AT&T Inc. is a North American telecommunications company. In addition to telephone, data and video telecommunications, AT&T also provides mobile communications and internet services for companies, private customers and government organizations. AT&T has long had a monopoly in the United States and Canada.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from to
Commission File Number 001-8610
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
Securities registered pursuant to Section 12(b) of the Act
Name of each exchange
Title of each class
Trading Symbol(s)
on which registered
Common Shares (Par Value $1.00 Per Share)
T
New York Stock Exchange
AT&T Inc. Floating Rate Global Notes due August 3, 2020
T 20C
AT&T Inc. 1.875% Global Notes due December 4, 2020
T 20
AT&T Inc. 2.65% Global Notes due December 17, 2021
T 21B
AT&T Inc. 1.45% Global Notes due June 1, 2022
T 22B
AT&T Inc. 2.50% Global Notes due March 15, 2023
T 23
AT&T Inc. 2.75% Global Notes due May 19, 2023
T 23C
AT&T Inc. Floating Rate Global Notes due September 5, 2023
T 23D
AT&T Inc. 1.05% Global Notes due September 5, 2023
T 23E
AT&T Inc. 1.30% Global Notes due September 5, 2023
T 23A
AT&T Inc. 1.95% Global Notes due September 15, 2023
T 23F
AT&T Inc. 2.40% Global Notes due March 15, 2024
T 24A
AT&T Inc. 3.50% Global Notes due December 17, 2025
T 25
AT&T Inc. 0.250% Global Notes due March 4, 2026
T 26E
AT&T Inc. 1.80% Global Notes due September 5, 2026
T 26D
AT&T Inc. 2.90% Global Notes due December 4, 2026
T 26A
AT&T Inc. 2.35% Global Notes due September 5, 2029
T 29D
AT&T Inc. 4.375% Global Notes due September 14, 2029
T 29B
AT&T Inc. 2.60% Global Notes due December 17, 2029
T 29A
AT&T Inc. 0.800% Global Notes due March 4, 2030
T 30B
AT&T Inc. 3.55% Global Notes due December 17, 2032
T 32
AT&T Inc. 5.20% Global Notes due November 18, 2033
T 33
AT&T Inc. 3.375% Global Notes due March 15, 2034
T 34
AT&T Inc. 2.45% Global Notes due March 15, 2035
T 35
AT&T Inc. 3.15% Global Notes due September 4, 2036
T 36A
AT&T Inc. 1.800% Global Notes due September 14, 2039
T 39B
AT&T Inc. 7.00% Global Notes due April 30, 2040
T 40
AT&T Inc. 4.25% Global Notes due June 1, 2043
T 43
AT&T Inc. 4.875% Global Notes due June 1, 2044
T 44
AT&T Inc. 5.35% Global Notes due November 1, 2066
TBB
AT&T Inc. 5.625% Global Notes due August 1, 2067
TBC
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 every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
[X]
Accelerated Filer
[ ]
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
At October 31, 2019, there were 7,305 million common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
Three months ended
Nine months ended
September 30,
2019
2018
Operating Revenues
Service
$
40,317
41,297
122,024
109,849
Equipment
4,271
4,442
12,348
12,914
Total operating revenues
44,588
45,739
134,372
122,763
Operating Expenses
Cost of revenues
4,484
4,828
13,047
14,053
Broadcast, programming and operations
7,066
7,227
22,448
17,842
Other cost of revenues (exclusive of depreciation and
amortization shown separately below)
8,604
8,651
25,910
24,215
Selling, general and administrative
9,584
9,598
29,077
26,179
Depreciation and amortization
6,949
8,166
21,256
20,538
Total operating expenses
36,687
38,470
111,738
102,827
Operating Income
7,901
7,269
22,634
19,936
Other Income (Expense)
Interest expense
(2,083)
(2,051)
(6,373)
(5,845)
Equity in net income (loss) of affiliates
3
(64)
36
(71)
Other income (expense) – net
(935)
1,053
(967)
5,108
Total other income (expense)
(3,015)
(1,062)
(7,304)
(808)
Income Before Income Taxes
4,886
6,207
15,330
19,128
Income tax expense
937
1,391
3,059
4,305
Net Income
3,949
4,816
12,271
14,823
Less: Net Income Attributable to Noncontrolling Interest
(249)
(98)
(762)
(311)
Net Income Attributable to AT&T
3,700
4,718
11,509
14,512
Basic Earnings Per Share Attributable to AT&T
0.50
0.65
1.57
2.19
Diluted Earnings Per Share Attributable to AT&T
Weighted Average Number of Common Shares
Outstanding – Basic (in millions)
7,327
7,284
7,321
6,603
Outstanding – with Dilution (in millions)
7,356
7,320
7,350
6,630
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
Net income
Other comprehensive income (loss), net of tax:
Foreign currency:
Translation adjustment (includes $(17), $(7), $(15) and $(37)
attributable to noncontrolling interest), net of taxes of
$(69), $(2), $(21) and $(145)
(342)
(14)
(181)
(824)
Securities:
Net unrealized gains (losses), net of taxes of $7, $(4), $22
and $(8)
25
(10)
67
(22)
Derivative instruments:
Net unrealized gains (losses), net of taxes of $(168), $0,
$(299) and $68
(516)
4
(1,006)
257
Reclassification adjustment included in net income,
net of taxes of $2, $3, $7 and $9
7
12
24
35
Defined benefit postretirement plans:
Net prior service (cost) credit arising during period, net of taxes of $0, $0, $0 and $173
-
530
Amortization of net prior service credit included in net
income, net of taxes of $(112), $(108), $(332)
and $(322)
(343)
(332)
(1,031)
(989)
Other comprehensive income (loss)
(1,169)
(340)
(2,127)
(1,013)
Total comprehensive income
2,780
4,476
10,144
13,810
Less: Total comprehensive income attributable to
noncontrolling interest
(232)
(91)
(747)
(274)
Total Comprehensive Income Attributable to AT&T
2,548
4,385
9,397
13,536
CONSOLIDATED BALANCE SHEETS
December 31,
Assets
Current Assets
Cash and cash equivalents
6,588
5,204
Accounts receivable - net of allowances for doubtful accounts of $1,121 and $907
22,921
26,472
Prepaid expenses
1,493
2,047
Other current assets
19,693
17,704
Total current assets
50,695
51,427
Noncurrent Inventories and Theatrical Film and Television Production Costs
12,014
7,713
Property, plant and equipment
337,240
330,690
Less: accumulated depreciation and amortization
(205,924)
(199,217)
Property, Plant and Equipment – Net
131,316
131,473
Goodwill
146,106
146,370
Licenses – Net
96,026
96,144
Trademarks and Trade Names – Net
23,855
24,345
Distribution Networks – Net
15,806
17,069
Other Intangible Assets – Net
22,060
26,269
Investments in and Advances to Equity Affiliates
4,137
6,245
Operating lease right-of-use assets
24,477
Other Assets
22,304
24,809
Total Assets
548,796
531,864
Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year
11,608
10,255
Accounts payable and accrued liabilities
43,955
43,184
Advanced billings and customer deposits
6,097
5,948
Accrued taxes
2,741
1,179
Dividends payable
3,725
3,854
Total current liabilities
68,126
64,420
Long-Term Debt
153,568
166,250
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes
57,786
57,859
Postemployment benefit obligation
22,853
19,218
Operating lease liabilities
22,288
Other noncurrent liabilities
29,848
30,233
Total deferred credits and other noncurrent liabilities
132,775
107,310
Stockholders’ Equity
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2019 and
December 31, 2018: issued 7,620,748,598 at September 30, 2019 and December 31, 2018)
7,621
Additional paid-in capital
125,139
125,525
Retained earnings
59,347
58,753
Treasury stock (317,374,689 at September 30, 2019 and 339,120,073 December 31, 2018,
at cost)
(11,195)
(12,059)
Accumulated other comprehensive income
2,137
4,249
Noncontrolling interest
11,278
9,795
Total stockholders’ equity
194,327
193,884
Total Liabilities and Stockholders’ Equity
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of television and film costs
7,059
1,608
Undistributed earnings from investments in equity affiliates
81
312
Provision for uncollectible accounts
1,855
1,240
Deferred income tax expense
1,039
4,337
Net (gain) loss from investments, net of impairments
(1,014)
(501)
Pension and postretirement benefit expense (credit)
(1,297)
Actuarial (gain) loss on pension and postretirement benefits
4,048
(2,726)
Changes in operating assets and liabilities:
Receivables
2,503
(1,268)
Other current assets, inventories and theatrical film and television production costs
(9,337)
(2,729)
Accounts payable and other accrued liabilities
(936)
(1,385)
Equipment installment receivables and related sales
848
220
Deferred customer contract acquisition and fulfillment costs
(796)
(2,657)
Postretirement claims and contributions
(635)
(630)
Other - net
(220)
1,102
Total adjustments
24,454
16,699
Net Cash Provided by Operating Activities
36,725
31,522
Investing Activities
Capital expenditures:
Purchase of property and equipment
(15,683)
(16,695)
Interest during construction
(160)
(404)
Acquisitions, net of cash acquired
(1,124)
(43,116)
Dispositions
3,775
983
(Purchases), sales and settlements of securities and investments, net
523
(234)
Advances to and investments in equity affiliates, net
(333)
(1,021)
Cash collections of deferred purchase price
500
Net Cash Used in Investing Activities
(13,002)
(59,987)
Financing Activities
Net change in short-term borrowings with original maturities of three months or less
(1,071)
Issuance of other short-term borrowings
4,012
4,852
Repayment of other short-term borrowings
(4,702)
(1,075)
Issuance of long-term debt
15,034
38,325
Repayment of long-term debt
(24,368)
(43,579)
Payment of vendor financing
(2,601)
(347)
Purchase of treasury stock
(409)
(577)
Issuance of treasury stock
576
359
Issuance of preferred interests in subsidiary
1,488
Dividends paid
(11,162)
(9,775)
Other
(187)
(791)
Net Cash Used in Financing Activities
(22,341)
(13,679)
Net increase (decrease) in cash and cash equivalents and restricted cash
1,382
(42,144)
Cash and cash equivalents and restricted cash beginning of year
5,400
50,932
Cash and Cash Equivalents and Restricted Cash End of Period
6,782
8,788
6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Dollars and shares in millions except per share amounts
September 30, 2019
September 30, 2018
Shares
Amount
Common Stock
Balance at beginning of period
6,495
Issuance of stock
1,126
Balance at end of period
Additional Paid-In Capital
125,109
125,960
89,563
Issuance of common stock
35,473
(1)
(45)
(128)
(49)
Share-based payments
31
(209)
(258)
719
125,706
Retained Earnings
59,389
56,555
50,500
Net income attributable to AT&T ($0.50,
$0.65, $1.57 and $2.19 per diluted share)
Dividends to stockholders ($0.51, $0.50,
$1.53, and $1.50 per share)
(3,742)
(3,649)
(11,231)
(10,388)
Cumulative effect of accounting changes
316
3,000
57,624
Treasury Stock
(316)
(11,151)
(361)
(12,872)
(339)
(356)
(12,714)
Repurchase and acquisition of common stock
(5)
(186)
(34)
(466)
(19)
(641)
142
11
420
1,330
869
(317)
(351)
(12,486)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - continued
Accumulated Other Comprehensive
Income Attributable to AT&T, net of tax
3,289
5,716
7,017
Other comprehensive income
attributable to AT&T
(1,152)
(2,112)
(976)
Amounts reclassified to retained earnings
(658)
5,383
Noncontrolling Interest
9,824
1,150
1,146
Net income attributable to
249
98
762
311
Interest acquired by noncontrolling owners
1,498
8
Acquisition of noncontrolling interest
1
Acquisition of interests held by
noncontrolling owners
(9)
Distributions
(266)
(109)
Translation adjustments attributable to
noncontrolling interest, net of taxes
(17)
(7)
(15)
(37)
29
1,123
Total Stockholders’ Equity at beginning
of period
194,081
184,130
142,007
Total Stockholders’ Equity at end
184,971
SEPTEMBER 30, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation Throughout this document, AT&T Inc. is referred to as “we,” “AT&T” or the “Company.” The consolidated financial statements include the accounts of the Company and subsidiaries and affiliates which we control, including the operating results of Warner Media, LLC (referred to as “Time Warner” or “WarnerMedia”), which was acquired on June 14, 2018 (see Note 8). Our operating results for 2018 include the results from Time Warner following the acquisition date. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. The results for the interim periods are not necessarily indicative of those for the full year. 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.
