REG - AT & T Inc. - 1st Quarter Results 2017 <Origin Href="QuoteRef">T.N</Origin> - Part 2
23/05/2017 15:40
- Part 2: For the preceding part double click ID:nRSW0123Ga
$ 4,360 $ 4,299
Entertainment Group 1,597 1,595
Consumer Mobility 2,339 2,494
International (100 ) (184 )
Segment Contribution 8,196 8,204
Reconciling Items:
Corporate and Other (27 ) (121 )
Merger and integration charges (207 ) (295 )
Amortization of intangibles acquired (1,202 ) (1,351 )
Employee separation costs - (25 )
Gain on wireless spectrum transactions 118 736
Segment equity in net (income) loss of affiliates (14 ) (17 )
AT&T Operating Income 6,864 7,131
Interest expense 1,293 1,207
Equity in net income (loss) of affiliates (173 ) 13
Other income (expense) - net (20 ) 70
Income Before Income Taxes $ 5,378 $ 6,007
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental,
life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined
postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee
Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits
described in the plans to employees upon their retirement.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding
company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans.
The preferred equity interest had a value of $8,426 at March 31, 2017. The trust is entitled to receive cumulative cash
distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and
accounted for as contributions. We distributed $140 to the trust during the three months ended March 31, 2017. So long as
we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This
preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial
statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is
not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation.
We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual
measurement date of December 31, unless earlier remeasurements are required. The following table details pension and
postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A
portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net
expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and
expected return on plan assets are included with Corporate and Other (see Note 4).
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MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Three months ended
March 31,
2017 2016
Pension cost:
Service cost - benefits earned during the period $ 282 $ 278
Interest cost on projected benefit obligation 484 495
Expected return on assets (783 ) (778 )
Amortization of prior service credit (31 ) (26 )
Net pension (credit) cost $ (48 ) $ (31 )
Postretirement cost:
Service cost - benefits earned during the period $ 41 $ 48
Interest cost on accumulated postretirement benefit obligation 222 243
Expected return on assets (80 ) (89 )
Amortization of prior service credit (336 ) (319 )
Net postretirement (credit) cost $ (153 ) $ (117 )
Combined net pension and postretirement (credit) cost $ (201 ) $ (148 )
The decrease in the combined net pension and postretirement costs in the first quarter reflects higher amortization of
prior service credits due to plan changes, including changes to future costs for continued retiree healthcare coverage. The
reduction also reflects decreasing corporate bond rates, which contributed to lower interest costs.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings
plans. For the first quarter ended 2017 and 2016, net supplemental pension benefits costs not included in the table above
were $22 and $23.
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described
below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.
Level 2 Inputs to the valuation methodology include:
· Quoted prices for similar assets and liabilities in active markets.
· Quoted prices for identical or similar assets or liabilities in inactive markets.
· Inputs other than quoted market prices that are observable for the asset or liability.
· Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
· Fair value is often based on developed models in which there are few, if any, external observations.
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs
and minimize the use of unobservable inputs.
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AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net
realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with
other market participants. The use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different fair value measurement at the reporting date. There have been no changes
in the methodologies used since December 31, 2016.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial
instruments, are summarized as follows:
March 31, 2017 December 31, 2016
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures 1 $ 132,379 $ 138,944 $ 122,381 $ 128,726
Bank borrowings 3 3 4 4
Investment securities 2,640 2,640 2,587 2,587
1 Includes credit agreement borrowings.
The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value
measurements used for notes and debentures are considered Level 2 and are determined using various methods, including
quoted prices for identical or similar securities in both active and inactive markets.
Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2017 and December
31, 2016:
March 31, 2017
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,253 $ - $ - $ 1,253
International equities 639 - - 639
Fixed income bonds - 501 - 501
Asset Derivatives1
Interest rate swaps - 62 - 62
Cross-currency swaps - 235 - 235
Liability Derivatives1
Interest rate swaps - (20 ) - (20 )
Cross-currency swaps - (3,635 ) - (3,635 )
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
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AT&T INC.
MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
December 31, 2016
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,215 $ - $ - $ 1,215
International equities 594 - - 594
Fixed income bonds - 508 - 508
Asset Derivatives1
Interest rate swaps - 79 - 79
Cross-currency swaps - 89 - 89
Liability Derivatives1
Interest rate swaps - (14 ) - (14 )
Cross-currency swaps - (3,867 ) - (3,867 )
1 Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair
values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not
traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) -
net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of
tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than
temporary are recorded in "Other income (expense) - net" with the corresponding reduction to the carrying basis of the
investment. Fixed income investments of $236 have maturities of less than one year, $58 within one to three years, $47
within three to five years and $160 for five or more years.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable
customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term
investments and nonrefundable customer deposits are recorded in "Other current assets" and our investment securities are
recorded in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency
exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and
combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or
speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from
observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows
associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as
the item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps
is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt
of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying
principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated
statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized
losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest
rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early
termination of our fair value hedges are recognized in interest expense. In the three months ended March 31, 2017 and March
31, 2016, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
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MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency
swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk
generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These
agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S.
dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon
issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S.
dollar denominated interest rate.
