access charges in 2016 and our change in accounting estimate related to customer fulfillment costs (see Note 1). The decrease was mostly offset by higher expenses resulting from our acquisition of DIRECTV, higher compensation- related costs for programs tied to our stock price and an increase in noncash financing-related costs associated with our pension and postretirement benefits.

 

The increase for the first six months was primarily due to our acquisitions of DIRECTV and Mexican wireless properties. Also contributing to higher expenses was an increase in noncash financing-related costs associated with our pension and postretirement benefits. These increases were partially offset by prior year network rationalization charges, a decline in network and access charges and lower employee separation charges.

 

Selling, general and administrative expenses increased $1,442, or 19.3%, in the second quarter and $1,922, or 12.5%, for the first six months of 2016. The increases were primarily due to our acquisitions in 2015 and increased advertising activity in 2016, partially offset by lower wireless commission expenses. The increase for the first six months was also offset by a $736 noncash gain on wireless spectrum transactions and lower employee separation charges.

 

Depreciation and amortization expense increased $1,880, or 40.0%, in the second quarter and $3,865, or 41.7%, for the first six months of 2016. Amortization expense increased $1,197 in the second quarter and $2,425 for the first six months of 2016 due to the amortization of intangibles from recent acquisitions.

 

Depreciation expense increased $683, or 14.9%, in the second quarter and $1,440, or 15.9%, for the first six months of 2016. The increase was primarily due to previously mentioned acquisitions and ongoing capital spending for network upgrades.

 

Operating income increased $787, or 13.6%, in the second quarter and $2,361, or 20.8%, for the first six months of 2016. Our operating income margin in the second quarter decreased from 17.5% in 2015 to 16.2% in 2016, and the first six months decreased from 17.3% in 2015 to 16.9% in 2016.

 

Interest expense increased $326, or 35.0%, in the second quarter and $634, or 34.6%, for the first six months of 2016. The increases were primarily due to higher average debt balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV. The increase for the first six months was slightly offset by higher capitalized interest resulting from the spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note 7).

 

22

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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

Equity in net income of affiliates  decreased $5, or 15.2%, in the second quarter and increased $8, or 24.2%, for the first six months of 2016. Equity in net income of affiliates is primarily attributable to the results from our investments in the Game Show Network, SKY Mexico, YP Holdings LLC and Otter Media Holdings.

 

Other income (expense) - net We had other income of $91 in the second quarter and $161 for the first six months of 2016, compared to other income of $48 in the second quarter and $118 for the first six months of 2015. Results in the second quarter and for the first six months of 2016 included net gains on the sale of non-strategic assets and investments of $41 and $85 and interest and dividend income of $38 and $67.

 

Other income in the second quarter and for the first six months of 2015 included net gains on the sale of non-strategic assets and investments of $17 and $50 and interest and dividend income of $26 and $45.

 

Income taxes increased $168, or 9.7%, in the second quarter and $901, or 28.8%, for the first six months of 2016. Our effective tax rate was 35.2% for both the second quarter and first six months of 2016, as compared to 35.3% for the second quarter and 32.4% for the first six months of 2015. The increases in income tax expense for the second quarter and the first six months of 2016 were primarily due to higher income before income taxes in 2016. In 2015, we recognized tax benefits related to the restructuring of a portion of our Business Solutions segment, which contributed to lower tax expense and the effective tax rate for the first six months of 2015.

 

Selected Financial and Operating Data









June 30, 

Subscribers and connections in (000s)


2016



2015


Domestic wireless subscribers



131,805




123,902


Mexican wireless subscribers



9,955




8,550


North American wireless subscribers



141,760




132,452











North American branded subscribers



99,557




95,049


North American branded net additions 1



2,596




1,280











Domestic satellite video subscribers



20,454




-


U-verse video subscribers



4,869




5,971


Latin America satellite video subscribers



12,523




-


Total video subscribers



37,846




5,971











Total domestic broadband connections



15,641




15,961











Network access lines in service



15,285




18,116


U-verse VoIP connections



5,593




5,381











Debt ratio



50.5

%



55.5

%

Net Debt Ratio



47.6

%



45.2

%

Ratio of earnings to fixed charges



4.01




4.18


Number of AT&T employees



277,200




250,730


1 At June 30, 2015, our Mexican wireless subscribers have been excluded.

2 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At March 31, 2016, SKY Mexico had 7.7 million subscribers.