All significant intercompany transactions are eliminated in the consolidation process. Investments in subsidiaries and partnerships which we do not control but 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.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain prior period amounts have been conformed to the current period’s presentation.
In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.
Adopted Accounting Standards and Other Changes
Leases As of January 1, 2019, we adopted, with modified retrospective application, Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842)” (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements (see Note 10). ASC 842 requires lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets. For income statement recognition purposes, leases are classified as either a finance or an operating lease without relying upon bright-line tests.
The key change upon adoption of the standard was balance sheet recognition, given that the recognition of lease expense on our income statement is similar to our historical accounting. Using the modified retrospective transition method of adoption, we did not adjust the balance sheet for comparative periods but recorded a cumulative effect adjustment to retained earnings on January 1, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward our historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements that were not accounted for as leases. We excluded leases with original terms of one year or less. Additionally, we elected to not separate lease and non-lease components for certain classes of assets in arrangements where we are the lessee and for certain classes of assets where we are the lessor. Our accounting for finance leases did not change from our prior accounting for capital leases.
The adoption of ASC 842 resulted in the recognition of an operating lease liability of $22,121 and an operating right-of-use asset of the same amount. Existing prepaid and deferred rent accruals were recorded as an offset to the right-of-use asset, resulting in a net asset of $20,960. The cumulative effect of the adoption to retained earnings was an increase of $316 reflecting the reclassification of deferred gains related to sale/leaseback transactions. The standard did not materially impact our income statements or statements of cash flows, and had no impact on our debt-covenant compliance under our current agreements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Deferral of Episodic Television and Film Costs In March 2019, the FASB issued ASU No. 2019-02, “Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials” (ASU 2019-02), which we early adopted as of January 1, 2019, with prospective application. The standard eliminates certain revenue-related constraints on capitalization of inventory costs for episodic television that existed under prior guidance. In addition, the balance sheet classification requirements that existed in prior guidance for film production costs and programming inventory were eliminated. As of January 1, 2019, we reclassified $2,274 of our programming inventory costs from “Other current assets” to “Other Assets” in accordance with the guidance. This change in accounting does not materially impact our income statement.
Spectrum Licenses in Mexico During the first quarter of 2019, in conjunction with the renewal process of certain spectrum licenses in Mexico, we reassessed the estimated economic lives and renewal assumptions for these licenses. As a result, we have changed the life of these licenses from indefinite to finite-lived. On January 1, 2019, we began amortizing our spectrum licenses in Mexico over their average remaining economic life of 25 years. This change in accounting does not materially impact our income statement.
Recently Issued Accounting Standards
Credit Loss Standard In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13, as amended), which replaces the incurred loss impairment methodology under current GAAP. ASU 2016-13 affects trade receivables, loans and other financial assets that are not subject to fair value through net income, as defined by the standard. The amendments under ASU 2016-13 will be effective for years beginning after December 15, 2019, and interim periods within those years. We are currently evaluating ASU 2016-13 but do not anticipate it will have a material impact on our financial statements.
10
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and nine months ended September 30, 2019 and 2018, is shown in the table below:
Numerators
Numerator for basic earnings per share:
Less: Net income attributable to noncontrolling interest
Net Income attributable to AT&T
Dilutive potential common shares:
Share-based payment
16
13
Numerator for diluted earnings per share
3,706
4,722
11,525
14,525
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding
Share-based payment (in shares)
27
Denominator for diluted earnings per share
Basic earnings per share attributable to AT&T
Diluted earnings per share attributable to AT&T
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated OCI are presented below. All amounts are net of tax and exclude noncontrolling interest.
Foreign Currency Translation Adjustment
Net Unrealized Gains (Losses) on Securities
Net Unrealized Gains (Losses) on Derivative Instruments
Defined Benefit Postretirement Plans
Accumulated Other Comprehensive Income
Balance as of December 31, 2018
(3,084)
(2)
818
6,517
(loss) before reclassifications
(166)
(1,105)
Amounts reclassified
from accumulated OCI
2
(1,007)
Net other comprehensive
income (loss)
(982)
Balance as of September 30, 2019
(3,250)
65
(164)
5,486
Balance as of December 31, 2017
(2,054)
660
1,402
7,009
(787)
(954)
292
(459)
Amounts reclassified to
retained earnings
Balance as of September 30, 2018
(2,841)
(20)
1,694
6,550
(Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7).
The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the
consolidated statements of income (see Note 6).
With the adoption of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Liabilities," the unrealized (gains) losses on our equity investments are reclassified to retained earnings.
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America, and (4) Xandr.
We also evaluate segment and business unit performance based on EBITDA and/or EBITDA margin, which is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
We have recast our segment results for all prior periods to exclude our wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands from our Mobility and Business Wireline business units of the Communications segment, instead reporting them with Corporate and Other. (See Note 8)
The Communications segment provides wireless and wireline telecom, video and broadband services to consumers located in the U.S. and businesses globally. This segment contains the following business units:
Mobility provides nationwide wireless service and equipment.
Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms.
Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.
The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content in various physical and digital formats globally. Historical financial results from AT&T’s Regional Sports Networks (RSNs) and equity investments (predominantly Game Show Network and Otter Media), previously included in Entertainment Group, have been reclassified into the WarnerMedia segment and are combined with the Time Warner operations for the period subsequent to our acquisition on June 14, 2018. This segment contains the following business units:
Turner primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.
Home Box Office consists of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment.
Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.
The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:
Mexico provides wireless service and equipment to customers in Mexico.
Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean.
The Xandr segment provides advertising services and includes AppNexus, an advertising technology company we acquired in August 2018. Xandr services utilize data insights to develop and deliver targeted advertising across video and digital platforms. Certain revenues in this segment are also reported by the Communications segment and are eliminated upon consolidation.
Corporate and Other reconcile our segment results to consolidated operating income and income before income taxes, and include:
Corporate, which consists of: (1) businesses no longer integral to our operations or which we no longer actively market, (2) corporate support functions, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense) – net and (5) the recharacterization of programming intangible asset amortization, for released programming acquired in the Time Warner acquisition, which we continue to report within WarnerMedia segment operating expense, to consolidated amortization expense. The programming and intangible asset amortization reclass was $108 and $772 in the third quarter and $370 and $870 for the first nine months of 2019 and 2018, respectively.
Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, including amortization of intangible assets.
Certain significant items includes (1) employee separation charges associated with voluntary and/or strategic offers, (2) losses resulting from abandonment or impairment of network assets and (3) other items for which the segments are not being evaluated.
Eliminations and consolidations, which (1) removes transactions involving dealings between our segments, including content licensing between WarnerMedia and Communications, and (2) includes adjustments for our reporting of the advertising business.
Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.
14
For the three months ended September 30, 2019
Revenues
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization
Operating
Income (Loss)
Equity in Net
Income (Loss) of
Affiliates
Segment
Contribution
Communications
Mobility
17,701
9,948
7,753
2,011
5,742
Entertainment Group
11,197
8,797
2,400
1,316
1,084
1,085
Business Wireline
6,503
4,022
2,481
1,271
1,210
1,209
Total Communications
35,401
22,767
12,634
4,598
8,036
WarnerMedia
Turner
3,007
1,460
1,547
68
1,479
1,489
Home Box Office
1,819
1,072
747
33
714
724
Warner Bros.
3,333
2,706
627
39
588
(25)
563
Eliminations and other
(313)
(242)
(252)
20
Total WarnerMedia
7,846
5,167
2,679
150
2,529
15
2,544
Latin America
Vrio
1,013
851
162
Mexico
717
774
(57)
122
(179)
Total Latin America
1,730
1,625
105
284
Xandr
504
342
327
Segment Total
45,481
29,721
15,760
5,047
10,713
28
10,741
Corporate and Other
Corporate
407
703
(296)
131
(427)
Acquisition-related items
190
(190)
1,771
(1,961)
Certain significant items
(39)
Eliminations and consolidations
(1,300)
(915)
(385)
AT&T Inc.