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses
on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments
designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into
interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is
recognized as "Other income (expense) - net" in the consolidated statements of income in each period. We evaluate the
effectiveness of our cross-currency swaps each quarter. In the three months ended March 31, 2017 and March 31, 2016, no
ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of
fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest
rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be
ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of
income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated
transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at
a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are
amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be
ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of
income. In the three months ended March 31, 2017 and March 31, 2016, no ineffectiveness was measured on foreign exchange
contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing
collateral thresholds based on respective credit ratings and netting agreements. At March 31, 2017, we had posted
collateral of $2,846 (a deposit asset) and held no collateral. Under the agreements, if AT&T's credit rating had been
downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to
post additional collateral of $123. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P), we would
have been required to post additional collateral of $246. At December 31, 2016, we had posted collateral of $3,242 (a
deposit asset) and held no collateral. We do not offset the fair value of collateral, whether the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the
derivative instruments.
Following are the notional amounts of our outstanding derivative positions:
March 31, December 31,
2017 2016
Interest rate swaps $ 10,450 $ 9,650
Cross-currency swaps 29,642 29,642
Total $ 40,092 $ 39,292
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AT&T INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Following are the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships Three months ended
March 31,
2017 2016
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (25 ) $ 66
Gain (Loss) on long-term debt 25 (66 )
In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were offset against interest
expense.
Three months ended
March 31,
Cash Flow Hedging Relationships 2017 2016
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ 20 $ 191
Interest rate locks:
Interest income (expense) reclassified from accumulated OCI into income (15 ) (15 )
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Subsequent and Pending Acquisitions
Time Warner Inc. On October 22, 2016, we entered into and announced a merger agreement (Merger Agreement) to acquire Time
Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or
approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at December 31, 2016,
the total transaction value is approximately $108,200. Each share of Time Warner common stock will be exchanged for $53.75
per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as
defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share,
the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater
than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be
1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis
based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and
cash.
Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most
respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new
premium content for audiences around the world with our extensive customer relationships and distribution, one of the
world's largest pay-TV subscriber bases and leading scale in TV, mobile and broadband distribution.
The Merger Agreement was approved by Time Warner shareholders on February 15, 2017 and remains subject to review by the
U.S. Department of Justice. The Federal Communications Commission (FCC) has stated that it does not believe it will need to
review the deal as no licenses are involved. It is also a condition to closing that necessary consents from foreign
governmental entities must be obtained. The transaction is expected to close before year-end 2017. If the Merger is
terminated as a result of reaching the termination date (and at that time one or more of the conditions relating to certain
regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating
to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we
would be obligated to pay Time Warner $500.
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MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
Auction 1000 On April 13, 2017, the FCC announced that we were the successful bidder for $910 of spectrum in 18 markets. We
provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017.
Other Events
FirstNet On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and
manage the first nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz
of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network
buildout. The actual reach of the network and our investment over the 25-year period will be determined by the number of
individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results
given the timing of the state opt-in process.
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months
and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have
the remaining unpaid balance satisfied. As of March 31, 2017 and December 31, 2016, gross equipment installment receivables
of $4,119 and $5,665 were included on our consolidated balance sheets, of which $2,346 and $3,425 are notes receivable that
are included in "Accounts receivable - net."
In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related
security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this
agreement, we transferred certain receivables to the Purchasers for cash and additional consideration upon settlement of
the receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and
collect the payments from our customers on behalf of the Purchasers. Since inception, cash proceeds received, net of
remittances (excluding amounts returned as deferred purchase price), were $3,740.
The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31,
2017 and 2016:
Three months ended
March 31,
2017 2016
Gross receivables sold $ 2,846 $ 2,482
Net receivables sold 1 2,621 2,256
Cash proceeds received 1,432 1,521
Deferred purchase price recorded 1,189 719
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments
expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the
lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by
independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements
used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
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MARCH 31, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -Continued
Dollars in millions except per share amounts
The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in
exchange for the associated deferred purchase price during the three months ended March 31, 2017 and 2016:
Three months ended
March 31,
2017 2016
Fair value of repurchased receivables $ 377 $ 532
Carrying value of deferred purchase price 339 539
Gain (loss) on repurchases 1 $ 38 $ (7 )
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.
