REG - AT & T Inc. - 3Q14 10-Q <Origin Href="QuoteRef">T.N</Origin> - Part 2
18/11/2014 18:00
- Part 2: For the preceding part double click ID:nRSR3768Xa
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 meet the plans' obligations to provide benefits to employees upon their retirement.
In July 2014, the U.S. Department of Labor (DOL) published in the Federal Register their final retroactive approval of our
September 9, 2013 voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding
company for our wireless business, to the trust used to pay pension benefits under our qualified pension plans. The
preferred equity interest had a value of $9,114 at September 30, 2014. The trust is entitled to receive cumulative cash
distributions of $560 per annum, which will be distributed quarterly in equal amounts and will be accounted for as
contributions. We distributed $420 to the trust during the nine months ended September 30, 2014. So long as we make the
distributions, the terms of the preferred interest will impose 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, expense
credits are denoted with parentheses. A portion of these expenses is capitalized as part of internal construction projects,
providing a small reduction in the net expense recorded.
Three months ended Nine months ended
September 30, September 30,
2014 2013 2014 2013
Pension cost:
Service cost - benefits earned during the period $ 282 $ 331 $ 846 $ 991
Interest cost on projected benefit obligation 661 608 1,984 1,822
Expected return on assets (849) (828) (2,549) (2,484)
Amortization of prior service credit (24) (25) (71) (71)
Net pension cost $ 70 $ 86 $ 210 $ 258
Postretirement cost:
Service cost - benefits earned during the period $ 59 $ 95 $ 175 $ 286
Interest cost on accumulated postretirement benefit obligation 365 389 1,094 1,168
Expected return on assets (165) (177) (491) (533)
Amortization of prior service credit (362) (263) (1,086) (788)
Net postretirement (credit) cost $ (103) $ 44 $ (308) $ 133
Combined net pension and postretirement (credit) cost $ (33) $ 130 $ (98) $ 391
Our combined net pension and postretirement cost decreased $163 in the third quarter and $489 for the first nine months of
2014. The decrease reflects higher amortization of prior service credits due to plan changes, including changes to future
costs for continued retiree healthcare coverage. The decrease also reflects increasing corporate bond rates, which
contributed to lower service cost and higher interest costs.
Our fourth-quarter 2014 results will include the effects of settlement accounting for a portion of our pension plan. Due in
part to our 2013 enhanced retirement offer and other distributions, lump sum distributions from the plan during 2014
exceeded service and interest costs in early October.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings
plans. Net supplemental retirement pension benefits cost, which is not included in the table above, was $29 in the third
quarter of 2014, of which $27 was interest cost, and $87 for the first nine months, of which $82 was interest cost. In
2013, net supplemental retirement pension benefits cost was $27 in the third quarter, of which $25 was interest cost, and
$82 for the first nine months, of which $76 was interest cost.
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. Valuation techniques used should 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, 2013.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial
instruments, are summarized as follows:
September 30, 2014 December 31, 2013
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures $ 75,226 $ 82,938 $ 74,484 $ 79,309
Commercial paper - - 20 20
Bank borrowings 5 5 1 1
Investment securities 2,643 2,643 2,450 2,450
The carrying value of debt with an original maturity of less than one year approximates market value. The fair value
measurements used for notes and debentures are considered Level 2 and are determined using various methods, including
quoted prices for identical or similar securities in both active and inactive markets.
Following is the fair value leveling for available-for-sale securities and derivatives as of September 30, 2014 and
December 31, 2013:
September 30, 2014
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,108 $ - $ - $ 1,108
International equities 541 - - 541
Fixed income bonds - 913 - 913
Asset Derivatives1
Interest rate swaps - 131 - 131
Cross-currency swaps - 1,536 - 1,536
Liability Derivatives1
Interest rate swaps - (10) - (10)
Cross-currency swaps - (901) - (901)
December 31, 2013
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,049 $ - $ - $ 1,049
International equities 563 - - 563
Fixed income bonds - 759 - 759
Asset Derivatives1
Interest rate swaps - 191 - 191
Cross-currency swaps - 1,951 - 1,951
Liability Derivatives1
Interest rate swaps - (7) - (7)
Cross-currency swaps - (519) - (519)
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.
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 $91 have maturities of less than one year, $277 within one to three years, $292
within three to five years, and $253 for five or more years.
Our cash equivalent (money market securities) short-term investments (certificate and time deposits) and customer deposits
are recorded at amortized cost, and the respective carrying amounts approximate fair values. Our short-term investments of
$1,890 are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the
consolidated balance sheets.
Derivative Financial Instruments
We employ derivatives 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.
The majority of our derivatives are designated either as a hedge of the fair value of a recognized asset or liability or of
an unrecognized firm commitment (fair value hedge), or as a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability (cash flow hedge).
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps
is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt
of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying
principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated
statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized
losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest
rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early
termination of our fair value hedges are recognized in interest expense. In the nine months ended September 30, 2014 and
September 30, 2013, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency
swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk
generated from the issuance of our Euro, British pound sterling and Canadian dollar denominated debt. These agreements
include initial and final exchanges of principal from fixed foreign denominations to fixed U.S. denominated amounts, to be
exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest
rate swap of a fixed foreign-denominated rate to a fixed U.S. 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, both for the period they are
outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of
accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The
gain or loss on the ineffective portion is recognized as "Other income (expense) - net" in the consolidated statements of
income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the nine months ended
September 30, 2014 and September 30, 2013, 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 $42 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. Some of these instruments are designated as cash flow hedges while others remain nondesignated, largely based
on size and duration. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts
are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to
be ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of
income. In the nine months ended September 30, 2014 and September 30, 2013, no ineffectiveness was measured on foreign
exchange contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing
collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2014, we had posted
collateral of $58 (a deposit asset) and held collateral of $1,396 (a receipt liability). Under the agreements, if our
credit rating had been downgraded one rating level by Moody's Investors Service and Standard & Poor's Rating Services and
two rating levels by Fitch Ratings, before the final collateral exchange in September, we would have been required to post
additional collateral of $71. At December 31, 2013, we had posted collateral of $8 (a deposit asset) and held collateral of
$1,600 (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), against the fair value of the derivative
instruments.
Following is the notional amount of our outstanding derivative positions:
September 30, December 31,
2014 2013
Interest rate swaps $ 6,550 $ 4,750
Cross-currency swaps 20,650 17,787
Total $ 27,200 $ 22,537
Following is the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships Three months ended Nine months ended
September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (70) $ 9 $ (59) $ (78)
Gain (Loss) on long-term debt 70 (9) 59 78
In addition, the net swap settlements that accrued and settled in the quarter ended September 30 were offset against
interest expense.
Cash Flow Hedging Relationships Three months ended Nine months ended
September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ 567 $ 482 $ 418 $ 807
Interest rate locks:
Interest income (expense) reclassified from accumulated OCI into income (11) (11) (33) (34)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI - 5 (2) 5
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Leap On March 13, 2014, we acquired Leap, a provider of prepaid wireless service, for fifteen dollars per outstanding
share of Leap's common stock, or $1,248 (excluding Leap's cash on hand), plus one nontransferable contingent value right
(CVR) per share. The CVR will entitle each Leap stockholder to a pro rata share of the net proceeds of the future sale of
the Chicago 700 MHz A-band Federal Communications Commission (FCC) license held by Leap.
The preliminary values of assets acquired under the terms of the agreement were: $3,000 in licenses, $510 in property,
plant and equipment, $520 of customer lists, $340 for trade names and $744 of goodwill. The estimated fair value of debt
associated with the acquisition of Leap was $3,889, all of which was redeemed or matured by July 31, 2014.
Pending Acquisition
DIRECTV In May 2014, we announced a merger agreement to acquire DIRECTV in a stock-and-cash transaction for ninety-five
dollars per share of DIRECTV's common stock, or approximately $48,500 at the date of announcement. As of September 30,
2014, DIRECTV had approximately $16,852 in net debt based on DIRECTV's financial statements included in the Form 10-Q for
the third quarter of 2014. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our
stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our
stock price is below $34.90 per share at closing and 1.724 AT&T shares if our stock price is above $38.58 at closing. If
our average stock price (calculated in accordance with the merger agreement with DIRECTV) is between $34.90 and $38.58 at
closing, then DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value.
DIRECTV is a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best
selection of programming, the best technology for delivering and viewing high-quality video on any device and the best
customer satisfaction among major U.S. cable and satellite TV providers.
The merger agreement was adopted by DIRECTV's stockholders on September 25, 2014 and remains subject to review by the FCC
and the Department of Justice and to other closing conditions. It is also a condition that all necessary consents by
certain foreign governmental entities have been obtained and are in full force and effect. The transaction is expected to
close in the first half of 2015. The merger agreement provides certain mutual termination rights for us and DIRECTV,
including the right of either party to terminate the agreement if the merger is not consummated by May 18, 2015, subject to
extension in certain cases to a date no later than November 13, 2015. Either party may also terminate the agreement if an
order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and
nonappealable. In October 2014, DIRECTV and the National Football League renewed their agreement for the "NFL Sunday
Ticket" service substantially on the terms discussed between AT&T and DIRECTV, satisfying one of the conditions to closing
the merger. Under certain circumstances relating to a competing transaction, DIRECTV may be required to pay a termination
fee to us in connection with or following a termination of the agreement.
Dispositions
América Móvil In May 2014, in conjunction with the announcement of our intention to dispose of our investment in América
Móvil and the resignation of our board members from the board of América Móvil, we discontinued accounting for this
investment under the equity method due to our lack of significant influence. On June 30, 2014, we sold our remaining stake
in América Móvil for approximately $5,566 and recorded a pre-tax gain of $1,243. At closing, we received $4,565 cash and we
received the remaining cash in the third quarter.
Connecticut Wireline In December 2013, we agreed to sell our incumbent local exchange operations in Connecticut to
Frontier Communications Corporation for $2,000 in cash. The transaction was approved by the FCC in July 2014 and was
approved by the Connecticut Public Utilities Regulatory Authority on October 15, 2014. The transaction closed on October
24, 2014.
We applied held-for-sale treatment to the assets and liabilities of the Connecticut operations, and, accordingly, included
the assets in "Other current assets," and the related liabilities in "Accounts payable and accrued liabilities," on our
consolidated balance sheets. However, the business does not qualify as discontinued operations as we expect significant
continuing direct cash flows related to the disposed operations. Assets and liabilities of the Connecticut operations
included the following:
September 30, December 31,
2014 2013
Assets held for sale:
Current assets $ 138 $ 155
Property, plant and equipment - net 1,436 1,289
Goodwill 799 799
Other assets 18 17
Total assets $ 2,391 $ 2,260
Liabilities related to assets held for sale:
Current liabilities $ 122 $ 128
Noncurrent liabilities 537 480
Total liabilities $ 659 $ 608
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 24 months,
with the right to trade in the original equipment for a new device and have the remaining unpaid balance satisfied. As of
September 30, 2014, gross equipment installment receivables of $3,002 were included on our consolidated balance sheets, of
which $1,861 are notes receivable that are included in "Accounts receivable, net."
On June 27, 2014, we entered into uncommitted agreements pertaining to the sale of equipment installment receivables and
related security with Citibank, N.A. and various other relationship banks as purchasers (collectively, the Purchasers) with
a funding amount not expected to exceed $2,000 at any given time. Under the agreement, we may transfer the receivables to
the Purchasers for cash and additional consideration upon settlement of the receivables. Under the terms of the
arrangement, we continue to bill and collect on behalf of our customers for the receivables sold.
The following table sets forth a summary of equipment installment receivables sold during the three months and nine months
ended September 30, 2014:
Three months Nine months
Net receivables sold1 $ 885 $ 2,276
Cash proceeds received 556 1,375
Deferred purchase price recorded 324 889
1 Gross receivables sold were $1,028 and $2,665 for the third quarter and the first nine months of 2014, respectively, before
deducting the allowance, imputed interest and trade-in right guarantees.
The deferred purchase price was initially recorded at estimated fair value, which was based on remaining installment
payments expected to be collected, adjusted by the expected timing and value of the device trade-ins, and is subsequently
carried at the lower of cost or net realizable value. The value of the device trade-ins considers estimated prices offered
to us by independent, third parties that contemplate changes in value after the launch of a device. At September 30, 2014,
our deferred purchase price receivable was $901, which is included in "Other Assets" on our consolidated balance sheets.
Our maximum exposure to loss as a result of selling these receivables is limited to the amount of our deferred purchase
price at any point in time.
These transactions did not have a material impact in 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
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