29,738
14,850
For the three months ended September 30, 2018
Operations and Support Expenses
Depreciation and Amortization
Operating Income (Loss)
Segment Contribution
17,735
10,104
7,631
2,057
5,574
5,575
11,589
9,155
2,434
1,331
1,103
1,104
6,683
2,661
1,187
1,474
(3)
1,471
36,007
23,281
12,726
4,575
8,151
8,150
2,988
1,487
1,501
59
1,442
1,449
1,644
991
653
628
630
3,720
3,104
616
40
(23)
553
(148)
(79)
(69)
(104)
8,204
5,503
2,701
134
2,567
2,528
877
225
168
57
66
731
(138)
129
(267)
1,833
1,746
87
297
(210)
(201)
445
109
336
333
46,489
30,639
15,850
5,009
10,841
(31)
10,810
531
141
390
829
(439)
362
(362)
2,329
(2,691)
75
(75)
(1,281)
(913)
(368)
(367)
30,304
15,435
For the nine months ended September 30, 2019
52,356
29,511
22,845
6,027
16,818
16,817
33,893
25,839
8,054
3,978
4,076
4,077
19,588
12,029
7,559
3,735
3,824
105,837
67,379
38,458
13,740
24,718
9,860
5,813
4,047
167
3,880
46
3,926
5,045
3,124
1,921
1,854
1,894
10,240
8,543
1,697
1,575
1,556
(570)
(539)
(567)
70
(497)
24,575
17,449
7,126
384
6,742
137
6,879
3,112
2,598
514
496
18
43
2,093
2,312
(219)
372
(591)
5,205
4,910
295
868
(573)
(548)
1,415
469
946
41
905
137,032
90,207
46,825
15,033
31,792
31,954
1,290
2,129
(839)
505
(1,344)
(72)
579
(651)
5,719
(6,370)
381
(381)
(3,878)
(2,814)
(1,064)
(1,063)
90,482
43,890
17
For the nine months ended September 30, 2018
51,965
29,603
22,362
6,218
16,144
34,498
26,623
7,875
3,986
3,889
3,888
20,035
12,047
7,988
3,520
4,468
4,466
106,498
68,273
38,225
13,724
24,501
24,498
3,767
1,933
1,834
71
1,763
1,802
1,925
1,162
763
30
733
734
4,227
3,507
720
54
666
(24)
642
(106)
(115)
9,709
6,496
3,213
166
3,047
(55)
2,992
3,710
2,894
816
559
281
2,099
2,459
(360)
383
(743)
5,809
5,353
456
942
(486)
(462)
1,174
218
956
952
123,190
80,340
42,850
14,836
28,014
27,980
1,636
1,832
(196)
1,034
(1,230)
750
(750)
4,669
(5,419)
(407)
(2,063)
(1,040)
(1,023)
(1,022)
82,289
40,474
The following table is a reconciliation of Segment Contributions to “Income Before Income Taxes” reported on our consolidated statements of income:
Reconciling Items:
Merger and integration items
(794)
Amortization of intangibles acquired
(1,771)
(2,329)
(5,719)
(4,669)
Employee separation charges
(259)
Natural disaster items
Segment equity in net income of affiliates
(28)
(162)
34
AT&T Operating Income
Interest Expense
Other income (expense) - net
The following table presents intersegment revenues by segment:
Intersegment Revenue Reconciliation
Intersegment revenues
812
844
2,531
Total Intersegment Revenues
821
850
1,061
Consolidations
479
431
1,002
1,300
1,281
3,878
2,063
19
NOTE 5. REVENUE RECOGNITION
Revenue Categories
The following tables set forth reported revenue by category and by business unit:
Service Revenues
Wireless
Advanced Data
Legacy Voice & Data
Subscription
Content
Advertising
Total
13,856
74
3,771
2,117
7,512
421
517
3,269
2,252
783
199
1,927
89
913
78
1,533
23
3,129
Eliminations and Other
(387)
455
262
124
227
37
Eliminations and
consolidations
(798)
(421)
(81)
Total Operating Revenues
14,435
5,399
2,886
12,065
2,317
1,523
1,692
13,751
77
3,907
2,045
739
7,882
401
518
3,053
2,602
831
197
125
944
64
1,517
3,494
186
(199)
440
291
161
307
(830)
(401)
(50)
14,352
5,111
3,348
12,403
2,715
1,505
1,863
21
41,171
212
10,973
6,296
1,969
22,872
1,170
1,580
9,649
6,973
2,430
536
5,835
335
3,440
250
4,383
655
9,636
160
(776)
1,376
437
605
116
1,218
(2,475)
(1,170)
(233)
42,984
15,985
8,962
36,429
7,375
5,136
5,153
22
40,432
11,371
5,904
23,559
1,122
1,588
9,101
8,176
2,192
566
2,363
146
1,181
1,787
136
223
(255)
1,261
838
480
958
(1,039)
(1,122)
42,173
15,044
10,521
31,473
2,937
2,558
5,143
Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire and fulfill customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from three years to five years. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.
The following table presents the deferred customer contract acquisition costs and deferred customer contract fulfillment costs included on our consolidated balance sheets:
Consolidated Balance Sheets
Deferred Acquisition Costs
2,190
1,901
2,878
2,073
Total deferred customer contract acquisition costs
5,068
3,974
Deferred Fulfillment Costs
4,589
4,090
6,640
7,450
Total deferred customer contract fulfillment costs
11,229
11,540
The following table presents deferred customer contract acquisition cost and deferred customer contract fulfillment cost amortization for the nine months ended:
Consolidated Statements of Income
Deferred acquisition cost amortization
1,565
959
Deferred fulfillment cost amortization
3,656
2,983
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration. The contract asset will decrease as services are provided and billed. For example, when installment sales include promotional discounts (e.g., “buy one get one free”) the difference between revenue recognized and consideration received is recorded as a contract asset to be amortized over the contract term.
When consideration is received in advance of the delivery of goods or services, a contract liability is recorded for deferred revenue. Reductions in the contract liability will be recorded as we satisfy the performance obligations.
The following table presents contract assets and liabilities on our consolidated balance sheets:
Contract asset
2,255
1,896
Contract liability
6,886
6,856
Our December 31, 2018 contract liability recorded as customer contract revenue during 2019 was $5,295.
Our consolidated balance sheets at September 30, 2019 and December 31, 2018 included approximately $1,496 and $1,244, respectively, for the current portion of our contract asset in “Other current assets” and $5,910 and $5,752, respectively, for the current portion of our contract liability in “Advanced billings and customer deposits.”
Remaining Performance Obligations
Remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. In determining the transaction price allocated, we do not include non-recurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year, which are primarily prepaid wireless, video and residential internet agreements.
Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $40,216, of which we expect to recognize approximately 70% by the end of 2020, with the balance recognized thereafter.
NOTE 6. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.
In first quarter of 2019, for certain management participants in our pension plan who terminated employment before April 1, 2019, we offered the option of more favorable 2018 interest rates and mortality basis for determining lump-sum distributions. During the first nine months of 2019, we have recorded special termination benefits of $81 in “Other income (expense) – net.” During 2019, we also offered certain terminated vested pension plan participants the opportunity to receive their benefit in a lump-sum amount.
We recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of “Other income (expense) – net” at our annual measurement date of December 31, unless earlier remeasurements are required. We anticipated total distributions from the pension plan would exceed the threshold of service and interest costs for 2019, requiring us to follow settlement accounting and remeasure our pension benefit obligation at each quarter-end, resulting in the recognition of actuarial losses of $432, $1,699, and $1,888 in the first, second and third quarters of 2019, respectively.
As part of our quarterly 2019 remeasurements, we decreased the weighted-average discount rate used to measure our pension benefit obligation from 4.50% at December 31, 2018 by 40 basis points each quarter to 3.30% at September 30, 2019. Our remeasurements also reflect actual returns on plan assets of 13.40% (nine-month rate). Our expected long-term rate of return on pension plan assets is an annualized 7.00% for 2019.
The following table details pension and postretirement benefit costs included in the accompanying consolidated statements of income. The service cost component of net periodic pension cost (benefit) is recorded in operating expenses in the consolidated statements of income while the remaining components are recorded in “Other income (expense) – net.”
Pension cost:
Service cost – benefits earned during the period
260
270
743
845
Interest cost on projected benefit obligation
463
551
1,520
1,542
Expected return on assets
(905)
(761)
(2,636)
(2,276)
Amortization of prior service credit
(85)
(87)
Actuarial (gain) loss
1,888
4,019
(1,796)
Net pension (credit) cost
1,678
32
3,561
(1,772)
Postretirement cost:
55
82
Interest cost on accumulated postretirement benefit obligation
185
196
557
582
(76)
(169)
(228)
(425)
(412)
(1,277)
(1,222)
(930)
Net postretirement (credit) cost
(278)
(265)
(834)
(1,716)
Combined net pension and postretirement (credit) cost
1,400
2,727
(3,488)
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental pension benefits costs not included in the table above were $24 and $24 in the third quarter and $74 and $65 for the first nine months of 2019 and 2018, respectively. During the third quarter of 2019, we recorded an actuarial loss of $29.
NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework in ASC 820, “Fair Value Measurement,” provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.
The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2018.
26
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:
December 31, 2018
Carrying
Fair
Value
Notes and debentures1
160,758
180,801
171,529
172,287
Commercial paper
2,439
3,048
Bank borrowings
Investment securities2
3,599
3,409
Includes credit agreement borrowings.
Excludes investments accounted for under the equity method.
The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
The following tables present the fair value leveling for investment securities and derivatives that are measured at fair value as of September 30, 2019 and December 31, 2018. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.
Level 1
Level 2
Level 3
Equity Securities
Domestic equities
781
International equities
171
Fixed income equities
Available-for-Sale Debt Securities
1,380
Asset Derivatives
Interest rate swaps
Cross-currency swaps
Foreign exchange contracts
Liability Derivatives
(4,553)
Interest rate locks
(225)
256
172
870
472
(2,563)
Investment Securities
Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities is estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
The components comprising total gains and losses in the period on equity securities are as follows:
Total gains (losses) recognized on equity securities
80
231
88
Gains (Losses) recognized on equity securities sold
101
(4)
Unrealized gains (losses) recognized on equity securities
held at end of period
130
92
At September 30, 2019, available-for-sale debt securities totaling $1,380 have maturities as follows - less than one year: $102; one to three years: $177; three to five years: $164; five or more years: $937.
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.
We also designate some of our foreign exchange contracts as fair value hedges. The purpose of these contracts is to hedge currency risk associated with foreign-currency-denominated operating assets and liabilities.
Accrued and realized gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged. Unrealized gains on fair value hedges are recorded at fair market value as assets, and unrealized losses are recorded at fair market value as liabilities. Changes in the fair value of derivative instruments designated as fair value hedges are offset against the change in fair value of the hedged assets or liabilities through earnings. In the nine months ended September 30, 2019 and 2018, no ineffectiveness was measured on fair value hedges.
Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our foreign-denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated interest rate to a fixed U.S. dollar denominated interest rate.
We also designate some of our foreign exchange contracts as cash flow hedges. The purpose of these contracts is to hedge currency risk associated with variability in anticipated foreign-currency-denominated cash flows, such as unremitted or forecasted royalty and license fees owed to WarnerMedia’s domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency.
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses 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 the consolidated statements of income 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 cash flow hedges each quarter. In the nine months ended September 30, 2019 and 2018, no ineffectiveness was measured on 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 from the settlement of 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 $62 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.
Net Investment Hedging We have designated €1,450 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of our subsidiaries. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated OCI, net on the consolidated balance sheet. Net gains on net investment hedges recognized in accumulated OCI in the third quarter and for the first nine months of 2019 was $43.
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, 2019, we had posted collateral of $407 (a deposit asset) and held collateral of $38 (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 $122. If AT&T’s credit rating had been downgraded four ratings levels by Fitch Ratings, two levels by S&P, and two levels by Moody’s, we would have been required to post additional collateral of
$4,502. If DIRECTV Holdings LLC’s credit rating had been downgraded below BBB- by S&P, we would have been required to post additional collateral of $288. At December 31, 2018, we had posted collateral of $1,675 (a deposit asset) and held collateral of $103 (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:
853
3,483
42,792
42,192
3,500
473
2,094
47,618
47,769
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
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps
(60)
Gain (Loss) on long-term debt
(59)
60
In addition, the net swap settlements that accrued and settled in the quarter ended September 30 were offset against interest expense.
The following table presents information for our cash flow hedging relationships:
Cash Flow Hedging Relationships
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI
(487)
(13)
(1,082)
308
Foreign exchange contracts:
Other income (expense) - net reclassified from
accumulated OCI into income
Interest rate locks:
(202)
Interest income (expense) reclassified from
(47)
(44)
NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Time Warner On June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. We paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,358, excluding Time Warner’s net debt at acquisition.
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 thus represent a Level 3 measurement as defined in ASC 820, other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content, in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition.
The following table summarizes the fair values of the Time Warner assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date:
Assets acquired
Cash
1,889
Accounts receivable
9,020
All other current assets
2,913
Noncurrent inventory and theatrical film and television production costs
5,591
4,693
Intangible assets subject to amortization
Distribution network
18,040
Released television and film content
10,806
Trademarks and trade names
18,081
10,300
Investments and other assets
9,438
38,801
Total assets acquired
129,572
Liabilities assumed
Current liabilities, excluding current portion of long-term debt
8,294
4,471
Long-term debt
18,394
19,054
Total liabilities assumed
50,213
Net assets acquired
79,359
Aggregate value of consideration paid
79,358
Purchased goodwill is not expected to be deductible for tax purposes. All of the goodwill was allocated to the WarnerMedia segment.