At March 31, 2017 and December 31, 2016, our deferred purchase price receivable was $3,813 and $3,090, respectively, of
which $2,049 and $1,606 are included in "Other current assets" on our consolidated balance sheets, with the remainder in
"Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to
the amount of our deferred purchase price at any point in time.
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or
to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as
operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both
the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate
risk.
Derecognized Installment Receivables
The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no
longer considered our assets.
2017
Outstanding derecognized receivables at January 1, $ 7,232
Gross receivables sold 2,846
Collections on cash purchase price (1,128 )
Collections on deferred purchase price (185 )
Fees (23 )
Trade ins and other (73 )
Fair value of repurchased receivables (377 )
Outstanding derecognized receivables at March 31, $ 8,292
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MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
RESULTS OF OPERATIONS
AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment
services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband
services both domestically and internationally. You should read this discussion in conjunction with the consolidated
financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to
Consolidated Financial Statements.
Consolidated Results Our financial results in the first quarter of 2017 and 2016 are summarized as follows:
First Quarter
2017 2016 Percent Change
Operating Revenues
Service $ 36,456 $ 37,101 (1.7 )%
Equipment 2,909 3,434 (15.3 )
Total Operating Revenues 39,365 40,535 (2.9 )
Operating expenses
Cost of services and sales
Equipment 3,848 4,375 (12.0 )
Broadcast, programming and operations 4,974 4,629 7.5
Other cost of services 9,065 9,396 (3.5 )
Selling, general and administrative 8,487 8,441 0.5
Depreciation and amortization 6,127 6,563 (6.6 )
Total Operating Expenses 32,501 33,404 (2.7 )
Operating Income 6,864 7,131 (3.7 )
Income Before Income Taxes 5,378 6,007 (10.5 )
Net Income 3,574 3,885 (8.0 )
Net Income Attributable to AT&T $ 3,469 $ 3,803 (8.8 )%
Overview
Operating revenues decreased $1,170, or 2.9%, in the first quarter of 2017.
Service revenues decreased $645, or 1.7%, in the first quarter of 2017. The decrease was primarily due to continued
declines in legacy wireline voice and data products and lower wireless service revenues reflecting adoption of unlimited
and Mobile Share plans. These were partially offset by increased revenues from video and strategic business services.
Equipment revenues decreased $525, or 15.3%, in the first quarter of 2017. The decrease was primarily due to lower wireless
handset sales, driven by a low rate of customer device upgrades and strong Bring Your Own Device (BYOD) participation.
Equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or
bring their own.
Operating expenses decreased $903, or 2.7%, in the first quarter of 2017.
Equipment expenses decreased $527, or 12.0%, in the first quarter of 2017. The decrease was driven by a decline in devices
sold reflecting a change in customer buying habits.
Broadcast, programming and operations expenses increased $345, or 7.5%, in the first quarter of 2017, reflecting annual
content cost increases.
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MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Other cost of services expenses decreased $331, or 3.5%, in the first quarter of 2017. The decrease reflects our continued
cost structure management and utilizing automation and digitalization where appropriate. Federal Universal Service Fund
(USF) rates and fees were also lower when compared to the prior year. These expense declines were partially offset by
higher handset insurance costs.
Selling, general and administrative expenses increased $46, or 0.5%, in the first quarter of 2017. Expenses include an
increase of approximately $618 resulting from lower gains on wireless spectrum transactions in the first quarter of 2017
than in the comparable period of 2016. Offsetting this increase were lower advertising costs, decreased expenses for merger
and integration-related activities and reductions from our disciplined cost management.
Depreciation and amortization expense decreased $436, or 6.6%, in the first quarter of 2017. Depreciation expense decreased
$288, or 5.5%, in the first quarter. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful
lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327
of the decrease. This decrease was partially offset by increases resulting from ongoing capital spending for upgrades and
expansion.
Amortization expense decreased $148, or 11.0%, in the first quarter of 2017 due to lower amortization of intangibles for
the customer lists associated with acquisitions.
Operating income decreased $267, or 3.7%, for the first quarter of 2017. Our operating income margin in the first quarter
decreased from 17.6% in 2016 to 17.4% in 2017.
Interest expense increased $86, or 7.1%, in the first quarter of 2017. The increases were primarily due to higher average
rates and debt balances when compared to the prior year.
Equity in net income of affiliates decreased $186 in the first quarter of 2017, predominantly from losses from our legacy
publishing business, partially offset by income from our investments in video-related businesses.