3 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.

4 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).

5 See Exhibit 12.

 

23

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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

Dollars in millions except per share and per subscriber amounts

 

Segment Results

 

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating 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 affiliate for investments managed within each operating 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 Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. 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.

 

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 strategic business services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as "wired" or "wireline") 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 U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.

 

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

 

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 wireless 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 operating segment, and therefore asset information and capital expenditures by operating segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.

 

We discuss capital expenditures in "Liquidity and Capital Resources."

 

24

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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

Dollars in millions except per share and per subscriber amounts

 

                  

Business Solutions



















 

Segment Results



















 



Second Quarter



Six-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


 


 

Segment operating revenues



















 

     Wireless service


$

7,963



$

7,756




2.7

 %


$

15,818



$

15,271




3.6

 %

 

     Fixed strategic services



2,797




2,580




8.4




5,559




5,099




9.0


 

     Legacy voice and data services



4,158




4,681




(11.2

)



8,521




9,465




(10.0

)

 

     Other service and equipment



886




854




3.7




1,744




1,700




2.6


 

     Wireless equipment



1,775




1,793




(1.0

)



3,546




3,686




(3.8

)

 

Total Segment Operating Revenues



17,579




17,664




(0.5

)



35,188




35,221




(0.1

)

 


























 

Segment operating expenses

























 

     Operations and support



10,857




10,972




(1.0

)



21,659




22,045




(1.8

)

 

     Depreciation and amortization



2,521




2,460




2.5




5,029




4,802




4.7


 

Total Segment Operating Expenses



13,378




13,432




(0.4

)



26,688




26,847




(0.6

)

 

Segment Operating Income



4,201




4,232




(0.7

)



8,500




8,374




1.5


 

Equity in Net Income of Affiliates



-




-




-




-




-




-


 

Segment Contribution


$

4,201



$

4,232




(0.7

) %


$

8,500



$

8,374




1.5

 %

 

 

The following tables highlight other key measures of performance for the Business Solutions segment:

 

(in 000s)


June 30,

2016



June 30,

2015



Percent

Change


Business Wireless Subscribers 










   Postpaid/Branded



49,432




46,697




5.9

 %

   Reseller



52




19




-


   Connected devices



28,061




22,462




24.9


Total Business Wireless Subscribers



77,545




69,178




12.1















Business IP Broadband Connections



948




872




8.7

 %

Includes data-centric devices such as monitoring devices and automobile systems. Excludes postpaid tablets.


 

25

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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




2016



2015



Percent

Change



2016



2015



Percent

Change


(in 000s)

Business Wireless Net Additions  1, 4 



















   Postpaid/Branded



185 




288 




(35.8

) %



318 




585 




(45.6

) %

   Reseller



(13)




   



-




(35)







-


   Connected devices



1,199 




1,478 




(18.9

)



2,777 




2,502 




11.0


Business Wireless Net Subscriber Additions



1,371 




1,769 




(22.5

)



3,060 




3,093 




(1.1

)


























Business Wireless Postpaid Churn  1, 3, 4



0.91%




0.91%




-




0.97%




0.90%



7 BP



























Business IP Broadband Net Additions



20 




23 




(13.0

) %



37 




50 




(26.0

) %

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 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 Includes the impacts of the expected shutdown of our U.S. 2G network.


