Company Announcements

3Q16 10-Q

Source: RNS
RNS Number : 5061P
AT & T Inc.
17 November 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 September 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 October 31, 2016 there were 6,141 million common shares outstanding.

 

 

 



 

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

 

AT&T INC.


CONSOLIDATED STATEMENTS OF INCOME


Dollars in millions except per share amounts


(Unaudited)




Three months ended



Nine months ended




September 30,



September 30,




2016



2015



2016



2015















Operating Revenues













Service


$

37,272



$

35,539



$

111,515



$

94,042


Equipment



3,618




3,552




10,430




10,640


Total operating revenues



40,890




39,091




121,945




104,682



















Operating Expenses

















Cost of services and sales

















   Equipment



4,455




4,501




13,090




13,400


   Broadcast, programming and operations



4,909




4,081




14,239




6,351


   Other cost of services (exclusive of depreciation and

         amortization shown separately below)



9,526




9,214




28,436




27,604


Selling, general and administrative



9,013




9,107




26,363




24,535


Depreciation and amortization



6,579




6,265




19,718




15,539


Total operating expenses



34,482




33,168




101,846




87,429


Operating Income



6,408




5,923




20,099




17,253


Other Income (Expense)

















Interest expense



(1,224

)



(1,146

)



(3,689

)



(2,977

)

Equity in net income of affiliates



16




15




57




48


Other income (expense) - net



(7

)



(57

)



154




61


Total other income (expense)



(1,215

)



(1,188

)



(3,478

)



(2,868

)

Income Before Income Taxes



5,193




4,735




16,621




14,385


Income tax expense



1,775




1,657




5,803




4,784


Net Income



3,418




3,078




10,818




9,601


Less: Net Income Attributable to Noncontrolling Interest



(90

)



(84

)



(279

)



(262

)

Net Income Attributable to AT&T


$

3,328



$

2,994



$

10,539



$

9,339


Basic Earnings Per Share Attributable to AT&T


$

0.54



$

0.50



$

1.70



$

1.71


Diluted Earnings Per Share Attributable to AT&T


$

0.54



$

0.50



$

1.70



$

1.71


Weighted Average Number of Common Shares

















   Outstanding - Basic (in millions)



6,168




5,924




6,171




5,447


Weighted Average Number of Common Shares

















   Outstanding - with Dilution (in millions)



6,189




5,943




6,191




5,463


Dividends Declared Per Common Share


$

0.48



$

0.47



$

1.44



$

1.41


See Notes to Consolidated Financial Statements.

















 

2

 

 

 



 

 

AT&T INC.













CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME











Dollars in millions













(Unaudited)















Three months ended



Nine months ended




September 30,



September 30,




2016



2015



2016



2015



















Net income


$

3,418



$

3,078



$

10,818



$

9,601


Other comprehensive income (loss), net of tax:

















    Foreign Currency:

















        Foreign currency translation adjustment (includes $21,

            $(20), $21 and $(20) attributable to noncontrolling

            interest), net of taxes of $(91), $(535), $35 and $(638)



(225

)



(1,039

)



(51

)



(1,224

)

    Available-for-sale securities:

















        Net unrealized gains (losses), net of taxes of $28, $(49), $15

            and $(30)



46




(85

)



25




(51

)

        Reclassification adjustment included in net income, net of

            taxes of $(3), $2, $(3), and $(3)



(5

)



3




(5

)



(6

)

     Cash flow hedges:

















        Net unrealized gains (losses), net of taxes of $240, $(237),

            $99 and $(479)



446




(441

)



183




(890

)

        Reclassification adjustment included in net income, net of

            taxes of $5, $6, $15 and $15



10




11




29




28


     Defined benefit postretirement plans:

















        Amortization of net prior service credit included in net

            income, net of taxes of $(131), $(131), $(393) and $(393)



(215

)



(215

)



(644

)



(644

)

Other comprehensive income (loss)



57




(1,766

)



(463

)



(2,787

)

Total comprehensive income



3,475




1,312




10,355




6,814


Less: Total comprehensive income attributable to

            noncontrolling interest



(111

)



(64

)



(300

)



(242

)

Total Comprehensive Income Attributable to AT&T


$

3,364



$

1,248



$

10,055



$

6,572


See Notes to Consolidated Financial Statements.

















 

3

 

 

 



 

 

AT&T INC.


CONSOLIDATED BALANCE SHEETS


Dollars in millions except per share amounts




September 30,



December 31,




2016



2015


Assets


(Unaudited)





Current Assets







Cash and cash equivalents


$

5,895



$

5,121


Accounts receivable - net of allowances for doubtful accounts of $650 and $704



16,855




16,532


Prepaid expenses



1,333




1,072


Other current assets



13,291




13,267


Total current assets



37,374




35,992


Property, plant and equipment



316,261




306,227


   Less: accumulated depreciation and amortization



(192,339

)



(181,777

)

Property, Plant and Equipment - Net



123,922




124,450


Goodwill



105,271




104,568


Licenses



94,241




93,093


Customer Lists and Relationships - Net



15,227




18,208


Other Intangible Assets - Net



8,734




9,409


Investments in Equity Affiliates



1,679




1,606


Other Assets



16,527




15,346


Total Assets


$

402,975



$

402,672











Liabilities and Stockholders' Equity









Current Liabilities









Debt maturing within one year


$

7,982



$

7,636


Accounts payable and accrued liabilities



28,849




30,372


Advanced billing and customer deposits



4,637




4,682


Accrued taxes



2,686




2,176


Dividends payable



2,948




2,950


Total current liabilities



47,102




47,816


Long-Term Debt



117,239




118,515


Deferred Credits and Other Noncurrent Liabilities









Deferred income taxes



59,649




56,181


Postemployment benefit obligation



33,483




34,262


Other noncurrent liabilities



20,899




22,258


Total deferred credits and other noncurrent liabilities



114,031




112,701











Stockholders' Equity









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









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



6,495




6,495


Additional paid-in capital



89,536




89,763


Retained earnings



35,319




33,671


Treasury stock (354,467,711 at September 30, 2016 and 350,291,239









   at December 31, 2015, at cost)



(12,589

)



(12,592

)

Accumulated other comprehensive income



4,850




5,334


Noncontrolling interest



992




969


Total stockholders' equity



124,603




123,640


Total Liabilities and Stockholders' Equity


$

402,975



$

402,672


See Notes to Consolidated Financial Statements.