Hudson Yards In June 2019, we sold our ownership in Hudson Yards North Tower Holdings LLC under a sale-leaseback arrangement for cash proceeds of $2,081 and recorded a loss of approximately $100 resulting from transaction costs (primarily real estate transfer taxes).
Hulu In April 2019, we sold our ownership in Hulu for cash proceeds of $1,430 and recorded a gain of $740.
Held-for-Sale
In October 2019, we entered into an agreement to sell our wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands for approximately $1,950. We expect the transaction to close in the first half of 2020, subject to customary closing conditions.
In the third quarter of 2019, we applied held-for-sale treatment to the assets and liabilities of these operations, and, accordingly, included the assets in “Other current assets,” and the related liabilities in “Accounts payable and accrued liabilities,” on our consolidated balance sheet at September 30, 2019.
The assets and liabilities primarily consist of approximately $700 of net property, plant and equipment; $1,100 of FCC licenses; $300 of goodwill; and $400 of net tax liabilities.
NOTE 9. SALES OF RECEIVABLES
We have agreements with various third-party financial institutions pertaining to the sales of certain types of our accounts receivable. The most significant of these programs are discussed in detail below and generally consist of (1) receivables arising from equipment installment plans, which are sold for cash and a deferred purchase price, and (2) receivables related to our WarnerMedia business. Under these programs, we transfer receivables to purchasers in exchange for cash and additional consideration upon settlement of the receivables, where applicable. Under the terms of our agreements for these programs, we continue to bill and collect the payments from our customers on behalf of the financial institutions.
The sales of receivables did not have a material impact on our consolidated statements of income or to “Total Assets” reported on our consolidated balance sheets. We reflect cash receipts on sold receivables as cash flows from operations in our consolidated statements of cash flows. Cash receipts on the deferred purchase price are classified as cash flows from investing activities.
Our equipment installment and WarnerMedia programs are discussed in detail below. A summary of the receivables and accounts being serviced is as follows:
Installment
Gross receivables:
4,425
3,147
5,994
Balance sheet classification
Notes receivable
3,457
Trade receivables
460
2,626
438
Noncurrent notes and trade receivables
1,437
521
Outstanding portfolio of receivables derecognized from
our consolidated balance sheets
9,405
3,456
9,065
Cash proceeds received, net of remittances1
6,920
6,508
Represents amounts to which financial institutions remain entitled, excluding the deferred purchase price.
Equipment Installment Receivables
We offer our customers the option to purchase certain wireless devices in installments over a specified period of time and, in many cases, once certain conditions are met, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled.
We maintain a program under which we transfer a portion of these receivables in exchange for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. In the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the financial institutions equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation for this estimated amount at the time the receivables are transferred.
The following table sets forth a summary of equipment installment receivables sold during the three and nine months ended September 30, 2019 and 2018:
Gross receivables sold
2,098
2,161
7,043
7,077
Net receivables sold1
2,014
2,064
6,693
6,670
Cash proceeds received
1,700
1,752
5,895
5,679
Deferred purchase price recorded
352
922
1,161
Guarantee obligation recorded
261
Receivables net of allowance, imputed interest and equipment trade-in right guarantees.
The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of device trade-ins. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).
The following table shows the previously transferred equipment installment receivables, which we repurchased in exchange for the associated deferred purchase price during the three and nine months ended September 30, 2019 and 2018:
Fair value of repurchased receivables
268
926
1,481
Carrying value of deferred purchase price
259
891
1,393
Gain (loss) on repurchases1
These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income.
At September 30, 2019 and December 31, 2018, our deferred purchase price receivable was $2,300 and $2,370, respectively, of which $1,605 and $1,448 are included in “Other current assets” on our consolidated balance sheets, with the remainder in “Other Assets.” The guarantee obligation at September 30, 2019 and December 31, 2018 was $427 and $439, respectively, of which $152 and $196 are included in “Accounts payable and accrued liabilities” on our consolidated balance sheets, with the remainder in “Other noncurrent liabilities.” Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.
WarnerMedia Receivables
In March 2019, we entered into a revolving agreement to transfer $1,400 of certain receivables from our WarnerMedia business to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred. As customers pay their balances, we transfer additional receivables into the program, resulting in our gross receivables sold exceeding net cash flow impacts (e.g., collect and reinvest). In June 2019, we expanded the program another $2,600 for a total maximum outstanding amount of $4,000, of which approximately $3,456 is outstanding at September 30, 2019. The transferred receivables are fully guaranteed by our subsidiary, which holds additional receivables in the amount of $,3147 that are pledged as collateral under this agreement. The transfers are recorded at fair value of the proceeds received and obligations assumed less derecognized receivables. Our maximum exposure to loss related to selling these receivables is limited to the amount outstanding.
The following table sets forth a summary of WarnerMedia receivables sold during the three and nine months ended September 30, 2019 and 2018:
Gross receivables sold/cash proceeds received1
2,873
8,725
Collections reinvested under revolving agreement
5,000
Collections not reinvested
269
Net cash proceeds received (remitted)
(269)
Net receivables sold2
2,864
8,361
Obligations recorded
475
Includes initial sale of receivables of $0 for the three months ended and $3,725 for the nine months ended September 30, 2019.
Receivables net of allowance, return and incentive reserves and imputed interest
NOTE 10. LEASES
We have operating and finance leases for certain facilities and equipment used in our operations. As of September 30, 2019, our leases have remaining lease terms of up to 15 years. Some of our real estate operating leases contain renewal options that may be exercised, and some of our leases include options to terminate the leases within one year.
Subsequent to the adoption of ASC 842 on January 1, 2019, we recognize a right-of-use asset for both operating and finance leases, and an operating lease liability that represents the present value of our obligation to make payments over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use the unsecured borrowing rate and risk-adjust that rate to approximate a collateralized rate in the currency of the lease, which is updated on a quarterly basis for measurement of new lease obligations.
The components of lease expense were as follows:
Operating lease cost
4,333
Finance lease cost:
Amortization of right-of-use assets
203
Interest on lease obligation
42
126
Total finance lease cost
329
Supplemental balance sheet information related to leases is as follows:
At September 30, 2019
Operating Leases
3,453
Operating lease obligation
Total operating lease obligation
25,741
Finance Leases
Property, plant and equipment, at cost
3,438
Accumulated depreciation and amortization
(1,215)
Property, plant and equipment, net
2,223
Current portion of long-term debt
153
1,823
Total finance lease obligation
1,976
Weighted-Average Remaining Lease Term
Operating leases
8.7
yrs
Finance leases
10.4
Weighted-Average Discount Rate
4.3
%
8.4
Future minimum maturities of lease obligations are as follows:
Finance
Leases
Remainder of 2019
1,168
100
2020
4,643
306
2021
4,258
287
2022
3,993
276
2023
3,609
264
2024
2,923
247
Thereafter
11,706
1,591
Total lease payments
32,300
3,071
Less imputed interest
(6,559)
(1,095)
NOTE 11. ADDITIONAL FINANCIAL INFORMATION
Cash and Cash Flows
We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments. The components comprising cash and cash equivalents and restricted cash are as follows:
2017
8,657
50,498
Restricted cash in Other current assets
56
61
Restricted cash in Other Assets
179
135
428
Cash and cash equivalents and restricted cash
Supplemental disclosures for the statement of cash flows related to operating leases are as follows:
Cash Flows from Operating Activities
Cash paid for amounts included in lease obligations
Operating cash flows from operating leases
3,338
3,694
Supplemental Lease Cash Flow Disclosures
Operating lease right-of-use assets obtained
in exchange for new operating lease obligations
7,068
Cash paid (received) from interest and income taxes during the period are as follows:
Interest
6,938
6,943
Income taxes, net of refunds
(537)
Other Noncash Investing and Financing Activities In 2019, we recorded approximately $1,920 of new vendor financing commitments related to capital investments, and we have repaid $2,601 of such obligations during the year. In connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing), which are excluded from our investing activities and reported as financing activities.
Preferred Interests Issued by Subsidiary In September 2019, we issued $1,500 nonconvertible cumulative preferred interests in a wireless subsidiary that holds interests in various tower assets (Tower Holdings).
The membership interests in Tower Holdings consist of (1) common interests, which are held by a consolidated subsidiary of AT&T, and (2) these newly issued preferred interests (Tower preferred interests), which pay an initial preferred distribution of 5.0% annually, subject to declaration, resetting every five years. The declaration and payment of distributions on the preferred interests do not impose any limitation on cash movements between affiliates, or our ability to declare a dividend on or repurchase AT&T shares. We can call the Tower preferred interests beginning five years from the issuance date or upon the receipt of proceeds from the sale of the underlying assets. The preferred interests are included in “Noncontrolling interest” on the consolidated balance sheet.
The holders of the Tower preferred interests have the option to require redemption upon the occurrence of certain contingent events, such as the failure of AT&T to pay the preferred distribution for two or more periods or to meet certain other requirements, including a minimum credit rating. If notice is given upon such an event, all other holders of equal or more subordinate classes of membership interests in Tower Holdings are entitled to receive the same form of consideration payable to the holders of the preferred interests, resulting in a deemed liquidation for accounting purposes.
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars, subscribers and connections in millions, except per share and per subscriber amounts
OVERVIEW
AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). We completed the acquisition of Time Warner Inc. (Time Warner) on June 14, 2018, and have included its results after that date. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from Time Warner prior to the acquisition are excluded.
We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our segment results presented in Note 4 and discussed below follow our internal management reporting. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items and equity in net income (loss) of affiliates for investments managed within each segment. Percentage increases and decreases that are not considered meaningful are denoted with a dash. We have recast our segment results for all prior periods presented to exclude our wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands from our Mobility and Business Wireline business units of the Communications segment, instead reporting them with Corporate and Other (see Note 8).
Third Quarter
Nine-Month Period
Percent
Change
(1.7)
(0.6)
(4.4)
(5.6)
(10.4)
13.3
20.5
Corporate and other
(23.4)
(25.6)
Eliminations and consolidation
(1.5)
(88.0)
AT&T Operating Revenues
(2.5)
9.5
Operating Contribution
(1.4)
0.9
0.6
17.4
(18.6)
(1.8)
(4.9)
Segment Operating Contribution
14.2
The Communications segment provides services to businesses and consumers located in the U.S. and businesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the following business units:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. This segment contains the following business units:
The Xandr segment provides advertising services and includes our recently acquired AppNexus. These services utilize data insights to develop and deliver targeted advertising across video and digital platforms.
RESULTS OF OPERATIONS
Consolidated Results Our financial results are summarized in the following discussions. Additional analysis is discussed in our “Segment Results” section. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
(2.4)
11.1
(3.8)
Operating expenses
Operations and support
(1.9)
10.0
(14.9)
3.5
Total Operating Expenses
(4.6)
13.5
2,083
2,051
1.6
6,373
5,845
9.0
Equity in net income (loss)
of affiliates
(21.3)
(19.9)
(18.0)
(17.2)
(21.6)
(20.7)
Operating revenues decreased in the third quarter and increased in the first nine months of 2019. The decrease in the third quarter was primarily due to declines in our Communications, WarnerMedia and Latin America segments. Communications segment decreases were due to continued declines in legacy and video services and lower wireless device upgrades, partially offset by growth in advanced data and wireless services. WarnerMedia segment declines were driven by lower theatrical
product compared to a more favorable mix of box office releases in the prior year, partially offset by higher international licenses revenues at Home Box Office. Latin America revenues were negatively impacted by foreign exchange pressures.