 

Operating Revenues decreased $85, or 0.5%, in the second quarter and $33, or 0.1%, for the first six months of 2016. Revenue decreases were due to continued declines in our legacy voice and data products, lower equipment revenue, the sale of certain hosting operations and foreign exchange pressures. These decreases were partially offset by increased wireless service revenues and fixed strategic services.

 

Wireless service revenues increased $207, or 2.7%, in the second quarter and $547, or 3.6%, for the first six months of 2016. The revenue increase is primarily due to customer migrations from our Consumer Mobility segment and reflects smartphone and tablet gains.

 

At June 30, 2016, we served 77.5 million subscribers, an increase of 12.1% from the prior year. Postpaid subscribers increased 5.9% 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 and losses attributable to the expected shutdown of our U.S. 2G network. Connected devices, which have lower average revenue per average subscriber (ARPU), increased 24.9% from the prior year reflecting growth in business customers using tracking, monitoring and other sensor-embedded devices on their equipment. We expect that churn and net additions of connected devices could be negatively impacted by the shutdown of the 2G network if these subscribers do not migrate to another device.

 

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 was 0.91% in both 2016 and 2015, and for the first six months increased to 0.97% in 2016 from 0.90% in 2015.

 

Fixed strategic services revenues increased $217, or 8.4%, in the second quarter and $460, or 9.0%, for the first six months of 2016. Our revenues, which were negatively impacted by foreign exchange rates, increased in the second quarter and for the first six months of 2016 due to: AT&T Dedicated Internet (formally known as Ethernet access to Managed Internet Services) of $61 and $115, Ethernet of $34 and $99, U-verse services of $40 and $90, and VPN of $30 and $56.

 

Legacy wired voice and data service revenues decreased $523, or 11.2%, in the second quarter and $944, or 10.0%, for the first six months of 2016. Traditional data revenues in the second quarter and for the first six months of 2016 decreased $327 and $562 and long-distance and local voice revenues decreased $193 and $376. The decreases were primarily due to lower demand as customers continue to migrate to fixed strategic services or shift to competitors, and the sale of certain hosting operations.

 

26

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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 service and equipment  revenues increased $32, or 3.7%, in the second quarter and $44, or 2.6%, for the first six months of 2016. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing, government professional service and customer premises equipment.

 

Wireless equipment revenues decreased $18, or 1.0%, in the second quarter and $140, or 3.8%, for the first six months of 2016. The decrease in equipment revenues resulted from a decrease in handsets sold to postpaid customers and increased promotional offers. The decreases were partially offset by an increase in purchases of devices on installment payment agreements rather than the device subsidy model.

 

Operations and support expenses decreased $115, or 1.0%, in the second quarter and $386, or 1.8%, for the first six months of 2016. 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.

 

The second quarter decrease was primarily due to declines in wireless commissions costs resulting from lower sales volumes, lower amortization of customer fulfillment costs (see Note 1) and the sale of certain hosting operations. Partially offsetting these decreases were higher wireless handset insurance claims due to an increase in the volume and cost of replacement phones, advertising costs, bad debt expense driven by a higher AT&T Next SM  (AT&T Next) subscriber base and wireless equipment expense.

 

The decrease for the first six months was primarily due to declines of $157 in wireless equipment and $252 in wireless commissions costs, reflecting a decrease in sales volumes. Access costs also declined $84, largely resulting from lower interconnect costs. Lower employee-related costs and the sale of certain hosting operations also contributed to the decrease. Partially offsetting these decreases were higher advertising expenses, wireless handset insurance claims and bad debt expense driven by a higher AT&T Next subscriber base.

 

Depreciation expense increased $61, or 2.5%, in the second quarter and $227, or 4.7%, for the first six months of 2016. The increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

 

Operating income decreased $31, or 0.7%, in the second quarter and increased $126, or 1.5%, for the first six months of 2016. Our Business Solutions segment operating income margin in the second quarter decreased from 24.0% in 2015 to 23.9% in 2016, and for the first six months increased from 23.8% in 2015 to 24.2% in 2016. Our Business Solutions EBITDA margin in the second quarter increased from 37.9% in 2015 to 38.2% in 2016, and for the first six months increased from 37.4% in 2015 to 38.4% in 2016.