 

4

 

 

 



 

 

AT&T INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


Dollars in millions


(Unaudited)









Nine months ended




September 30,




2016



2015


Operating Activities







Net income


$

10,818



$

9,601


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









   Depreciation and amortization



19,718




15,539


   Undistributed earnings from investments in equity affiliates



(22

)



(36

)

   Provision for uncollectible accounts



1,036




895


   Deferred income tax expense



3,011




1,539


   Net gain from sale of investments, net of impairments



(88

)



(46

)

Changes in operating assets and liabilities:









   Accounts receivable



(1,108

)



737


   Other current assets



1,805




546


   Accounts payable and accrued liabilities



(1,173

)



1,332


   Equipment installment receivables and related sales



207




(1,682

)

   Deferred fulfillment costs



(1,883

)



(884

)

Retirement benefit funding



(770

)



(595

)

Other - net



(2,349

)



(251

)

Total adjustments



18,384




17,094


Net Cash Provided by Operating Activities



29,202




26,695











Investing Activities









Capital expenditures:









   Purchase of property and equipment



(15,283

)



(13,356

)

   Interest during construction



(669

)



(566

)

Acquisitions, net of cash acquired



(2,922

)



(30,694

)

Dispositions



184




79


Sale of securities, net



501




1,490


Net Cash Used in Investing Activities



(18,189

)



(43,047

)










Financing Activities









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



-




(1

)

Issuance of long-term debt



10,140




33,967


Repayment of long-term debt



(10,688

)



(9,962

)

Purchase of treasury stock



(444

)



-


Issuance of treasury stock



137




133


Dividends paid



(8,850

)



(7,311

)

Other



(534

)



(2,875

)

Net Cash (Used in) Provided by Financing Activities



(10,239

)



13,951


Net increase (decrease) in cash and cash equivalents



774




(2,401

)

Cash and cash equivalents beginning of year



5,121




8,603


Cash and Cash Equivalents End of Period


$

5,895



$

6,202


Cash paid during the nine months ended September 30 for:









   Interest


$

4,430



$

3,462


   Income taxes, net of refunds


$

3,166



$

873


See Notes to Consolidated Financial Statements.


 

5

 

 

 



 

AT&T INC.


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


Dollars and shares in millions except per share amounts


(Unaudited)




September 30, 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







(207

)

Change related to acquisition of interests held by noncontrolling owners







23


Balance at end of period






$

89,536











Retained Earnings









Balance at beginning of year






$

33,671


Net income attributable to AT&T ($1.70 per diluted share)







10,539


Dividends to stockholders ($1.44 per share)







(8,891

)

Balance at end of period






$

35,319











Treasury Stock









Balance at beginning of year



(350

)


$

(12,592

)

Repurchase and acquisition of common stock



(14

)



(566

)

Issuance of treasury stock



10




569


Balance at end of period



(354

)


$

(12,589

)










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







(484

)

Balance at end of period






$

4,850











Noncontrolling Interest









Balance at beginning of year






$

969


Net income attributable to noncontrolling interest







279


Distributions







(252

)

Acquisition of interest held by noncontrolling owners







(25

)

Translation adjustments attributable to noncontrolling interest, net of taxes







21


Balance at end of period






$

992











Total Stockholders' Equity at beginning of year






$

123,640


Total Stockholders' Equity at end of period






$

124,603


See Notes to Consolidated Financial Statements.









 

6

 

 

 



 

 

AT&T INC.

SEPTEMBER 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. The consolidated statements of cash flows include revisions to present "Equipment installment receivables and related sales" and "Deferred fulfillment costs" separately from "Other - net" and previously reported changes in operating assets and liabilities.

 

Cash Flows  In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15, "Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments" (ASU 2016-15), which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption. The majority of the guidance in ASU 2016-15 is consistent with our current cash flow classifications. However, cash receipts on the deferred purchase price described in Note 8 will be classified as cash flows from investing activities instead of our current presentation as cash flow from operations. Under ASU 2016-15, we will continue to recognize cash receipts on owned equipment installment receivables as cash from operations. AT&T's cash flows from operating activities included cash receipts on the deferred purchase price of $534 for the nine months ended September 30, 2016, and $536 for the year ended December 31, 2015.

 

Leases  In February 2016, the 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 and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP.

 

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

 

Revenue Recognition  In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09) and has modified the standard thereafter. 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.

 

 

7

 

 

 



 

 

AT&T INC.

SEPTEMBER 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  - Continued

Dollars in millions except per share amounts

 

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.

 

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 made in 2015, we believe that the requirement to defer such costs under the new standard 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 amortization period to approximately 4.5 years. This change in accounting estimate decreased other cost of services and impacted net income $79, or $0.01 per diluted share, in the third quarter of 2016 and $161, or $0.03 per diluted share, for the nine months ended September 30, 2016.

 

NOTE 2. EARNINGS PER SHARE

 

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

 



Three months ended



Nine months ended




September 30,



September 30,




2016



2015



2016



2015


Numerators













Numerator for basic earnings per share:













   Net Income


$

3,418



$

3,078



$

10,818



$

9,601


   Less:  Net income attributable to noncontrolling interest



(90

)



(84

)



(279

)



(262

)

   Net Income attributable to AT&T



3,328




2,994




10,539




9,339


   Dilutive potential common shares:

















      Share-based payment



3




3




9




9


Numerator for diluted earnings per share


$

3,331



$

2,997



$

10,548



$

9,348


Denominators (000,000)

















Denominator for basic earnings per share:

















   Weighted average number of common shares outstanding



6,168




5,924




6,171




5,447


   Dilutive potential common shares:

















      Share-based payment (in shares)



21




19




20




16


Denominator for diluted earnings per share



6,189




5,943




6,191




5,463


Basic earnings per share attributable to AT&T


$

0.54



$

0.50



$

1.70



$

1.71


Diluted earnings per share attributable to AT&T


$

0.54



$

0.50



$

1.70



$

1.71


 

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.

 

8

 

 

 



 

 

AT&T INC.

SEPTEMBER 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  - Continued

Dollars in millions except per share amounts

 

Following our 2015 acquisitions of DIRECTV and wireless properties 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 17.6%, the Argentine peso exchange rate has depreciated 18.4% and the Mexican peso exchange rate has depreciated 12.7%.

 


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


(72)



25



183



-



136

Amounts reclassified

   from accumulated OCI


-

1


(5)

1


29

2


(644)

3


(620)

Net other comprehensive

   income (loss)


(72)



20



212



(644)



(484)

Balance as of September 30,

   2016

$

(1,270)


$

504


$

228


$

5,388


$

4,850


















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


(1,204)



(51)



(890)



-



(2,145)

Amounts reclassified

   from accumulated OCI


-

1


(6)

1


28

2


(644)

3


(622)

Net other comprehensive

   income (loss)


(1,204)



(57)



(862)



(644)



(2,767)

Balance as of September 30,

   2015

$

(1,230)


$

442


$

(121)


$

6,203


$

5,294

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

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

3 The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).

 

NOTE 4. SEGMENT INFORMATION

 

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our 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.

 

9

 

 

 



 

 

AT&T INC.

SEPTEMBER 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  - Continued

Dollars in millions except per share amounts

 

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.

 

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 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.