The increase in the first nine months was primarily due to our 2018 acquisition of Time Warner. Partially offsetting the increase were declines in the Communications segment driven by continued pressure in legacy and video services and lower wireless equipment upgrades that were offset by growth in advanced data and wireless services, and foreign exchange pressures in our Latin America segment.
Operations and support expenses decreased in the third quarter and increased in the first nine months of 2019. The decrease in the third quarter was primarily due to declines in content costs reflecting continued declines in premium TV subscribers and postpaid smartphone volumes in the Communications segment. Lower film and television production costs in the WarnerMedia segment and foreign exchange rate impacts in the Latin America segment also contributed to lower expense in 2019.
The increase in the first nine months of 2019 was primarily due to our 2018 acquisition of Time Warner. The increase was partially offset by lower costs in our Communications segment, including lower content and wireless equipment costs, foreign exchange rate impacts in our Latin America segment, and lower expenses due to our continued focus on cost management.
Depreciation and amortization expense decreased in the third quarter and increased for the first nine months of 2019. Depreciation expense increased $5, or 0.1% in the third quarter and $168, or 1.1% for the first nine months of 2019. The increase in the nine-month period was primarily due to the Time Warner acquisition.
Amortization expense decreased $1,222, or 39.4% in the third quarter and increased $550, or 9.9% for the first nine months of 2019 primarily due to the amortization of intangibles associated with WarnerMedia. We expect continued quarterly declines in amortization expense, reflecting the accelerated method of amortization applied on the WarnerMedia intangibles.
Operating income increased in the third quarter and the first nine months of 2019. Our operating income margin for the third quarter increased from 15.9% in 2018 to 17.7% in 2019 and for the first nine months increased from 16.2% in 2018 to 16.8% in 2019.
Interest expense increased in the third quarter and first nine months of 2019. The increase was primarily due to lower capitalized interest associated with putting spectrum into network service. Higher debt balances related to our acquisition of Time Warner also contributed to higher expense for the nine-month period.
Equity in net income of affiliates increased in the third quarter and for the first nine months of 2019, primarily due to changes in our investment portfolio resulting from acquisitions and the second-quarter 2019 sale of Hulu.
Other income (expense) – net decreased in the third quarter and for the first nine months of 2019. The decrease in the quarter was primarily due to the recognition of a $1,917 actuarial loss in 2019 with no comparable remeasurement in 2018, and higher income in the prior year resulting from a gain on our third-quarter 2018 Otter Media transaction.
The decrease for the first nine months was primarily due to the recognition of an actuarial loss of $4,048 in 2019, compared to actuarial gain of $2,726 in 2018, and the prior-year gain on the Otter Media transaction. Partially offsetting the declines was a $740 gain on the second-quarter 2019 sale of our investment in Hulu and lower premiums on debt redemptions.
Income taxes decreased in the third quarter and for the first nine months of 2019. Our effective tax rate was 19.2% for the third quarter and 20.0% for the first nine months of 2019, versus 22.4% for the third quarter and 22.5% for the first nine months of 2018. The decrease in income tax expense and the effective tax rate for the third quarter was primarily due to tax benefits related to internal restructurings and lower income before income taxes. The decrease in income tax expense and the effective tax rate for the first nine months was primarily due to benefits from tax settlements, internal restructurings and lower income before income taxes, including impacts of actuarial losses of $1,917 in the third quarter and $4,048 for the first nine months of 2019, compared to actuarial gains of $2,726 for the first nine months of 2018.
COMMUNICATIONS SEGMENT
Segment Operating Revenues
(0.2)
0.8
(3.4)
(2.7)
(2.2)
Total Segment Operating Revenues
3.0
4.2
4.9
(17.8)
(14.4)
Total Segment Operating Contribution
Selected Subscribers and Connections
(000s)
Total domestic broadband connections
15,575
15,747
Network access lines in service
8,831
10,399
U-verse VoIP connections
4,539
5,274
Results in the Mobility and Business Wireline business units of the Communications segment have been recast for all prior periods presented to remove operations in Puerto Rico and the U.S. Virgin Islands (see Note 8).
Operating revenues decreased in the third quarter and for the first nine months of 2019. The decrease in the quarter was driven by declines in each of our business units, Entertainment Group, Business Wireline and Mobility. Revenues reflect continued declines in legacy voice and data products, the shift to over-the-top (OTT) video offerings and decreased wireless equipment revenues, partially offset by growth in strategic and managed business services, wireless service and IP broadband.
The decrease for the first nine months was primarily due to declines in our Entertainment Group and Business Wireline business units, offset by increases in our Mobility business unit. The decrease reflects the shift away from legacy communications and linear video offerings, and lower wireless equipment revenues, largely offset by higher wireless service and advanced data revenues.
Operating contribution decreased in the third quarter and increased for the first nine months of 2019. The decrease in the quarter reflects declines in our Business Wireline and Entertainment Group business units, largely offset by improvement in our Mobility business unit. The increase for the first nine months includes improvements in our Mobility and Entertainment Group business units, partially offset by declines in our Business Wireline business unit. Our Communications segment operating income margin in the third quarter increased from 22.6% in 2018 to 22.7% in 2019 and for the first nine months increased from 23.0% in 2018 to 23.4% in 2019.
Communications Business Unit Discussion
Mobility Results
Operating revenues
13,930
13,828
0.7
41,383
40,594
1.9
(3.5)
(0.3)
(3.1)
11,959
12,161
35,538
35,821
(0.8)
Equity in Net Income (Loss)
of Affiliates
The following tables highlight other key measures of performance for Mobility:
(in 000s)
Mobility Subscribers
Postpaid smartphones
60,306
59,829
Postpaid feature phones and
data-centric devices
14,846
16,344
(9.2)
Postpaid
75,152
76,173
(1.3)
Prepaid
17,740
16,721
6.1
Reseller
7,120
8,079
(11.9)
Connected devices1
62,288
48,177
29.3
Total Mobility Subscribers
162,300
149,150
8.8
Postpaid Phone Subscribers
62,812
62,850
(0.1)
Total Phone Subscribers
79,462
78,639
1.0
Includes data-centric devices such as wholesale automobile systems, monitoring devices, fleet management, and session-based tablets.
Mobility Net Additions2
(217)
(231)
(105)
570
(60.2)
669
1,275
(47.5)
(366)
36.9
(677)
(1,175)
42.4
3,900
3,459
12.7
10,947
9,171
19.4
Mobility Net Subscriber Additions
3,679
3,432
7.2
10,369
9,166
13.1
Postpaid Phone Net Additions
50.7
254
63
Total Phone Net Additions
255
547
(53.4)
780
(29.3)
Postpaid Churn3
1.19
1.16
BP
1.14
1.08
Postpaid Phone-Only Churn3
0.95
0.93
0.91
0.86
Excludes acquisition-related additions during the period.
Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number
of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for
each month of that period.
Service revenue increased in the third quarter and for the first nine months of 2019 largely due higher postpaid phone average revenue per subscriber (ARPU) and gains in prepaid subscribers.
ARPU
Postpaid ARPU increased in the third quarter and for the first nine months primarily due to price actions that were not in effect in the comparative periods of the prior year.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn was higher due to tablet and involuntary churn. Postpaid phone-only churn was higher due to involuntary churn. Also contributing to higher churn for the first nine months was continued competitive pricing in the industry.
Equipment revenue decreased in the third quarter and for the first nine months of 2019 driven by lower postpaid smartphone sales, resulting from the continuing trend of customers choosing to upgrade devices less frequently or bring their own.
Operations and support expenses decreased in the third quarter and for the first nine months of 2019. The decreases were primarily due to lower postpaid smartphone volumes and increased operational efficiencies, partially offset by higher bad debt expense, commission deferral amortization and handset insurance costs. In the second quarter of 2019, we extended the estimated economic life of our customers, which will result in a decline of commission deferral amortization in the second half of 2019.
Depreciation expense decreased in the third quarter and for the first nine months of 2019 primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income increased in the third quarter and for the first nine months of 2019. Our Mobility operating income margin in the third quarter increased from 31.4% in 2018 to 32.4% in 2019, and for the first nine months increased from 31.1% in 2018 to 32.1% in 2019. Our Mobility EBITDA margin in the third quarter increased from 43.0% in 2018 to 43.8%
44
in 2019, and for the first nine months increased from 43.0% in 2018 to 43.6% in 2019. EBITDA is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization.
Subscriber Relationships
As the wireless industry has matured, future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and to provide these services in bundled product offerings with our video and broadband services. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. To support higher mobile video and data usage, our priority is to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible.
To attract and retain subscribers in a mature and highly competitive market, we have launched a wide variety of plans. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add devices, attract subscribers from other providers and/or minimize subscriber churn.
Connected Devices
Connected devices include data-centric devices such as wholesale automobile systems, monitoring devices, fleet management and session-based tablets. Connected device subscribers increased in 2019, and during the third quarter and for the first nine months of 2019, we added approximately 2.1 million and 6.2 million wholesale connected cars through agreements with various carmakers, and experienced strong growth in other Internet of Things (IoT) connections. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.
Entertainment Group Results
Video entertainment
7,933
8,283
(4.2)
24,042
24,681
(2.6)
High-speed internet
6.6
Legacy voice and data services
(15.0)
Other service and equipment
519
522
1,586
1,596
(3.9)
(2.9)
(1.1)
10,113
10,486
(3.6)
29,817
30,609
4.8
45
The following tables highlight other key measures of performance for Entertainment Group:
Video Connections
Premium TV
20,418
23,294
(12.3)
AT&T Now1
1,145
1,858
(38.4)
Total Video Connections
21,563
25,152
(14.3)
Broadband Connections
IP
13,739
13,723
0.1
DSL
562
718
(21.7)
Total Broadband Connections
14,301
14,441
(1.0)
Retail Consumer Switched Access Lines
3,467
4,144
(16.3)
U-verse Consumer VoIP Connections
3,973
4,757
(16.5)
Total Retail Consumer Voice
Connections
7,440
8,901
(16.4)
Fiber Broadband Connections
(included in IP)
3,696
2,504
47.6
Consistent with industry practice, connections that are on a free-trial are included.
Video Net Additions
Premium TV2
(1,163)
(346)
(2,485)
(795)
(195)
49
(446)
Net Video Additions
(1,358)
(297)
(2,931)
(92)
Broadband Net Additions
(83)
(96.2)
(36)
20.0
(118)
(170)
30.6
Net Broadband Additions
(119)
(108)
91
Fiber Broadband Net Additions
318
300
6.0
933
775
20.4
Includes disconnections for customers that migrated to AT&T Now.
Video entertainment revenues are comprised of subscription and advertising revenues. Revenues decreased in the third quarter and for the first nine months of 2019, largely driven by an 12.3% decline in premium TV subscribers as we continue to focus on high-value customers. Our customers continue to shift, consistent with the rest of the industry, from a premium linear service to our more economically priced OTT video service, or to competitors, which has pressured our video revenues. Churn rose for subscribers with premium TV-only service, partially reflecting price increases. We also experienced
increased churn in video (including customers who bundled broadband service) due to carriage disputes during the third quarter of 2019.
Revenue declines in our premium TV products were partially offset by growth in revenues from our OTT service, AT&T Now, which were primarily attributable to pricing actions. AT&T Now subscriber net additions declined in the third quarter and for the first nine months due to price increases and fewer promotions.