 

27

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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




2016



2015



Percent

Change



2016



2015



Percent

Change


 


 

Segment operating revenues



















 

     Video entertainment


$

8,963



$

1,991 




-

 %


$

17,867



$

3,862 




-

 %

 

     High-speed internet



1,867




1,623 




15.0




3,670




3,176 




15.6


 

     Legacy voice and data services



1,244




1,516 




(17.9

)



2,557




3,128 




(18.3

)

 

     Other service and equipment



637




652 




(2.3

)



1,275




1,276 




(0.1

)

 

Total Segment Operating Revenues



12,711




5,782 




-




25,369




11,442 




-


 


























 

Segment operating expenses

























 

     Operations and support



9,569




4,913 




94.8




19,147




9,772 




95.9


 

     Depreciation and amortization



1,489




1,065 




39.8




2,977




2,130 




39.8


 

Total Segment Operating Expenses



11,058




5,978 




85.0




22,124




11,902 




85.9


 

Segment Operating Income (Loss)



1,653




(196)




-




3,245




(460)




-


 

Equity in Net Income (Loss)

   of Affiliates



(2

)



(12)




83.3




1




(18)




-


 

Segment Contribution


$

1,651



$

(208)




-

 %


$

3,246



$

(478)




-

 %

 

 

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

 

(in 000s)


June 30,

2016



June 30,

2015



Percent

Change


Video Connections










   Satellite



20,454




-




-

  %

   U-verse



4,841




5,946




(18.6

)

Total Video Connections



25,295




5,946




-















Broadband Connections













   IP



12,596




12,013




4.9


   DSL



1,585




2,415




(34.4

)

Total Broadband Connections



14,181




14,428




(1.7

)














Retail Consumer Switched Access Lines



6,515




8,142




(20.0

)

U-verse Consumer VoIP Connections



5,300




5,170




2.5


Total Retail Consumer Voice Connections



11,815




13,312




(11.2

) %

 

28

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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




2016



2015



Percent

Change



2016



2015



Percent

Change


 

(in 000s)

 

Video Net Additions



















 

   Satellite



342







-

  %



670







-

 %

 

   U-verse



(391

)



(23)




-




(773

)



26 




-


 

Net Video Additions



(49

)



(23)




-




(103

)



26 




-


 


























 

Broadband Net Additions

























 

   IP



54




217 




(75.1

)



240




630 




(61.9

)

 

   DSL



(164

)



(324)




49.4




(345

)



(644)




46.4


 

Net Broadband Additions



(110

)



(107)




(2.8

) %



(105

)



(14)




-

 %

 

 

Operating revenues increased $6,929 in the second quarter and $13,927 for the first six months of 2016, largely due to our acquisition of DIRECTV in the third quarter of 2015. Also contributing to the increases was continued growth in consumer IP broadband, which more than offset lower revenues from legacy voice and data products.

 

Video entertainment revenues increased $6,972 in the second quarter and $14,005 for the first six months of 2016, primarily related to our acquisition of DIRECTV. We are now focusing our sales efforts on satellite service as there are lower content costs for satellite subscribers. U-verse video revenue was lower in the second quarter and the first six months of 2016, primarily due to an 18.6% decrease in U-verse video connections, when compared to 2015. At June 30, 2016, more than 80% of our video subscribers were on the DIRECTV platform.

 

High-speed internet revenues increased $244, or 15.0%, in the second quarter and $494, or 15.6%, for the first six months of 2016. When compared to 2015, IP broadband subscribers increased 4.9%, to 12.6 million subscribers at June 30, 2016; however, second-quarter and year-to-date net additions were lower due to fewer U-verse sales promotions in the year. The churn of video customers also contributed to lower net additions, as a portion of these video subscribers also chose to disconnect their IP broadband service.