Other income (expense) - net We had other expense of $20 in the first quarter of 2017 and other income of $70 in the first
quarter of 2016. Results in the first quarter of 2017 included net losses on the sale of non-strategic assets and
investments of $61 and interest and dividend income of $30.
Other income (expense) in the first quarter of 2016 included net gains on the sale of non-strategic assets and investments
of $44 and interest and dividend income of $29.
Income taxes decreased $318, or 15.0%, in the first quarter of 2017. Our effective tax rate was 33.5% for the first quarter
of 2017, as compared to 35.3% for the first quarter of 2016. The decrease in income tax expense and our effective tax rate
for the first quarter of 2017 was primarily due to lower income before income taxes in 2017 and the recognition of tax
benefits related to the restructuring of a portion of our wireless business.
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MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
Selected Financial and Operating Data
March 31,
Subscribers and connections in (000s) 2017 2016
Domestic wireless subscribers 134,218 130,445
Mexican wireless subscribers 12,606 9,213
North American wireless subscribers 146,824 139,658
North American branded subscribers 103,532 98,158
North American branded net additions 738 1,195
Domestic satellite video subscribers 21,012 20,112
AT&T U-verse (U-verse) video subscribers 4,048 5,260
Latin America satellite video subscribers 1 13,678 12,436
Total video subscribers 38,738 37,808
Total domestic broadband connections 15,695 15,764
Network access lines in service 13,363 15,975
U-verse VoIP connections 5,858 5,484
Debt ratio 2 51.6 % 51.2 %
Net debt ratio 3 45.8 % 47.3 %
Ratio of earnings to fixed charges 4 3.80 4.22
Number of AT&T employees 264,530 280,870
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At
December 31, 2016, SKY Mexico had 8.0 million subscribers.
2 Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital
(total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and
Capital Resources" section for discussion.
3 Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash
available by total capital (total debt plus total stockholders' equity).
4 See Exhibit 12.
Segment Results
Our segments are strategic business units that offer different products and services over various technology platforms
and/or in different geographies that are managed accordingly. Our segment results presented in Note 4 and discussed below
for each segment follow our internal management reporting. We analyze our segments based on Segment Contribution, which
consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income
(loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Business Solutions,
(2) Entertainment Group, (3) Consumer Mobility and (4) International.
We also evaluate segment performance based on EBITDA and/or EBITDA margin, which is defined as Segment Contribution,
excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant
and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is
an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for
debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary
uses. EBITDA margin is EBITDA divided by total revenues.
22
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The Business Solutions segment provides services to business customers, including multinational companies; governmental
and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We
provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband,
collectively referred to as fixed strategic services; as well as traditional data and voice products. We utilize our
wireless and wired networks to provide a complete integrated communications solution to our business customers.
The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising
services to customers located in the United States or in U.S. territories. We utilize our copper and IP-based wired network
and/or our satellite technology.
The Consumer Mobility segment provides nationwide wireless service to consumers, wholesale and resale wireless subscribers
located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including
high-speed internet, video and home monitoring services over wireless devices.
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video
entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional
and national networks in Mexico to provide consumer and business customers with wireless data and voice communication
services. Our international subsidiaries conduct business in their local currency, and operating results are converted to
U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.
Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an
international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to
our customers, not by segment, and therefore asset information and capital expenditures by segment are not presented.
Depreciation is allocated based on asset utilization by segment.
Business Solutions
Segment Results
First Quarter
2017 2016 Percent Change
Segment operating revenues
Wireless service $ 7,929 $ 7,855 0.9 %
Fixed strategic services 2,974 2,751 8.1
Legacy voice and data services 3,630 4,373 (17.0 )
Other service and equipment 817 859 (4.9 )
Wireless equipment 1,498 1,771 (15.4 )
Total Segment Operating Revenues 16,848 17,609 (4.3 )
Segment operating expenses
Operations and support 10,176 10,802 (5.8 )
Depreciation and amortization 2,312 2,508 (7.8 )
Total Segment Operating Expenses 12,488 13,310 (6.2 )
Segment Operating Income 4,360 4,299 1.4
Equity in Net Income of Affiliates - - -
Segment Contribution $ 4,360 $ 4,299 1.4 %
23
AT&T INC.
MARCH 31, 2017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share and per subscriber amounts
The following tables highlight other key measures of performance for the Business Solutions segment:
March 31,
(in 000s) 2017 2016 Percent Change
Business Wireless Subscribers
Postpaid/Branded 50,839 48,844 4.1 %
Reseller 76 64 18.8
Connected devices 1 31,439 26,863 17.0
Total Business Wireless Subscribers 82,354 75,771 8.7
Business IP Broadband Connections 980 928 5.6 %
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
First Quarter
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