High-speed internet revenues increased in the third quarter and for the first nine months of 2019 reflecting the continued shift of subscribers to our higher-speed fiber services. Our bundling strategy is helping to lower churn with subscribers who bundle broadband with another AT&T service.
Legacy voice and data service revenues decreased in the third quarter and for the first nine months of 2019, reflecting the continued migration of customers to our more advanced IP-based offerings or to competitors.
Operations and support expenses decreased in the third quarter and for the first nine months of 2019. Contributing to the decreases were lower content and selling costs largely due to lower subscribers and our ongoing focus on cost initiatives. Partially offsetting the decreases were increased costs associated with NFL SUNDAY TICKET and higher amortization of fulfillment cost deferrals, including the impact of second-quarter 2019 updates to decrease the estimated economic life for our Entertainment Group customers.
Depreciation expense decreased in the third quarter and for the first nine months of 2019. The decreases were due to fully depreciated assets, largely offset by ongoing capital spending for network upgrades and expansion.
Operating income decreased in the third quarter and increased for the first nine months of 2019. Our Entertainment Group operating income margin in the third quarter increased from 9.5% in 2018 to 9.7% in 2019, and for the first nine months increased from 11.3% in 2018 to 12.0% in 2019. Our Entertainment Group EBITDA margin in the third quarter increased from 21.0% in 2018 to 21.4% in 2019, and for the first nine months increased from 22.8% in 2018 to 23.8% in 2019.
Business Wireline Results
Strategic and managed services
3,677
11,513
10,849
(13.5)
(14.7)
351
404
(13.1)
1,010
9.1
7.1
5,293
5,209
15,764
15,567
1.3
(17.9)
66.7
Strategic and managed services revenues increased in the third quarter and for the first nine months of 2019. Our strategic services are made up of (1) data services, including our VPN, dedicated internet ethernet and broadband, (2) voice service, including VoIP and cloud-based voice solutions, (3) security and cloud solutions, and (4) managed, professional and
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outsourcing services. Revenue increases were primarily attributable to growth in our security and cloud solutions, dedicated internet and managed services.
Legacy voice and data service revenues decreased in the third quarter and for the first nine months of 2019, primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.
Other service and equipment revenues decreased in the third quarter and increased for the first nine months of 2019. Revenue trends are impacted by the licensing of intellectual property assets, which vary from period-to-period. In the third quarter, intellectual property revenues in 2018 exceeded 2019, which contributed to the revenue decline. During the first nine months, intellectual property revenues driven by second-quarter 2019 license sales, exceeded revenues recorded for the comparable 2018 period, which contributed to the revenue increase. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from customer premises equipment.
Operations and support expenses were flat in the third quarter and decreased for the first nine months of 2019, primarily due to our continued efforts to shift to a software-based network and automate and digitize our customer support activities, partially offset by higher fulfillment deferral amortization.
Depreciation expense increased in the third quarter and for the first nine months of 2019, primarily due to increases in capital spending for network upgrades and expansion.
Operating income decreased in the third quarter and for the first nine months of 2019. Our Business Wireline operating income margin in the third quarter decreased from 22.1% in 2018 to 18.6% in 2019, and for the first nine months decreased from 22.3% in 2018 to 19.5% in 2019. Our Business Wireline EBITDA margin in the third quarter decreased from 39.8% in 2018 to 38.2% in 2019, and for the first nine months decreased from 39.9% in 2018 to 38.6% in 2019.
WARNERMEDIA SEGMENT
10.6
Eliminations & Other
2.8
14.9
1.8
Our WarnerMedia segment consists of our Turner, Home Box Office and Warner Bros. business units. The order of presentation reflects the consistency of revenue streams, rather than overall magnitude as that is subject to timing and frequency of studio releases. WarnerMedia also includes our financial results for RSNs.
The WarnerMedia segment does not include results from Time Warner operations for the periods prior to our June 14, 2018 acquisition. Otter Media is included as an equity method investment for periods prior to our August 7, 2018 acquisition of the remaining interest and is in the segment operating results following the acquisition. Consistent with our past practice, many of the impacts of the fair value adjustments from the application of purchase accounting required under GAAP have not been allocated to the segment, instead they are reported as acquisition-related items in the reconciliation to consolidated results.
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Segment and business unit results for the first nine months are not comparable to the prior period and therefore not discussed. Comparative results for the third quarter are discussed below.
Operating revenues decreased in the third quarter of 2019, primarily due to lower Warner Bros. revenues, partially offset by increased revenues from Home Box Office and Turner.
Operating contribution increased in the third quarter of 2019. The WarnerMedia segment operating income margin in the third quarter increased from 31.3% in 2018 to 32.2% in 2019.
WarnerMedia Business Unit Discussion
Turner Results
3.9
(3.3)
Content and other
189
(11.6)
585
15.3
1,528
1,546
(1.2)
5,980
2,004
2.6
Equity in Net Income of Affiliates
42.9
17.9
Turner includes the WarnerMedia businesses managed by Turner as well as our RSNs.
Operating revenues increased in the third quarter of 2019, reflecting higher subscription revenues driven by higher domestic affiliate rates and growth at Turner’s international networks. These increases were partially offset by lower advertising revenues, resulting from lower audience delivery in the domestic entertainment networks, reduced content revenue and foreign exchange pressure.
Operations and support expenses decreased in the third quarter of 2019 due to lower programming, marketing and direct operating costs.
Operating income increased in the third quarter of 2019. Our Turner operating income margin in the third quarter increased from 48.3% in 2018 to 49.2% in 2019. Our Turner EBITDA margin increased from 50.2% in 2018 to 51.4% in 2019.
Home Box Office Results
1.1
286
127
662
138
8.2
32.0
1,105
1,016
3,191
1,192
13.7
Operating revenues increased in the third quarter of 2019, driven by higher content and other revenues due to an increase in international licensing. Subscription revenues also increased as a result of growth in digital and international subscriptions, partially offset by lower domestic linear subscribers.
Operations and support expenses increased in the third quarter of 2019 due to higher programming, distribution and marketing expenses.
Operating income increased in the third quarter of 2019. Our Home Box Office operating income margin in the third quarter increased from 38.2% in 2018 to 39.3% in 2019. Our Home Box Office EBITDA margin increased from 39.7% in 2018 to 41.1% in 2019.
Warner Bros. Results
Theatrical product
1,375
(18.8)
4,408
1,917
Television product
1,461
(8.2)
4,384
1,794
Games and other
497
435
14.3
1,448
516
(12.8)
2,745
3,144
(12.7)
8,665
2.1
(8.7)
20.8
50
Operating revenues decreased in the third quarter of 2019, primarily due to lower theatrical product resulting from a more favorable mix of box office releases in the prior-year quarter, and lower television licensing revenues. These decreases were partially offset by increases in games and initial telecast revenues.
Operations and support expenses decreased in the third quarter of 2019 primarily due to lower film and television production costs.
Operating income increased in the third quarter of 2019. Our Warner Bros. operating income margin in the third quarter increased from 15.5% in 2018 to 17.6% in 2019. Our Warner Bros. EBITDA margin increased from 16.6% in 2018 to 18.8% in 2019.
LATIN AMERICA SEGMENT
(8.1)
(16.1)
(80.3)
(84.7)
33.0
Operating Results
Our Latin America operations conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates, subjecting results to foreign currency fluctuations.
Operating revenues decreased in the third quarter and for the nine months of 2019 driven by lower revenues for Vrio, primarily resulting from foreign exchange pressures related to Argentina’s hyperinflationary economy.
Operating contribution increased in the third quarter and decreased for the first nine months of 2019, reflecting foreign exchange pressure. Our Latin America segment operating income margin in the third quarter increased from (11.5)% in 2018 to (10.3)% in 2019, and for the first nine months decreased from (8.4)% in 2018 to (11.0)% in 2019.
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Latin America Business Unit Discussion
Mexico Results
Percent Change
3.4
(10.0)
(10.9)
(6.0)
(5.4)
896
998
(10.2)
2,684
2,842
The following tables highlight other key measures of performance for Mexico:
Mexico Wireless Subscribers1
5,352
5,822
12,848
11,270
14.0
419
213
96.7
Total Mexico Wireless Subscribers
18,619
17,305
7.6
Mexico Wireless Net Additions
(137)
73
(359)
324
668
802
(16.7)
1,183
1,873
(36.8)
Mexico Wireless
Net Subscriber Additions
598
907
(34.1)
990
2,206
(55.1)
2019 excludes the impact of 692 subscriber disconnections resulting from the churn of customers related to sales by certain third-party
distributors and the sunset of 2G services in Mexico, which are reflected in beginning of period subscribers.
Service revenues increased in the third quarter and for the first nine months of 2019, primarily due to growth in our subscriber base.
Equipment revenues decreased in the third quarter and for the first nine months of 2019, reflecting higher demand in the prior year for our initial offering of equipment installment programs.
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Operations and support expenses decreased in the third quarter and for the first nine months of 2019, primarily due to lower equipment sales, partially offset by higher bad debt expenses. Approximately 6% of Mexico expenses are U.S. dollar based, with the remainder in the local currency.
Depreciation and amortization expense decreased in the third quarter and for the first nine months of 2019, primarily due to changes in the useful lives of certain assets, partially offset by the amortization of spectrum licenses and higher in-service assets.
Operating income increased in the third quarter and first nine months of 2019. Our Mexico operating income margin in the third quarter increased from (36.5)% in 2018 to (25.0)% in 2019, and for the first nine months increased from (35.4)% in 2018 to (28.2)% in 2019. Our Mexico EBITDA margin in the third quarter increased from (18.9)% in 2018 to (7.9)% in 2019, and for the first nine months increased from (17.2)% in 2018 to (10.5)% in 2019.
Vrio Results
(3.0)
(11.3)
1,045
3,094
(93.0)
44.4
The following tables highlight other key measures of performance for Vrio:
Vrio Video Subscribers1,2
13,306
13,640
Nine -Month Period
Vrio Video Net Subscriber Additions3
(167)
(73)
(310)
Excludes subscribers of our equity investment in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 7.4 million
subscribers at June 30, 2019 and 7.8 million subscribers at September 30, 2018.
2019 excludes the impact of 222 subscriber disconnections resulting from conforming our video credit policy across the region, which is
reflected in beginning of period subscribers.
Excludes SKY Mexico net subscriber additions of 7 and losses of 126 for the quarter ended June 30, 2019 and September 30, 2018,
respectively.
Operating revenues decreased in the third quarter and for the first nine months of 2019, primarily due to foreign exchange pressures.
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Operations and support expenses decreased in the third quarter and for the first nine months of 2019, primarily due to changes in foreign currency exchange rates. Approximately 19% of Vrio expenses are U.S. dollar based, with the remainder in the local currency.
Depreciation expense decreased in the third quarter and for the first nine months of 2019, primarily due to changes in foreign currency exchange rates.
Operating income decreased in the third quarter and for the first nine months of 2019. Our Vrio operating income was $0, compared to an operating income of $57, or an operating income margin of 5.2%, in the year-earlier quarter. For the first nine months our operating income margin decreased from 6.9% in 2018 to 0.6% in 2019. Our Vrio EBITDA margin in the third quarter decreased from 20.4% in 2018 to 16.0% in 2019, and for the first nine months decreased from 22.0% in 2018 to 16.5% in 2019.