 

Legacy voice and data service revenues decreased $272, or 17.9%, in the second quarter and $571, or 18.3%, for the first six months of 2016. At June 30, 2016, legacy voice and data services represented approximately 10% of our total Entertainment Group revenue, and reflect decreases of $161 and $340 in long-distance, and $111 and $231 in traditional data revenues. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At June 30, 2016, approximately 11% of our broadband connections were DSL compared to nearly 17% at June 30, 2015.

 

Operations and support expenses increased $4,656, or 94.8%, in the second quarter and $9,375, or 95.9%, for the first six months of 2016. 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, as well as personnel charges for compensation and benefits.

 

Increased expenses were primarily due to our acquisition of DIRECTV, which increased our second quarter and year-to-date Entertainment Group expenses by $5,100 and $9,923. The DIRECTV related second quarter and year-to-date increases were primarily due to the recognition of additional content costs for satellite subscribers, customer support and service related charges and advertising expenses. Partially offsetting these increases were lower employee charges resulting from ongoing workforce reductions and our focus on cost initiatives.

 

Depreciation expenses increased $424, or 39.8%, in the second quarter and $847, or 39.8%, for the first six months of 2016. The increases were primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

 

29

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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

Dollars in millions except per share and per subscriber amounts

Operating income  increased $1,849 in the second quarter and $3,705 for the first six months of 2016. Our Entertainment Group segment operating income margin in the second quarter increased from (3.4)% in 2015 to 13.0% in 2016, and for the first six months increased from (4.0)% in 2015 to 12.8% in 2016. Our Entertainment Group segment EBITDA margin in the second quarter increased from 15.0% in 2015 to 24.7% in 2016, and the first six months increased from 14.6% in 2015 to 24.5% in 2016.

 

                  

Consumer Mobility



















 

Segment Results



















 



Second Quarter



Six-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


 


 

Segment operating revenues



















 

     Service


$

6,948



$

7,359




(5.6

) %


$

13,891



$

14,656




(5.2

) %

 

     Equipment



1,238




1,396




(11.3

)



2,623




2,877




(8.8

)

 

Total Segment Operating Revenues



8,186




8,755




(6.5

)



16,514




17,533




(5.8

)

 


























 

Segment operating expenses

























 

     Operations and support



4,680




5,202




(10.0

)



9,592




10,743




(10.7

)

 

     Depreciation and amortization



932




934




(0.2

)



1,854




1,936




(4.2

)

 

Total Segment Operating Expenses



5,612




6,136




(8.5

)



11,446




12,679




(9.7

)

 

Segment Operating Income



2,574




2,619




(1.7

)



5,068




4,854




4.4


 

Equity in Net Income (Loss)

   of Affiliates



-




-




-




-




-




-


 

Segment Contribution


$

2,574



$

2,619




(1.7

) %


$

5,068



$

4,854




4.4

  %

 

 

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

 

(in 000s)


June 30,

2016



June 30,

2015



Percent

Change


Consumer Mobility Subscribers










   Postpaid



27,862




29,844




(6.6

) %

   Prepaid



12,633




10,438




21.0


Branded



40,495




40,282




0.5


Reseller



12,869




13,487




(4.6

)

Connected devices



896




955




(6.2

)

Total Consumer Mobility Subscribers



54,260




54,724




(0.8

)  %

1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.


 

30

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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




2016



2015



Percent

Change



2016



2015



Percent

Change


 

(in 000s)

 

Consumer Mobility Net Additions  1, 4 



















 

   Postpaid



72 




122 




(41.0

) %



68 




266 




(74.4

) %

 

   Prepaid



365 




331 




10.3




865 




429 




-


 

Branded Net Additions



437 




453 




(3.5

)



933 




695 




34.2


 

Reseller



(446)




(98)




-




(824)




(367)




-


 

Connected devices



(1)




(30)




96.7




(27)




(109)




75.2


 

Consumer Mobility Net Subscriber Additions



(10)




325 




-

  %



82 




219 




(62.6

) %

 


























 

Total Churn 1, 3, 4



1.96%




1.86%



10 BP




2.04%




1.95%



9 BP


 

Postpaid Churn 1, 3, 4



1.09%




1.16%



(7) BP




1.16%




1.18%



(2) BP


 

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


2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.