SEPTEMBER 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  - Continued

Dollars in millions except per share amounts

 

For the three months ended September 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


$

17,767



$

10,925



$

6,842



$

2,539



$

4,303



$

-



$

4,303


 

Entertainment Group



12,720




9,728




2,992




1,504




1,488




-




1,488


 

Consumer Mobility



8,267




4,751




3,516




944




2,572




-




2,572


 

International



1,879




1,640




239




293




(54

)



1




(53

)

 

Segment Total



40,633




27,044




13,589




5,280




8,309



$

1



$

8,310


 

Corporate and Other



270




270




-




17




(17

)









 

Acquisition-related items



-




290




(290

)



1,282




(1,572

)









 

Certain significant items



(13

)



299




(312

)



-




(312

)









 

AT&T Inc.


$

40,890



$

27,903



$

12,987



$

6,579



$

6,408










 






























 

For the nine months ended September 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


$

52,955



$

32,584



$

20,371



$

7,568



$

12,803



$

-



$

12,803


 

Entertainment Group



38,089




28,875




9,214




4,481




4,733




1




4,734


 

Consumer Mobility



24,781




14,343




10,438




2,798




7,640




-




7,640


 

International



5,374




4,951




423




868




(445

)



24




(421

)

 

Segment Total



121,199




80,753




40,446




15,715




24,731



$

25



$

24,756


 

Corporate and Other



759




940




(181

)



54




(235

)









 

Acquisition-related items



-




818




(818

)



3,949




(4,767

)









 

Certain significant items



(13

)



(383

)



370




-




370










 

AT&T Inc.


$

121,945



$

82,128



$

39,817



$

19,718



$

20,099










 

 

 

11

 

 

 



 

 

AT&T INC.

SEPTEMBER 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  - Continued

Dollars in millions except per share amounts

 

For the three months ended September 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


$

17,692



$

10,921



$

6,771



$

2,474



$

4,297



$

-



$

4,297


 

Entertainment Group



10,858




8,450




2,408




1,389




1,019




2




1,021


 

Consumer Mobility



8,784




5,065




3,719




976




2,743




-




2,743


 

International



1,526




1,384




142




225




(83

)



(4

)



(87

)

 

Segment Total



38,860




25,820




13,040




5,064




7,976



$

(2

)


$

7,974


 

Corporate and Other



316




315




1




3




(2

)









 

Acquisition-related items



(85

)



611




(696

)



1,198




(1,894

)









 

Certain significant items



-




157




(157

)



-




(157

)









 

AT&T Inc.


$

39,091



$

26,903



$

12,188



$

6,265



$

5,923










 






























 

For the nine months ended September 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


$

52,913



$

32,966



$

19,947



$

7,276



$

12,671



$

-



$

12,671


 

Entertainment Group



22,300




18,222




4,078




3,519




559




(16

)



543


 

Consumer Mobility



26,317




15,808




10,509




2,912




7,597




-




7,597


 

International



2,253




2,131




122




346




(224

)



(4

)



(228

)

 

Segment Total



103,783




69,127




34,656




14,053




20,603



$

(20

)


$

20,583


 

Corporate and Other



984




785




199




47




152










 

Acquisition-related items



(85

)



1,604




(1,689

)



1,439




(3,128

)









 

Certain significant items



-




374




(374

)



-




(374

)









 

AT&T Inc.


$

104,682



$

71,890



$

32,792



$

15,539



$

17,253










 

 

 

12

 

 

 



 

 

AT&T INC.

SEPTEMBER 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.















 



Third Quarter



Nine-Month Period


 



2016



2015



2016



2015


 

Business Solutions


$

4,303



$

4,297



$

12,803



$

12,671


 

Entertainment Group



1,488




1,021




4,734




543


 

Consumer Mobility



2,572




2,743




7,640




7,597


 

International



(53

)



(87

)



(421

)



(228

)

 

Segment Contribution



8,310




7,974




24,756




20,583


 

Reconciling Items:

















 

  Corporate and Other



(17

)



(2

)



(235

)



152


 

  Merger and integration items



(290

)



(696

)



(818

)



(1,689

)

 

  Amortization of intangibles acquired



(1,282

)



(1,198

)



(3,949

)



(1,439

)

 

  Employee separation charges



(260

)



(122

)



(314

)



(339

)

 

  Gain (loss) on wireless spectrum transactions



(22

)



-




714




-


 

  Other



(30

)



(35

)



(30

)



(35

)

 

  Segment equity in net (income) loss

    of affiliates



(1

)



2




(25

)



20


 

AT&T Operating Income



6,408




5,923




20,099




17,253


 

Interest expense



1,224




1,146




3,689




2,977


 

Equity in net income of affiliates



16




15




57




48


 

Other income (expense) - net



(7

)



(57

)



154




61


 

Income Before Income Taxes


$

5,193



$

4,735



$

16,621



$

14,385


 

 

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 $8,630 at September 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 $420 to the trust during the nine months ended September 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 dates of our federal income tax return for 2015 and 2016. Both such contributions, totaling $350, were made in September 2016.

 

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.

SEPTEMBER 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  - Continued

Dollars in millions except per share amounts

 



Three months ended



Nine months ended




September 30,



September 30,




2016



2015



2016



2015


Pension cost:













   Service cost - benefits earned during the period


$

278



$

305



$

834



$

904


   Interest cost on projected benefit obligation



495




477




1,485




1,424


   Expected return on assets



(778

)



(832

)



(2,336

)



(2,484

)

   Amortization of prior service credit



(26

)



(25

)



(77

)



(77

)

   Net pension (credit) cost


$

(31

)


$

(75

)


$

(94

)


$

(233

)


















Postretirement cost:

















   Service cost - benefits earned during the period


$

48



$

55



$

144



$

166


   Interest cost on accumulated postretirement benefit obligation



243




242




729




725


   Expected return on assets



(88

)



(105

)



(266

)



(315

)

   Amortization of prior service credit



(320

)



(320

)



(958

)



(959

)

   Net postretirement (credit) cost


$

(117

)


$

(128

)


$

(351

)


$

(383

)


















   Combined net pension and postretirement (credit) cost


$

(148

)


$

(203

)


$

(445

)


$

(616

)

 

The decrease in the combined net pension and postretirement credit of $55 in the third quarter and $171 for the first nine 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 third quarter ended 2016 and 2015, net supplemental pension benefits costs not included in the table above were $23 and $22. For the first nine months of 2016 and 2015, net supplemental pension benefit costs were $70 and $63.

 

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.

SEPTEMBER 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:

 


September 30, 2016


December 31, 2015



Carrying


Fair


Carrying


Fair



Amount


Value


Amount


Value


Notes and debentures1

$

123,962



$

137,894



$

124,847



$

128,993


Bank borrowings


4




4




4




4


Investment securities


2,622




2,622




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 September 30, 2016 and December 31, 2015:

 



September 30, 2016




Level 1



Level 2



Level 3



Total


 

Available-for-Sale Securities













 

   Domestic equities


$

1,171



$

-



$

-



$

1,171


 

   International equities



571




-




-




571


 

   Fixed income bonds



-




611




-




611


 

Asset Derivatives1

















 

   Interest rate swaps



-




145




-




145


 

   Cross-currency swaps



-




151




-




151


 

Liability Derivatives1

















 

   Cross-currency swaps



-




(3,260

)



-




(3,260

)

 

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.