XANDR SEGMENT
48.6
177
112
58.0
510
222
Operating revenues increased in the third quarter and for the first nine months of 2019 primarily due to our acquisition of AppNexus in August 2018.
Operations and support expenses increased in the third quarter and for the first nine months of 2019, primarily due to our acquisition of AppNexus and our ongoing development of the platform supporting Xandr’s business.
Operating income decreased in the third quarter and for the first nine months of 2019. Our Xandr segment operating income margin in the third quarter decreased from 74.8% in 2018 to 64.9% in 2019, and for the first nine months decreased from 81.1% in 2018 to 64.0% in 2019.
SUPPLEMENTAL TOTAL ADVERTISING REVENUE INFORMATION
As a supplemental presentation to our Xandr segment operating results, we are providing a view of total advertising revenues generated by AT&T. This combined view presents the entire portfolio of advertising revenues reported across all operating segments and represents a significant strategic initiative and growth opportunity for AT&T. See revenue categories tables in Note 5 for a reconciliation.
Total Advertising Revenues
945
3,509
1,222
495
478
3.6
1,284
Eliminations
(5.0)
(4.3)
1.2
SUPPLEMENTAL COMMUNICATIONS OPERATING INFORMATION
As a supplemental presentation to our Communications segment operating results, we are providing a view of our AT&T Business Solutions results which includes both wireless and wireline operations. This combined view presents a complete profile of the entire business customer relationship, and underscores the importance of mobile solutions to serving our business customers. See “Discussion and Reconciliation of Non-GAAP Measure” for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
Business Solutions Results
Wireless service
2,009
1,857
5,901
5,440
8.5
Wireless equipment
694
586
18.4
1,902
1,737
9,206
9,126
27,391
27,212
5,643
16,770
16,724
0.3
1,573
1,485
5.9
5.3
7,216
7,060
2.2
21,413
21,132
1,990
2,066
(3.7)
5,978
6,080
1,989
6,078
(1.6)
OTHER BUSINESS MATTERS
Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC’s allegations concern the application of AT&T’s Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer’s billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC’s allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. We reached a tentative agreement with the FTC staff in August 2019, pending FTC approval. We do not expect the resolution of the matter to have a material adverse impact on our financial results. We are not admitting culpability in the tentative agreement. In addition to the FTC case, several class actions were filed challenging our MBR program. We secured dismissals in each of these cases except Roberts v. AT&T Mobility LLC, which is ongoing.
Labor Contracts As of September 30, 2019, we employed approximately 252,000 persons. Approximately 40% of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.
A contract covering approximately 8,000 traditional wireline employees in our Midwest region expired in April 2018. In August 2019, a new four-year contract was ratified by employees and will expire in April 2022.
A contract covering approximately 3,000 traditional wireline employees in our legacy AT&T Corp. business expired in April 2018. In August 2019, a new four-year contract was ratified by employees and will expire in April 2022.
A contract covering approximately 20,000 traditional wireline employees in our Southeast region expired in August 2019. In October 2019, a new five-year contract was ratified by employees and will expire in August 2024.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. The leadership at the FCC is charting a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. Based on its public statements, we expect the FCC to continue to eliminate antiquated, unnecessary regulations and streamline processes. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.
We have organized the following discussion by reportable segment.
Communications Segment
Internet In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The Order, which represented a departure from longstanding bipartisan precedent, significantly expanded the FCC’s authority to regulate broadband internet access services, as well as internet interconnection arrangements. In December 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. Several parties appealed the FCC’s December 2017 decision and the D.C. Circuit heard oral argument on the appeals on February 1, 2019. On October 1, 2019, the court issued a unanimous opinion upholding the FCC’s reclassification of broadband as an information service, and its reliance on transparency requirements and competitive marketplace dynamics to safeguard net neutrality. While the court vacated the FCC’s express preemption of any state regulation of net neutrality, it nevertheless stressed that its ruling does not prevent the FCC or ISPs from relying on conflict preemption to invalidate particular state laws that are inconsistent with the FCC’s regulatory objectives and framework. The court also concluded that the FCC failed to satisfy its obligation under the Administrative Procedure Act (APA) to consider the impact of its 2017 order in three discrete areas—public safety, the Lifeline program, and pole attachment regulation—and thus remanded it to the FCC for further proceedings on those issues, but without disturbing the operative effect of that order. A number of states have adopted legislation that would reimpose the very rules the FCC repealed, and in some cases, established additional requirements that go beyond the FCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively reimpose the repealed requirements. Suits have recently been filed concerning laws in California and Vermont, and other lawsuits are possible. The California and Vermont suits have been stayed pursuant to agreements by those states not to enforce their laws pending resolution of appeals of the FCC’s December 2017 order. If no one seeks rehearing or Supreme Court review of the D.C. Circuit’s decision, the foregoing litigation will recommence. We expect that additional states may seek to regulate net neutrality based on the D.C. Circuit’s decision. We will continue to support congressional action to codify a set of standard consumer rules for the internet.
In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called “edge” providers such as Google and Facebook. In April 2017, the president signed a resolution passed by Congress repealing the new rules under the Congressional Review Act.
Privacy-related legislation has been considered in a number of states. Legislative and regulatory action could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. On June 28, 2018, the state of California enacted comprehensive privacy legislation that, effective as of January 1, 2020, gives California consumers the right to know what personal information is being collected about them, and whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right to opt-out of the sale of personal information. The law applies the same rules to all companies that collect consumer information.
Wireless The industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of “small cell” equipment and therefore increase the need for local permitting processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede broadband services, including small cell equipment. In March, August and September 2018, the FCC adopted orders to streamline the wireless infrastructure review process in order to facilitate deployment of next-generation wireless facilities. Those orders have been appealed and the various appeals remain pending in the DC Circuit and 9th Circuit Court of Appeals. In addition, to date, 28 states and Puerto Rico have adopted legislation to facilitate small cell deployment.
In December 2018, we introduced the nation’s first commercial mobile 5G service. We currently have mobile 5G in parts of 21 U.S. cities and we plan to roll out mobile 5G service in parts of at least 29 cities by the end of the year. We expect to have mobile 5G service nationwide to more than 200 million people by the first half of 2020.
LIQUIDITY AND CAPITAL RESOURCES
We had $6,588 in cash and cash equivalents available at September 30, 2019. Cash and cash equivalents included cash of $3,765 and money market funds and other cash equivalents of $2,823. Approximately $2,200 of our cash and cash equivalents were held by our foreign entities in accounts predominantly outside of the U.S. and may be subject to restrictions on repatriation.
Cash and cash equivalents increased $1,384 since December 31, 2018. In the first nine months of 2019, cash inflows were primarily provided by the cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment and WarnerMedia receivables to third parties, sale of investments, issuance of commercial paper and long-term debt, collateral received from banks and other participants in our derivative arrangements and issuance of perpetual nonconvertible preferred interests in a subsidiary. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, debt repayments, funding capital expenditures and vendor financing payments, spectrum deposits and dividends to stockholders.
Cash Provided by or Used in Operating Activities
During the first nine months of 2019, cash provided by operating activities was $36,725, compared to $31,522 for the first nine months of 2018. Higher operating cash flows in 2019 were primarily due to contributions from WarnerMedia and higher cash flows from working capital initiatives, including sales of receivables (see Note 9), partly offset by higher spend on film and television production and net tax payments in 2019 compared to net tax refunds in 2018.
We actively manage the timing of our supplier payments for non-capital items to optimize the use of our cash. Among other things, we seek to make payments on 90-day or greater terms, while providing the suppliers with access to bank facilities that permit earlier payments at their cost. In addition, for payments to a key supplier, we have arrangements that allow us to extend payment terms up to 90 days at an additional cost to us (referred to as supplier financing). The net impact of supplier financing on cash from operating activities was to reduce working capital $345 for the first nine months of 2019, and to improve working capital $284 for the first nine months of 2018. All supplier financing payments are due within one year.
Cash Used in or Provided by Investing Activities
For the first nine months of 2019, cash used in investing activities totaled $13,002, and consisted primarily of $15,843 (including interest during construction) for capital expenditures, ($1,256 lower than the prior-year comparable period), offset by proceeds from the sales of our ownership interests in Hulu and WarnerMedia’s headquarters (Hudson Yards) under a sale-leaseback arrangement (see Note 8).
For capital improvements, we have negotiated favorable vendor payment terms of 120 days or more (referred to as vendor financing) with some of our vendors, which are excluded from capital expenditures and reported as financing activities. For the first nine months of 2019, these vendor financing payments were $2,601, and when combined with $15,843 of capital expenditures, total capital investment was $18,444 ($998 higher than the prior-year comparable period). In the first nine months of 2019, we placed $1,917 of equipment in service under vendor financing arrangements.
The vast majority of our capital expenditures are spent on our networks, including product development and related support systems. During the first nine months, approximately $850 of assets related to the FirstNet build were placed into service. Total reimbursements from the government for FirstNet during the first nine months were $134 for 2019 and $336 for 2018, predominantly for capital expenditures.
The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. In July 2019, we completed our DIRECTV merger commitment, marketing fiber-to-the-premises network to nearly 14 million customer locations.
Cash Provided by or Used in Financing Activities
For the first nine months of 2019, cash used in financing activities totaled $22,341 and included net proceeds of $15,034, which consisted primarily of the following issuances:
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Issued and redeemed in 2019
January draw of $2,850 on an 11-month syndicated term loan agreement (repaid in the third quarter).
January draw of $750 on a private financing agreement (repaid in the first quarter).
August borrowings of $400 under a private financing agreement (repaid in the third quarter).
Issued and outstanding at September 30, 2019
February issuance of $3,000 of 4.350% global notes due 2029.
February issuance of $2,000 of 4.850% global notes due 2039.
Borrowings of $725 in January and $525 in June that are supported by government agencies to support network equipment purchases.
June draw of $300 on U.S. Bank credit agreement.
September issuance of €1,000 of 0.25% global notes due 2026, €1,250 of 0.80% global notes due 2030 and €750 of 1.80% global notes due 2039 (when combined, $3,308 at issuance).
September draw of $1,300 on a Bank of America term loan credit agreement.
During the first nine months of 2019, repayment of long-term debt totaled $24,368. Repayments primarily consisted of the following:
Notes redeemed at maturity:
$1,850 of 2.300% AT&T global notes in the first quarter.
$400 of AT&T floating-rate notes in the first quarter.
€1,500 of AT&T floating-rate notes in the second quarter ($1,882 at maturity).
$650 of 2.100% WarnerMedia, LLC notes in the second quarter.
Notes redeemed prior to maturity:
$2,010 of AT&T global notes with interest rates ranging from 4.750% to 5.200% and original maturities in 2020 and 2021, in the first quarter.
$2,000 of Warner Media, LLC notes with interest rates ranging from 4.700% to 5.200% and original maturities in 2021, in the first quarter.
$590 of Warner Media, LLC and/or Historic TW Inc. notes that were tendered for cash in our May 2019 obligor debt exchange. The notes had interest rates ranging between 6.500% and 9.150% and original maturities ranging from 2023 to 2036.
$243 of open market redemptions of AT&T notes, with interest rates ranging from 7.125% to 8.750% and original maturities in 2031, in the second quarter.
$154 of open market redemptions of WarnerMedia, LLC, Historic TW Inc., BellSouth LLC and AT&T Mobility LLC notes, with interest rates ranging from 2.95% to 7.625% and original maturities ranging from 2022 to 2097, in the third quarter.