3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a 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 Includes the impacts of the expected shutdown of our U.S. 2G network.


 

Operating Revenues decreased $569, or 6.5%, in the second quarter and $1,019, or 5.8%, for the first six months of 2016. Decreased revenues reflect declines in postpaid service revenues due to customers choosing Mobile Share plans and migrating to our Business Solutions segment, 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 $411, or 5.6%, in the second quarter and $765, or 5.2%, for the first six months of 2016. The decreases were largely due to postpaid customers continuing to shift to no-device-subsidy plans that allow for discounted monthly service charges under our Mobile Share plans, and the migration of subscribers to Business Solutions. Revenues from postpaid customers declined $627, or 11.1%, in the second quarter and $1,143, or 10.2%, for the first six months. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 6.2% and 5.2%, respectively. The decreases were partially offset by higher prepaid service revenues of $249 in the second quarter and $453 for the first six months and include services sold under the Cricket brand.

 

Equipment revenue decreased $158, or 11.3%, in the second quarter and $254, or 8.8%, for the first six months of 2016. The decreases in equipment revenues resulted from lower postpaid handset volumes and increased promotional activities, partially offset by increases in handsets sold to prepaid customers and devices purchased on installment payment agreements rather than the device subsidy model.

 

31

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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 decreased $522, or 10.0%, in the second quarter and $1,151, or 10.7%, for the first six months of 2016. 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 in the second quarter were primarily due to the following:

·

Equipment costs decreased $223 primarily due to lower postpaid handset volumes partially offset by the sale of more devices to prepaid subscribers.

 

·

Selling and commission expenses decreased $113 primarily due to lower sales volumes and lower average commission rates, including those paid under the AT&T Next program, combined with fewer upgrade transactions.

 

·

Network costs decreased $81 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

 

·

Customer service costs decreased $69 primarily due to reduced salaries and benefits and lower vendor and professional services from reduced call volumes.

 

Decreased operations and support expenses for the first six months were primarily due to the following:

·

Equipment costs decreased $343 primarily due to lower postpaid handset volumes partially offset by the sale of more devices to prepaid subscribers.

 

·

Selling and commission expenses decreased $318 primarily due to lower sales volumes and lower average commission rates, including those paid under the AT&T Next program, combined with fewer upgrade transactions.

 

·

Network costs decreased $196 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

 

·

Customer service costs decreased $113 primarily due to reduced salaries and benefits and lower vendor and professional services from reduced call volumes.

 

Depreciation expense decreased $2, or 0.2%, in the second quarter and $82, or 4.2%, for the first six months of 2016. The decrease was primarily due to fully depreciated assets, partially offset by the ongoing capital spending for network upgrades and expansion.

 

Operating income decreased $45, or 1.7%, in the second quarter and increased $214, or 4.4%, in the first six months of 2016. Our Consumer Mobility segment operating income margin in the second quarter increased from 29.9% in 2015 to 31.4% in 2016, and for the first six months increased from 27.7% in 2015 to 30.7% in 2016. Our Consumer Mobility EBITDA margin in the second quarter increased from 40.6% in 2015 to 42.8% in 2016, and for the first six months increased from 38.7% in 2015 to 41.9% in 2016.

 

32

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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

Dollars in millions except per share and per subscriber amounts

 

International



















Segment Results




















Second Quarter



Six-Month Period



2016



2015



Percent

Change



2016



2015



Percent

Change


Segment operating revenues



















     Video entertainment


$

1,222



$




-

  %


$

2,352



$




-

 %

     Wireless



489




444 




10.1




944




659 




43.2


     Equipment



117




47 




-




199




68 




-


Total Segment Operating Revenues


$

1,828



$

491 




-



$

3,495



$

727 




-



























Segment operating expenses

























     Operations and support


$

1,723



$

529 




-



$

3,311



$

747 




-


     Depreciation and amortization



298




93 




-




575




121 




-


Total Segment Operating Expenses



2,021




622 




-




3,886




868 




-


Segment Operating Income (Loss)



(193

)



(131)




(47.3

)



(391

)



(141)




-


Equity in Net Income of Affiliates



9







-




23







-


Segment Contribution


$

(184

)


$

(131)




(40.5

) %


$

(368

)


$

(141)




-

 %

 

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

 

(in 000s)


June 30,

2016



June 30,

2015



Percent

Change


Mexican Wireless Subscribers










   Postpaid



4,570




4,144




10.3

 %

   Prepaid



5,059




3,926




28.9


Branded



9,629




8,070




19.3


Reseller



326




480




(32.1

)

Total Mexican Wireless Subscribers



9,955




8,550




16.4















Latin America Satellite Subscribers













   PanAmericana



7,175




-




-


   SKY Brazil



5,348




-




-


Total Latin America

   Satellite Subscribers 1



12,523




-




-

 %

1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At March 31, 2016, SKY Mexico had 7.7 million subscribers.

 

33

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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


(in 000s)


2016



2015



Percent

Change



2016



2015



Percent

Change


 

Mexican Wireless Net Additions



















 

   Postpaid



165







-

 %



281




32 




-

 %

 

   Prepaid



614




(161)




-




1,064




(467)




-


 

Branded Net Additions



779




(159)




-




1,345




(435)




-


 

Reseller



(37

)



(11)




-




(74

)



(23)




-


 

Mexican Wireless

   Net Subscriber Additions



742




(170)




-




1,271




(458)




-


 


























 

Latin America Satellite Net Additions

























 

   PanAmericana



81







-




109







-


 

   SKY Brazil



6







-




(95

)






-


 

Latin America Satellite

   Net Subscriber Additions 1



87







-

 %



14







-

 %

 

1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At March 31, 2016, SKY Mexico had 7.7 million subscribers and net subscriber additions of 398,000 in the first quarter of 2016.

 

Operating Results

Our International segment consists of the Latin American operations acquired in our July 2015 acquisition of DIRECTV as well as the Mexican wireless operations acquired earlier in 2015 (see Note 7). 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 $1,337 in the second quarter and $2,768 for the first six months of 2016. The increase in the second quarter and for the first six months includes $1,222 and $2,352 from video services in Latin America and increases of $115 and $416 attributable to additional wireless revenues in Mexico.

 

Operations and support expenses increased $1,194 in the second quarter and $2,564 for the first six months of 2016. 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.

 

Depreciation expense increased $205 in the second quarter and $454 for the first six months of 2016. The increase was primarily due to the acquisition of DIRECTV.

 

34

 

 

 



 

AT&T INC.

JUNE 30, 2016

 

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

Dollars in millions except per share and per subscriber amounts

Operating income  decreased $62 in the second quarter and $250 for the first six months of 2016. Our International segment operating income margin in the second quarter was (10.6)% in 2016 and (26.7)% in 2015, and for the first six months was (11.2)% in 2016 and (19.4)% in 2015. Our International EBITDA margin in the second quarter was 5.7% in 2016 and (7.7)% in 2015 and the first six months was 5.3% in 2016 and (2.8)% for 2015.

 

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).

 

                  

AT&T Mobility Results





















Second Quarter



Six-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change



 Operating revenues



















   Service


$

14,912



$

15,115




(1.3

) %


$

29,710



$

29,927




(0.7

) %

   Equipment



3,013




3,189




(5.5

)



6,169




6,563




(6.0

)

Total Operating Revenues



17,925




18,304




(2.1

)



35,879




36,490




(1.7

)


























 Operating expenses













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