SEPTEMBER 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 Derivatives1

















 

   Interest rate swaps



-




136




-




136


 

   Cross-currency swaps



-




556




-




556


 

   Foreign exchange contracts



-




3




-




3


 

Liability Derivatives1

















 

   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 $87 have maturities of less than one year, $277 within one to three years, $65 within three to five years and $182 for five or more years.

 

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

 

Derivative Financial Instruments

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

 

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

 

16

 

 

 



 

 

AT&T INC.

SEPTEMBER 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 nine months ended September 30, 2016 and September 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 nine months ended September 30, 2016 and September 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 September 30, 2016, we had posted collateral of $2,369 (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 September, we would have been required to post additional collateral of $162. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P), we would owe an additional $278. 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:

 



September 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.

SEPTEMBER 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


Nine months ended



 

September 30,


September 30,




 

2016


2015


2016


2015




 

Interest rate swaps (Interest expense):















 

     Gain (Loss) on interest rate swaps


$

(54

)


$

54



$

17



$

65




 

     Gain (Loss) on long-term debt



54




(54

)



(17

)



(65

)



 

 

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

 



Three months ended



Nine months ended




September 30,



September 30,


Cash Flow Hedging Relationships


2016



2015



2016



2015


Cross-currency swaps:













     Gain (Loss) recognized in accumulated OCI


$

686



$

(678

)


$

282



$

(1,008

)


















Interest rate locks:

















     Gain (Loss) recognized in accumulated OCI



-




-




-




(361

)

     Interest income (expense) reclassified from

        accumulated OCI into income



(15

)



(17

)



(44

)



(43

)

 

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.

SEPTEMBER 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.

SEPTEMBER 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 September 30, 2016 and December 31, 2015, gross equipment installment receivables of $5,015 and $5,719 were included on our consolidated balance sheets, of which $3,053 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 $3,496.

 

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

 


Three months ended


Nine months ended



September 30,


September 30,



2016


2015


2016


2015


Gross receivables sold


$

1,485



$

1,601



$

5,812



$

5,964


Net receivables sold1



1,336




1,431




5,263




5,367


Cash proceeds received



891




980




3,538




3,553


Deferred purchase price recorded



463




456




1,745




1,819


1 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).

 

The following table shows the equipment installment receivables, previously sold to the Purchasers, that we repurchased in exchange for the associated deferred purchase price during the three months and nine months ended September 30, 2016 and 2015:

 


Three months ended


Nine months ended



September 30,


September 30,



2016


2015


2016


2015


Fair value of repurchased receivables


$

749



$

412



$

1,281



$

412


Carrying value of deferred purchase price



722




314




1,261




314


Gain on repurchases1


$

27



$

98



$

20



$

98


1 These gains are included in "Selling, general and administrative" in the consolidated statements of income.


 

At September 30, 2016 and December 31, 2015, our deferred purchase price receivable was $3,022 and $2,961, respectively, of which $1,561 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.

 

 

20

 

 

 



 

 

AT&T INC.

SEPTEMBER 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  - Continued

Dollars in millions except per share amounts

 

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.

 

NOTE 9. SUBSEQUENT EVENT

Pending Acquisition

On October 22, 2016, we announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at September 30, 2016, the total transaction value is approximately $108,700. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares (exchange ratio) of AT&T common stock based on the average stock price at the time of closing the Merger. If the average stock price is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash. As further discussed below, we have an 18-month commitment for an unsecured bridge term facility (Bridge Loan) for $40,000.

Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium content that connects with audiences around the world, with our extensive customer relationships, world's largest pay TV subscriber base and leading scale in TV, mobile and broadband distribution.

The Merger Agreement must be adopted by Time Warner shareholders and is subject to review by the U.S. Department of Justice and if certain FCC licenses remain with Time Warner at closing, those are subject to FCC review and approval. It is also a condition to closing that necessary consents from certain public utility commissions and foreign governmental entities must be obtained. The transaction is expected to close before year end 2017. If the Merger is terminated as a result of reaching the termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances we would be obligated to pay Time Warner $500.

 

Bridge Loan

On October 22, 2016, in connection with entering into the Merger Agreement, AT&T entered into the Bridge Loan with JPMorgan Chase Bank, N.A., as agent, and JPMorgan Chase Bank, N.A. and Bank of America, N.A., as lenders.

 

In the event advances are made under the Bridge Loan, those advances would be used solely to finance a portion of the cash consideration to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related fees and expenses. We have not drawn on this facility.

 

The obligations of the lenders under the Bridge Loan to provide advances will terminate on the earliest of (i) the Termination Date (as defined in the Merger Agreement), (ii) the consummation of the transactions contemplated by the Merger Agreement without the borrowing of advances under the Bridge Loan and (iii) the termination of the Merger Agreement.

 

 

21

 

 

 



 

 

AT&T INC.

SEPTEMBER 30, 2016

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  - Continued

Dollars in millions except per share amounts

 

Advances would bear interest, at the Company's option, either:

 


at a variable annual rate equal to: (1) the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) 0.5% per annum above the federal funds rate, and (c) the London Interbank Offered Rate (LIBOR) rate applicable to dollars for a period of one month plus 1.00%, plus (2) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Base Advances"); or

 


at a rate equal to: (i) LIBOR (adjusted upwards to reflect any bank reserve costs) for a period of one, two, three or six months, as applicable, plus (ii) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Eurodollar Rate Advances").

 

The Applicable Margin for Eurodollar Rate Advances will be equal to 0.750%, 1.000%, 1.125%, 1.250% or 1.500% per annum depending on the Company's unsecured long-term debt ratings. The Applicable Margin for Base Advances will be equal to the greater of (x) 0.00% and (y) the relevant Applicable Margin for Eurodollar Rate Advances minus 1.00% per annum, depending on the Company's unsecured long-term debt ratings.

 

The Applicable Margin for Eurodollar Rate Advances and the Applicable Margin for Base Advances are scheduled to increase by an additional 0.25% on the 90th day after the closing of the Merger and another 0.25% every 90 days thereafter.

 

The Company will also pay a commitment fee (Commitment Fee) of 0.070%, 0.090%, 0.100%, 0.125% or 0.175% of the commitment amount per annum, depending on the Company's unsecured long-term debt ratings.

 

The Company is scheduled to pay a duration fee of 0.50%, 0.75% and 1.00% on the amount of advances outstanding as of the 90th, 180th and 270th day after advances are made.

 

The Bridge Loan contains provisions requiring the reduction of the commitments of the lenders and the prepayment of outstanding advances by the amount of net cash proceeds resulting from the incurrence of certain indebtedness by the Company or its subsidiaries, the issuance of certain capital stock by the Company or its subsidiaries and non-ordinary course sales or dispositions of assets by the Company or its subsidiaries, in each case subject to exceptions set forth in the Bridge Loan.

 

Advances under the Bridge Loan are conditioned on the absence of a material adverse effect on Time Warner and certain customary events, and repayment of all advances must be made no later than 364 days after the date on which the advances are made.

 

The Bridge Loan contains covenants that are customary for an issuer with an investment grade senior debt credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other modifications described in the Bridge Loan) financial ratio covenant that the Company will maintain, as of the last day of each fiscal quarter of not more than 3.5-to-1.

 

The events of default contained in the Bridge Loan are customary for an agreement of this type and such events would result in the acceleration of, or would permit the lenders to accelerate, as applicable, required payments and would increase the Applicable Margin by 2.00% per annum.

 

Prior to the closing date of the Merger, only a payment or bankruptcy event of default would permit the lenders to terminate their commitments under the Bridge Loan.

 

22

 

 

 



 

 

AT&T INC.

SEPTEMBER 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), our third-quarter 2015 results include 68 days of DIRECTV-related operations compared with a full quarter in 2016.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 third quarter and for the first nine months of 2016 and 2015 are summarized as follows:

 

                  



Third Quarter



Nine-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


 


 

Operating Revenues



















 

   Service


$

37,272



$

35,539




4.9

%


$

111,515



$

94,042




18.6

%

 

   Equipment



3,618




3,552




1.9




10,430




10,640




(2.0

)

 

Total Operating Revenues



40,890




39,091




4.6




121,945




104,682




16.5


 


























 

Operating expenses

























 

   Cost of services and sales

























 

      Equipment



4,455




4,501




(1.0

)



13,090




13,400




(2.3

)

 

      Broadcast, programming and

        operations



4,909




4,081




20.3




14,239




6,351




-


 

      Other cost of services



9,526




9,214




3.4




28,436




27,604




3.0


 

   Selling, general and administrative



9,013




9,107




(1.0

)



26,363




24,535




7.5


 

   Depreciation and amortization



6,579




6,265




5.0




19,718




15,539




26.9


 

Total Operating Expenses



34,482




33,168




4.0




101,846




87,429




16.5


 

Operating Income



6,408




5,923




8.2




20,099




17,253




16.5


 

Income Before Income Taxes



5,193




4,735




9.7




16,621




14,385




15.5


 

Net Income



3,418




3,078




11.0




10,818




9,601




12.7


 

Net Income Attributable to AT&T


$

3,328



$

2,994




11.2

%


$

10,539



$

9,339




12.8

%

 

 

Overview

 

Operating revenues increased $1,799, or 4.6%, in the third quarter and $17,263, or 16.5%, for the first nine months of 2016.

 

Service revenues increased $1,733, or 4.9%, in the third quarter and $17,473, or 18.6%, for the first nine months of 2016. The increases were primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic business service revenues. These were partially offset by continued declines in our legacy wireline voice and data products and lower wireless revenues resulting from more customers choosing to purchase devices through installment payment agreements, which entitle them to lower monthly service rates under our wireless Mobile Share plans.

 

23

 

 

 



 

 

AT&T INC.

SEPTEMBER 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 increased $66, or 1.9%, in the third quarter and decreased $210, or 2.0%, for the first nine months of 2016. The increase in the third quarter was primarily due to nonrecurring customer premises equipment contracts within our Business Solutions segment. The decline for the first nine months reflects additional promotional offers and fewer wireless handset sales during 2016, partially offset by the sale of higher priced devices and an increase in customers purchasing devices on installment.

 

Operating expenses increased $1,314, or 4.0%, in the third quarter and $14,417, or 16.5%, for the first nine months of 2016.

 

Equipment expenses decreased $46, or 1.0%, in the third quarter and $310, or 2.3%, for the first nine months of 2016. The decreases were primarily driven by lower domestic wireless sales volumes. The decrease for the first nine months was also impacted by promotional offers and vendor incentives, partially offset by increased sales volumes to our international wireless customers.

 

Broadcast, programming and operations expenses increased $828, or 20.3%, in the third quarter and $7,888 for the first nine months of 2016 due to our acquisition of DIRECTV and higher content costs. These increases were slightly offset by fewer AT&T U-verse ®  (U-verse) subscribers.

 

Other cost of services expenses increased $312, or 3.4%, in the third quarter and increased $832, or 3.0%, for the first nine months of 2016. The increase in the third quarter was primarily due to our acquisition of DIRECTV, lower federal Connect America and High Cost Funds' receipts in 2016 and 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, lower net expenses associated with our deferral and amortization of customer fulfillment costs and a decline in network and access charges.

 

The increase for the first nine months was primarily due to our acquisitions of DIRECTV and Mexican wireless properties. Also contributing to higher expenses were costs associated with Universal Service Fund (USF) fees and financing-related benefit costs. These increases were partially offset by prior year network rationalization charges, lower net expenses associated with fulfillment cost deferrals and a decline in network and access charges.

 

Selling, general and administrative expenses decreased $94, or 1.0%, in the third quarter and increased $1,828, or 7.5%, for the first nine months of 2016. The decrease in the third quarter was primarily due to lower customer support costs and bad debt reserves related to our wireless operations, partially offset by higher employee separation charges.

 

The increase for the first nine months was primarily due to our acquisitions in 2015 and increased advertising activity throughout 2016, partially offset by lower wireless commission expenses. The increase for the first nine months was also offset by noncash net gains of $714 on wireless spectrum transactions.

 

Depreciation and amortization expense increased $314, or 5.0%, in the third quarter and $4,179, or 26.9%, for the first nine months of 2016. Amortization expense increased $85, or 7.1%, in the third quarter and $2,510 for the first nine months of 2016 due to the amortization of intangibles from recent acquisitions.

 

Depreciation expense increased $229, or 4.5%, in the third quarter and $1,669, or 11.8%, for the first nine months of 2016. The increase was primarily due to previously mentioned acquisitions and ongoing capital spending for network upgrades and accelerating depreciation related to the expected year-end 2016 shutdown of our U.S. 2G network.

 

Operating income increased $485, or 8.2%, in the third quarter and $2,846, or 16.5%, for the first nine months of 2016. Our operating income margin in the third quarter increased from 15.2% in 2015 to 15.7% in 2016, and the first nine months was flat at 16.5% in 2015 and 2016.

 

Interest expense increased $78, or 6.8%, in the third quarter and $712, or 23.9%, for the first nine 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 nine months was slightly offset by higher capitalized interest resulting from the spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note 7).

 

24

 

 

 



 

 

AT&T INC.

SEPTEMBER 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 increased $1, or 6.7%, in the third quarter and $9, or 18.8%, for the first nine 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 expense of $7 in the third quarter and other income of $154 for the first nine months of 2016, compared to other expense of $57 in the third quarter and other income of $61 for the first nine months of 2015. Results in the third quarter and for the first nine months of 2016 included net gains on the sale of non-strategic assets and investments of $3 and $88 and interest and dividend income of $24 and $91.

 

Other income (expense) in the third quarter and for the first nine months of 2015 included net (losses) gains on the sale of non-strategic assets and investments of $(4) and $46, interest and dividend income of $29 and $74 and foreign exchange losses of $73 and $68.

 

Income taxes increased $118, or 7.1%, in the third quarter and $1,019, or 21.3%, for the first nine months of 2016. Our effective tax rate was 34.2% for the third quarter and 34.9% for the first nine months of 2016, as compared to 35.0% for the third quarter and 33.3% for the first nine months of 2015. The increases in income tax expense for the third quarter and the first nine 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 a lower effective tax rate for the first nine months of 2015.

 

25

 

 

 



 

 

AT&T INC.

SEPTEMBER 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

 

Selected Financial and Operating Data









September 30,


Subscribers and connections in (000s)


2016



2015


Domestic wireless subscribers



133,338




126,406


Mexican wireless subscribers



10,698




8,091


North American wireless subscribers



144,036




134,497











North American branded subscribers



100,821




95,305


North American branded net additions



3,881




1,405











Domestic satellite video subscribers



20,777




19,570


U-verse video subscribers



4,544




5,880


Latin America satellite video subscribers1



12,476




12,544


Total video subscribers



37,797




37,994











Total domestic broadband connections



15,618




15,832











Network access lines in service



14,603




17,352


U-verse VoIP connections



5,707




5,443











Debt ratio2



50.1

%



50.8

%

Net Debt ratio3



47.8

%



48.3

%

Ratio of earnings to fixed charges4



3.91




3.85


Number of AT&T employees



273,140




281,240


1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At June 30, 2016, SKY Mexico had 7.8 million subscribers.

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

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

4 See Exhibit 12.

 

Segment Results

 

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our 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.

 

 

26

 

 

 



 

 

AT&T INC.

SEPTEMBER 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

 

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."

 

27

 

 

 



 

 

AT&T INC.

SEPTEMBER 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



















 



Third Quarter



Nine-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


 


 

Segment operating revenues



















 

     Wireless service


$

8,049



$

7,732




4.1

%


$

23,867



$

23,003




3.8

%

 

     Fixed strategic services



2,888




2,646




9.1




8,447




7,745




9.1


 

     Legacy voice and data services



4,046




4,616




(12.3

)



12,567




14,081




(10.8

)

 

     Other service and equipment



908




885




2.6




2,652




2,585




2.6


 

     Wireless equipment



1,876




1,813




3.5




5,422




5,499




(1.4

)

 

Total Segment Operating Revenues



17,767




17,692




0.4




52,955




52,913




0.1


 


























 

Segment operating expenses

























 

     Operations and support



10,925




10,921




-




32,584




32,966




(1.2

)

 

     Depreciation and amortization



2,539




2,474




2.6




7,568




7,276




4.0


 

Total Segment Operating Expenses



13,464




13,395




0.5




40,152




40,242




(0.2

)

 

Segment Operating Income



4,303




4,297




0.1




12,803




12,671




1.0


 

Equity in Net Income of Affiliates



-




-




-




-




-




-


 

Segment Contribution


$

4,303



$

4,297




0.1

%


$

12,803



$

12,671




1.0

%

 

 

The following table highlights other key measures of performance for the Business Solutions segment:

 



September 30,



Percent


(in 000s)


2016



2015



Change


Business Wireless Subscribers










   Postpaid/Branded



50,014




47,414




5.5

%

   Reseller



58




83




(30.1

)

   Connected devices1



29,355




24,064




22.0


Total Business Wireless Subscribers



79,427




71,561




11.0















Business IP Broadband Connections



963




891




8.1

%

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


 

 

28

 

 

 



 

 

AT&T INC.

SEPTEMBER 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

 

      

      



Third Quarter



Nine-Month Period





2016



2015


Percent



2016



2015


Percent



 

(in 000s)

Change


Change










 


























 

Business Wireless Net Additions 1,4

























 

   Postpaid/Branded



191




265




(27.9

)%



509




850




(40.1

)%









 

   Reseller



1




8




(87.5

)



(34

)



14




-










 

   Connected devices2



1,290




1,602




(19.5

)



4,067




4,104




(0.9

)









 

Business Wireless Net Subscriber Additions



1,482




1,875




(21.0

)



4,542




4,968




(8.6

)









 


































 

Business Wireless Postpaid Churn 1, 3, 4



0.97%




1.05%


(8) BP




0.97%




0.95%


2 BP










 


































 

Business IP Broadband Net Additions



15




20




(25.0

)%



52




70




(25.7

)%









 

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 increased $75, or 0.4%, in the third quarter and $42, or 0.1%, for the first nine months of 2016. Revenue growth was driven by wireless service revenues and increased fixed strategic services. These increases were partially offset by continued declines in our legacy voice and data services revenues.

 

Wireless service revenues increased $317, or 4.1%, in the third quarter and $864, or 3.8%, for the first nine months of 2016. The revenue increase is primarily due to customer migrations from our Consumer Mobility segment and reflects smartphone and tablet gains.

 

At September 30, 2016, we served 79.4 million subscribers, an increase of 11.0% from the prior year. Postpaid subscribers increased 5.5% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 22.0% from the prior year reflecting growth in connected cars and business customers using tracking, monitoring and other sensor-embedded devices on their equipment.

 

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn could be negatively impacted in the future by the loss of 2G postpaid subscribers and connected devices on our 2G network. In the third quarter, business wireless postpaid churn decreased to 0.97% in 2016 from 1.05% in 2015, including 2 basis points of pressure related to the 2G network shutdown, and for the first nine months increased to 0.97% in 2016 from 0.95% in 2015, including 3 basis points of pressure related to the 2G network shutdown.

 

Fixed strategic services revenues increased $242, or 9.1%, in the third quarter and $702, or 9.1%, for the first nine months of 2016. Our revenues, which were negatively impacted by foreign exchange rates, increased in the third quarter and for the first nine months of 2016 due to: AT&T Dedicated Internet (formally known as Ethernet access to Managed Internet Services) of $58 and $173, Ethernet of $45 and $144, U-verse services of $42 and $132, and VPN of $32 and $88.

 

Legacy wired voice and data service revenues decreased $570, or 12.3%, in the third quarter and $1,514, or 10.8%, for the first nine months of 2016. Traditional data revenues in the third quarter and for the first nine months of 2016 decreased $336 and $895 and long-distance and local voice revenues decreased $224 and $600. The decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or to competitors, and the sale of certain hosting operations.

 

29

 

 

 



 

 

AT&T INC.

SEPTEMBER 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 $23, or 2.6%, in the third quarter and $67, or 2.6%, for the first nine 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 increased $63, or 3.5%, in the third quarter and decreased $77, or 1.4%, for the first nine months of 2016. The increase in the third quarter was primarily due to an increase in purchases of devices on installment payment agreements rather than the device subsidy model partially offset by a decrease in handsets sold to postpaid customers. Additionally, fewer customers upgraded their handsets during the period. The decrease for the first nine months resulted from a decrease in handsets sold to postpaid customers and increased promotional offers. The nine-month decrease was partially offset by an increase in purchases of devices on installment payment agreements rather than the device subsidy model.

 

Operations and support expenses increased $4 in the third quarter and decreased $382, or 1.2%, for the first nine 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 third quarter increase was primarily due to lower Connect America and High Cost Funds' receipts in 2016, wireless handset insurance claims due to an increase in the volume and cost of replacement phones, and wireless equipment expense. Offsetting these increases were lower employee-related costs, amortization of customer fulfillment costs (see Note 1), declines in access and advertising costs, as well as the sale of certain hosting operations.

 

The decrease for the first nine months was primarily due to declines of $115 in wireless equipment and $223 in wireless commissions costs, primarily reflecting a decrease in sales volumes. Also contributing to the decrease were lower employee-related costs and amortization of customer fulfillment costs, as well as 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, USF fees, advertising expenses, and bad debt expense driven by a higher AT&T Next SM  (AT&T Next) subscriber base.

 

Depreciation expense increased $65, or 2.6%, in the third quarter and $292, or 4.0%, for the first nine months of 2016. The increases were primarily due to ongoing capital spending for network upgrades and expansion and accelerating depreciation related to the expected year-end 2016 shutdown of our U.S. 2G network, partially offset by fully depreciated assets.

 

Operating income increased $6, or 0.1%, in the third quarter and $132, or 1.0%, for the first nine months of 2016. Our Business Solutions segment operating income margin in the third quarter decreased from 24.3% in 2015 to 24.2% in 2016, and for the first nine months increased from 23.9% in 2015 to 24.2%. Our Business Solutions EBITDA margin in the third quarter increased from 38.3% in 2015 to 38.5% in 2016, and for the first nine months increased from 37.7% in 2015 to 38.5% in 2016.

 

30

 

 

 



 

 

AT&T INC.

SEPTEMBER 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



















 



Third Quarter



Nine-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


 


 

Segment operating revenues



















 

     Video entertainment


$

9,026



$

7,162 




26.0

%


$

26,893



$

11,024 




-

%

 

     High-speed internet



1,892




1,685 




12.3




5,562




4,861 




14.4


 

     Legacy voice and data services



1,168




1,419 




(17.7

)



3,725




4,547 




(18.1

)

 

     Other service and equipment



634




592 




7.1




1,909




1,868 




2.2


 

Total Segment Operating Revenues



12,720




10,858 




17.1




38,089




22,300 




70.8


 


























 

Segment operating expenses

























 

     Operations and support



9,728




8,450 




15.1




28,875




18,222 




58.5


 

     Depreciation and amortization



1,504




1,389 




8.3




4,481




3,519 




27.3


 

Total Segment Operating Expenses



11,232




9,839 




14.2




33,356




21,741 




53.4


 

Segment Operating Income



1,488




1,019 




46.0




4,733




559 




-


 

Equity in Net Income (Loss)

   of Affiliates



-







-




1




(16)




-


 

Segment Contribution


$

1,488



$

1,021 




45.7

%


$

4,734



$

543 




-

%

 

 

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

 



September 30,



Percent


(in 000s)


2016



2015



Change


Video Connections










   Satellite



20,777




19,570




6.2

 %

   U-verse



4,515




5,854




(22.9

)

Total Video Connections



25,292




25,424




(0.5

)














Broadband Connections













   IP



12,752




12,185




4.7


   DSL



1,424




2,137




(33.4

)

Total Broadband Connections



14,176




14,322




(1.0

)














Retail Consumer Switched Access Lines



6,155




7,675




(19.8

)

U-verse Consumer VoIP Connections



5,378




5,216




3.1


Total Retail Consumer Voice Connections



11,533




12,891




(10.5

)%

 

 

31

 

 

 



 

 

AT&T INC.

SEPTEMBER 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

 

                  



Third Quarter



Nine-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


 

(in 000s)

 

Video Net Additions



















 

   Satellite1



323




26 




-

%



993




26 




-

%

 

   U-verse



(326

)



(92)




-




(1,099

)



(66)




-


 

Net Video Additions



(3

)



(66)




95.5




(106

)



(40)




-


 


























 

Broadband Net Additions

























 

   IP



156




172 




(9.3

)



396




802 




(50.6

)

 

   DSL



(161

)



(278)




42.1




(506

)



(922)




45.1


 

Net Broadband Additions



(5

)



(106)




95.3

%



(110

)



(120)




8.3

%

 

Excludes acquisition-related additions during the period. 

 

Operating revenues increased $1,862, or 17.1%, in the third quarter and $15,789, or 70.8%, for the first nine 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 offset lower revenues from legacy voice and data products.

 

As consumers continue to demand more mobile access to video, we have launched streaming access to our subscribers, including mobile access for existing satellite and U-verse subscribers. We also have created an option for customers to access most video programming on a mobile device while awaiting home installation of their video service ("walk out and watch"). At September 30, 2016, we had approximately 100,000 "walk out and watch" individuals and approximately 70% of such individuals complete the installation process and become subscribers. In the fourth quarter, we will launch our newest video streaming option that does not require either satellite or U-verse service (commonly called "Over the Top" service).

 

Video entertainment revenues increased $1,864, or 26.0%, in the third quarter and $15,869 for the first nine 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 third quarter and the first nine months of 2016, primarily due to a 22.9% decrease in U-verse video connections, when compared to 2015. At September 30, 2016, more than 80% of our video subscribers were on the DIRECTV platform.

 

High-speed internet revenues increased $207, or 12.3%, in the third quarter and $701, or 14.4%, for the first nine months of 2016. When compared to 2015, IP broadband subscribers increased 4.7%, to 12.8 million subscribers at September 30, 2016; however, third 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 $251, or 17.7%, in the third quarter and $822, or 18.1%, for the first nine months of 2016. For the period ended September 30, 2016, legacy voice and data services represented approximately 10% of our total Entertainment Group revenue compared to 13% at September 30, 2015, and reflect decreases of $149 and $489 in local voice and long-distance, and $102 and $333 in traditional data revenues. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At September 30, 2016, approximately 10% of our broadband connections were DSL compared to nearly 15% at September 30, 2015.

 

Operations and support expenses increased $1,278, or 15.1%, in the third quarter and $10,653, or 58.5%, for the first nine 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 third quarter and year-to-date Entertainment Group expenses by $1,457 and $11,380. The DIRECTV related third 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.

 

 

32

 

 

 



 

 

AT&T INC.

SEPTEMBER 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

 

In the fourth quarter, margins will be pressured by a full quarter of NFL Sunday Ticket costs, annual content cost increases and start-up costs for DIRECTV NOW.

 

Depreciation expenses increased $115, or 8.3%, in the third quarter and $962, or 27.3%, for the first nine 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.

 

Operating income increased $469, or 46.0%, in the third quarter and $4,174 for the first nine months of 2016. Our Entertainment Group segment operating income margin in the third quarter increased from 9.4% in 2015 to 11.7% in 2016, and for the first nine months increased from 2.5% in 2015 to 12.4% in 2016. Our Entertainment Group segment EBITDA margin in the third quarter increased from 22.2% in 2015 to 23.5% in 2016, and the first nine months increased from 18.3% in 2015 to 24.2% in 2016.

 

                  

Consumer Mobility



















 

Segment Results



















 



Third Quarter



Nine-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


 


 

Segment operating revenues



















 

     Service


$

6,914



$

7,363




(6.1

)%


$

20,805



$

22,019




(5.5

)%

 

     Equipment



1,353




1,421




(4.8

)



3,976




4,298




(7.5

)

 

Total Segment Operating Revenues



8,267




8,784




(5.9

)



24,781




26,317




(5.8

)

 


























 

Segment operating expenses

























 

     Operations and support



4,751




5,065




(6.2

)



14,343




15,808




(9.3

)

 

     Depreciation and amortization



944




976




(3.3

)



2,798




2,912




(3.9

)

 

Total Segment Operating Expenses



5,695




6,041




(5.7

)



17,141




18,720




(8.4

)

 

Segment Operating Income



2,572




2,743




(6.2

)



7,640




7,597




0.6


 

Equity in Net Income of Affiliates



-




-




-




-




-




-


 

Segment Contribution


$

2,572



$

2,743




(6.2

)%


$

7,640



$

7,597




0.6

 %

 

 

 

The following table highlights other key measures of performance for the Consumer Mobility segment:














September 30,



Percent


(in 000s)


2016



2015



Change


Consumer Mobility Subscribers










   Postpaid



27,374




29,257




(6.4

)%

   Prepaid



13,035




10,988




18.6


Branded



40,409




40,245




0.4


Reseller



12,566




13,647




(7.9

)

Connected devices1



936




953




(1.8

)

Total Consumer Mobility Subscribers



53,911




54,845




(1.7

)%

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


 

 

33

 

 

 



 

 

AT&T INC.

SEPTEMBER 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

 

                



Third Quarter



Nine-Month Period




2016



2015


Percent

Change



2016



2015


Percent

Change


(in 000s)

Consumer Mobility Net Additions 1, 4

















Postpaid



21




23 




(8.7

)%



89




289 




(69.2

)%

Prepaid



304




466 




(34.8

)



1,169




895 




30.6


Branded Net Additions



325




489 




(33.5

)



1,258




1,184 




6.3


Reseller



(316

)



149 




-




(1,140

)



(218)




-


Connected devices2



41







-




14




(109)




-


Consumer Mobility Net Subscriber

  Additions



50




638 




(92.2

)%



132




857 




(84.6

)%


























Total Churn1, 3, 4



2.11%




1.90%


21 BP




2.06%




1.93%


13 BP


Postpaid Churn1, 3, 4



1.19%




1.33%


(14) BP




1.17%




1.23%


(6) 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 $517, or 5.9%, in the third quarter and $1,536, or 5.8%, for the first nine 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 $449, or 6.1%, in the third quarter and $1,214, or 5.5%, for the first nine 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 $632, or 11.4%, in the third quarter and $1,775, or 10.6%, for the first nine months. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 6.8% and 5.7%, respectively. The decreases were partially offset by higher prepaid service revenues of $250 in the third quarter and $703 for the first nine months and include services sold under the Cricket brand.

 

Equipment revenue decreased $68, or 4.8%, in the third quarter and $322, or 7.5%, for the first nine months of 2016. The decreases in equipment revenues resulted from lower handset volumes and increased promotional activities, partially offset by the sale of higher priced devices and increases in devices purchased on installment payment agreements rather than the device subsidy model. We had fewer customers upgrading their handsets and more new customers bringing their own devices.

 

Operations and support expenses decreased $314, or 6.2%, in the third quarter and $1,465, or 9.3%, for the first nine 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.

 

 

34

 

 

 



 

 

AT&T INC.

SEPTEMBER 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

 

Decreased operations and support expenses in the third quarter were primarily due to the following:

·

Equipment costs decreased $110 primarily due to lower handset volumes partially offset by the sale of higher priced devices.

 

·

Bad debt expense decreased $70 primarily due to fewer expected write-offs.

 

·

Marketing and advertising costs decreased $51 due to lower media and production costs.

 

·

Network costs decreased $29 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

 

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

·

Equipment costs decreased $453 primarily due to lower handset volumes partially offset by the sale of higher priced devices.

 

·

Selling and commission expenses decreased $299 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 $225 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

 

·

Customer service costs decreased $107 primarily due to reduced salaries and benefits and lower vendor and professional services from reduced call volumes.

 

·

Bad debt expense decreased $101 primarily due to fewer expected write-offs.

 

Depreciation expense decreased $32, or 3.3%, in the third quarter and $114, or 3.9% for the first nine months of 2016. The decrease was primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion and accelerating depreciation related to the expected year-end 2016 shutdown of our U.S. 2G network.

 

Operating income decreased $171, or 6.2%, in the third quarter and increased $43, or 0.6%, for the first nine months of 2016. Our Consumer Mobility segment operating income margin in the third quarter decreased from 31.2% in 2015 to 31.1% in 2016, and for the first nine months increased from 28.9% in 2015 to 30.8% in 2016. Our Consumer Mobility EBITDA margin in the third quarter increased from 42.3% in 2015 to 42.5% in 2016, and for the first nine months increased from 39.9% in 2015 to 42.1% in 2016.

 

International



















Segment Results





















Third Quarter



Nine-Month Period




2016



2015



Percent

Change



2016



2015



Percent

Change


Segment operating revenues



















     Video entertainment


$

1,297



$

945 




37.2

%


$

3,649



$

945 




-

 %

     Wireless



484




494 




(2.0

)



1,428




1,153 




23.9


     Equipment



98




87 




12.6




297




155 




91.6


Total Segment Operating Revenues


$

1,879



$

1,526 




23.1



$

5,374



$

2,253 




-



























Segment operating expenses

























     Operations and support


$

1,640



$

1,384 




18.5



$

4,951



$

2,131 




-


     Depreciation and amortization



293




225 




30.2




868




346 




-


Total Segment Operating Expenses



1,933




1,609 




20.1




5,819




2,477 




-


Segment Operating Income (Loss)



(54

)



(83)




34.9




(445

)



(224)




(98.7

)

Equity in Net Income (Loss)

   of Affiliates



1




(4)




-




24




(4)




-


Segment Contribution


$

(53

)


$

(87)




39.1

%


$

(421

)


$

(228)




(84.6

)%

 

 

35

 

 

 



 

 

AT&T INC.

SEPTEMBER 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

 

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

 



September 30,



Percent


(in 000s)


2016



2015



Change


Mexican Wireless Subscribers










   Postpaid



4,733




4,159




13.8

 %

   Prepaid



5,665




3,487




62.5


Branded



10,398




7,646




36.0


Reseller



300




445




(32.6

)

Total Mexican Wireless Subscribers



10,698




8,091




32.2















Latin America Satellite Subscribers













   PanAmericana



7,139




7,006




1.9


   SKY Brazil



5,337




5,538




(3.6

)

Total Latin America Satellite Subscribers1



12,476