Credit facilities and other redemptions:
$2,625 of final amounts outstanding under our Acquisition Term Loan (defined below) in the first quarter.
$750 of January borrowings under a private financing agreement, in the first quarter.
$1,500 of four-year and five-year borrowings under the Nova Scotia Credit Agreement (defined below) in the second quarter and $750 of three-year borrowings in the third quarter.
$600 of borrowings under our credit agreement with Canadian Imperial Bank of Commerce in the second quarter.
$500 of advances under our November 2018 Term Loan (defined below) in the second quarter, with payment of the remaining $3,050 of advances in the third quarter.
$250 of borrowings under a U.S. Bank credit agreement in the second quarter.
$750 of borrowings under a private credit agreement in the third quarter.
$400 of borrowings under a private financing agreement in the third quarter.
$2,850 of borrowings under an 11-month syndicated term loan agreement from January 2019 in the third quarter.
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.4% as of September 30, 2019 and 4.4% as of December 31, 2018. We had $160,758 of total notes and debentures outstanding at September 30, 2019, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso, Canadian dollar and Australian dollar denominated debt that totaled approximately $41,399.
At September 30, 2019, we had $11,608 of debt maturing within one year, consisting of $2,443 of commercial paper and other short-term borrowings and $9,165 of long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
$1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021.
An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the remainder of the zero-coupon note (issued for principal of $500 in 2007 and partially exchanged in the 2017 debt exchange offers) is held to maturity, the redemption amount will be $592.
For the first nine months of 2019, we paid $2,601 of cash under our vendor financing program, compared to $347 in the first nine months of 2018. Total vendor financing payables included in our September 30, 2019 consolidated balance sheet were approximately $1,800, with $1,350 due within one year (in “Accounts payable and accrued liabilities”) and the remainder predominantly due within two to three years (in “Other noncurrent liabilities”).
In September 2019, we contributed certain tower assets to a wireless subsidiary and then generated $1,500 of capital from the issuance of nonconvertible preferred interests, which we reported as financing activities (see Note 11).
At September 30, 2019, we had approximately 371 million shares remaining from share repurchase authorizations approved by the Board of Directors in 2013 and 2014.
We paid dividends of $11,162 during the first nine months of 2019, compared with $9,775 for the first nine months of 2018, primarily reflecting the increase in the number of shares outstanding related to our June 2018 acquisition of Time Warner as well as an increase in our quarterly dividend approved by our Board of Directors in December 2018. Dividends declared by our Board of Directors totaled $1.53 per share in the first nine months of 2019 and $1.50 per share for the first nine months of 2018. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
Credit Facilities
The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.
We use credit facilities as a tool in managing our liquidity status. In December 2018, we amended our five-year revolving credit agreement (the “Amended and Restated Credit Agreement”) and concurrently entered into a new five-year agreement (the “Five Year Credit Agreement”) such that we now have two $7,500 revolving credit agreements totaling $15,000. The Amended and Restated Credit Agreement terminates on December 11, 2021 and the Five Year Credit Agreement terminates on December 11, 2023. No amounts were outstanding under either agreement as of September 30, 2019.
In September 2017, we entered into a $2,250 syndicated term loan credit agreement (the “Nova Scotia Credit Agreement”) containing (i) a three-year $750 term loan facility (the “2021 facility”), (ii) a four-year $750 term loan facility (the “2022 facility”) and (iii) a five-year $750 term loan facility (the “2023 facility”), with certain investment and commercial banks and The Bank of Nova Scotia, as administrative agent. We drew on all three facilities during the first quarter of 2018, paid the 2022 and 2023 facilities during the second quarter of 2019 and paid the 2021 facility during the third quarter of 2019. No amounts were outstanding under the Nova Scotia Credit Agreement as of September 30, 2019.
On November 20, 2018, we entered into and drew on a 4.5 year $3,550 term loan credit agreement (the “November 2018 Term Loan”) with Bank of America, N.A., as agent. We used the proceeds to finance the repayment, in part, of loans
outstanding under the Acquisition Term Loan. We paid $500 of these borrowings in the second quarter of 2019, and paid the remaining $3,050 in the third quarter. No amounts were outstanding under this agreement as of September 30, 2019.
On January 31, 2019, we entered into and drew on an 11-month $2,850 syndicated term loan credit agreement (the “Citibank Term Loan”), with certain investment and commercial banks and Citibank, N.A., as administrative agent. We paid the borrowings under the Citibank Term Loan during the third quarter. As of September 30, 2019, no amounts were outstanding under this agreement.
In September 2019, we entered into and drew on a $1,300 term loan credit agreement containing (i) a 1.25 year $400 facility due in 2020 (BAML Tranche A Facility), (ii) a 2.25 year $400 facility due in 2021 (BAML Tranche B Facility), and (iii) a 3.25 year $500 facility due in 2022 (BAML Tranche C Facility), with Bank of America, N.A., as agent. No payment had been made under these facilities as of September 30, 2019.
We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases, as well as a commercial paper program.
Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of September 30, 2019, we were in compliance with the covenants for our credit facilities.
Collateral Arrangements
During the year, we amended collateral arrangements with certain counterparties to require cash collateral posting by AT&T only when derivative market values exceed certain thresholds. Under these arrangements, counterparties are still required to post collateral. During the first nine months of 2019, we received $1,204 of cash collateral, on a net basis, primarily driven by the amended arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 7)
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At September 30, 2019, our debt ratio was 45.9%, compared to 49.8% at September 30, 2018 and 47.7% at December 31, 2018. Our net debt ratio was 44.1% at September 30, 2019, compared to 47.4% at September 30, 2018 and 46.2% at December 31, 2018. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.
During the first nine months of 2019, we have received $3,775 from the disposition of assets, and when combined with capital received from the external investors in a wireless tower subsidiary, an amendment of collateral arrangements, and working capital monetization initiatives, which include the sale of receivables, total cash received from monetization efforts was approximately $10,800. We plan to continue to explore similar opportunities. In October 2019, we entered into an agreement to sell our wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands for approximately $1,950, which we expect to close in the first half of 2020 (Note 8). Also in October, we entered into a sale-leaseback of certain domestic company-owned wireless towers for approximately $680, with a substantial number of the towers expected to close by year-end 2019, and an agreement to sell our stake in Central European Media Enterprises Ltd. for approximately $1,100, which we expect to close in the second quarter of 2020.
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE
We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.
Business Solutions Reconciliation
We provide a supplemental discussion of our Business Solutions operations that is calculated by combining our Mobility and Business Wireline business units, and then adjusting to remove non-business operations. The following table presents a reconciliation of our supplemental Business Solutions results.
Three Months Ended
Adjustments1
Business Solutions
(11,921)
(11,971)
(3,077)
(3,321)
(14,998)
(15,292)
(8,327)
(8,551)
(6,671)
3,563
(6,741)
3,551
(1,709)
(1,759)
Total Operating Expense
(10,036)
(10,310)
(4,962)
(4,982)
(4,983)
1Non-business wireless reported in the Communications segment under the Mobility business unit.
62
Nine Months Ended
(35,482)
(35,154)
(9,071)
(9,634)
(44,553)
(44,788)
(24,770)
(24,926)
(19,783)
10,621
(19,862)
10,488
(5,119)
(5,330)
(29,889)
(30,256)
(14,664)
(14,532)
(14,663)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2019, we had interest rate swaps with a notional value of $853 and a fair value of $2.
We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $42,792 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(4,483) at September 30, 2019. We have rate locks with a notional value of $3,500 and a fair value of $(225) at September 30, 2019.
We have foreign exchange contracts with a U.S. dollar notional value of $473 to provide currency at a fixed rate to hedge a portion of the exchange risk involved in foreign currency-denominated transactions. These foreign exchange contracts include fair value hedges, cash flow hedges and economic (nonqualifying) hedges with a total net fair value of $79 at September 30, 2019.
We have designated €1,450 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of our subsidiaries. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of September 30, 2019. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of September 30, 2019.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers’ ability to access financial markets at favorable rates and terms.
Increases in our benefit plans’ costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation or repeal of healthcare legislation, regulations or related court decisions.
The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) and legislative efforts involving issues that are important to our business, including, without limitation, special access and business data services; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure, including the withdrawal of legacy TDM-based services; universal service; broadband deployment; wireless equipment siting regulations; E911 services; competition policy; privacy; net neutrality; multichannel video programming distributor services and equipment; content licensing and copyright protection; availability of new spectrum on fair and balanced terms; and wireless and satellite license awards and renewals.
Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
Potential changes to the electromagnetic spectrum currently used for broadcast television and satellite distribution being considered by the FCC could negatively impact WarnerMedia’s ability to deliver linear network feeds of its domestic cable networks to its affiliates, and in some cases, WarnerMedia’s ability to produce high-value news and entertainment programming on location.
U.S. and foreign laws and regulations regarding intellectual property rights protection and privacy, personal data protection and user consent are complex and rapidly evolving and could result in impact to our business plans, increased costs, or claims against us that may harm our reputation.
The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including non-regulation of comparable alternative technologies and/or government-owned or subsidized networks.
The continued development and delivery of attractive and profitable wireless, video and broadband offerings and devices; the extent to which regulatory and build-out requirements apply to our offerings; our ability to match speeds offered by our competitors and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
Our ability to generate advertising revenue from attractive video content, especially from WarnerMedia, in the face of unpredictable and rapidly evolving public viewing habits.
The availability and cost and our ability to adequately fund additional wireless spectrum and network upgrades; and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.
Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.
The impact from major equipment or software failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions
including flooding and hurricanes, natural disasters including earthquakes and forest fires, pandemics, energy shortages, wars or terrorist attacks.
The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
Our ability to successfully integrate our WarnerMedia operations, including the ability to manage various businesses in widely dispersed business locations and with decentralized management.
Our ability to take advantage of the desire of advertisers to change traditional video advertising models.
Our increased exposure to foreign economies, including foreign exchange fluctuations as well as regulatory and political uncertainty.
Changes in our corporate strategies, such as changing network-related requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.
The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
PART II – OTHER INFORMATION
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the third quarter of 2019, there were no such material developments.
PART II – OTHER INFORMATION - CONTINUED
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the third quarter of 2019 is as follows:
(a)
(b)
(c)
(d)
Period
Total Number of Shares (or Units) Purchased 1, 2, 3
Average Price Paid Per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs1
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs
July 1, 2019 -
July 31, 2019
220,880
33.45
375,662,000
August 1, 2019 -
August 31, 2019
4,784,883
33.73
4,764,343
370,897,657
September 1, 2019 -
447,419
37.32
5,453,182
34.01
In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common
stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock.
The authorizations have no expiration date.
Of the shares repurchased, 258,198 shares were acquired through the withholding of taxes on the vesting of restricted stock
and performance shares or on the exercise price of options.
Of the shares repurchased, 430,641 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit
Association (VEBA) trusts.
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as a part of this report:
Exhibit
Number
Exhibit Description
10-a
AT&T Health Plan
10-b
Stock Purchase and Deferral Plan
10-c
Agreement and Release of Waiver of Claims between AT&T Services, Inc. and John Donovan (Exhibit 10.1 to Form 8-K filed on September 6, 2019)
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
Section 1350 Certifications
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, (formatted as Inline XBRL and contained in Exhibit 101).
69
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 4, 2019
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer