REG - AT & T Inc. - Half-year Report 10-Q <Origin Href="QuoteRef">T.N</Origin> - Part 2
22/08/2016 10:00
- Part 2: For the preceding part double click ID:nRSV7286Ha
8,186 4,680 3,506 932 2,574 - 2,574
International 1,828 1,723 105 298 (193 ) 9 (184 )
Segment Total 40,304 26,829 13,475 5,240 8,235 $ 7 $ 8,242
Corporate and Other 216 293 (77 ) 20 (97 )
Acquisition-related items - 233 (233 ) 1,316 (1,549 )
Certain significant items - 29 (29 ) - (29 )
AT&T Inc. $ 40,520 $ 27,384 $ 13,136 $ 6,576 $ 6,560
For the six months ended June 30, 2016
Revenue Operationsand SupportExpenses EBITDA DepreciationandAmortization OperatingIncome (Loss) Equity in NetIncome (Loss) ofAffiliates SegmentContribution
Business Solutions $ 35,188 $ 21,659 $ 13,529 $ 5,029 $ 8,500 $ - $ 8,500
Entertainment Group 25,369 19,147 6,222 2,977 3,245 1 3,246
Consumer Mobility 16,514 9,592 6,922 1,854 5,068 - 5,068
International 3,495 3,311 184 575 (391 ) 23 (368 )
Segment Total 80,566 53,709 26,857 10,435 16,422 $ 24 $ 16,446
Corporate and Other 489 670 (181 ) 37 (218 )
Acquisition-related items - 528 (528 ) 2,667 (3,195 )
Certain significant items - (682 ) 682 - 682
AT&T Inc. $ 81,055 $ 54,225 $ 26,830 $ 13,139 $ 13,691
11
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2015
Revenue Operationsand SupportExpenses EBITDA DepreciationandAmortization OperatingIncome (Loss) Equity in NetIncome (Loss) ofAffiliates SegmentContribution
Business Solutions $ 17,664 $ 10,972 $ 6,692 $ 2,460 $ 4,232 $ - $ 4,232
Entertainment Group 5,782 4,913 869 1,065 (196 ) (12 ) (208 )
Consumer Mobility 8,755 5,202 3,553 934 2,619 - 2,619
International 491 529 (38 ) 93 (131 ) - (131 )
Segment Total 32,692 21,616 11,076 4,552 6,524 $ (12 ) $ 6,512
Corporate and Other 323 236 87 24 63
Acquisition-related items - 694 (694 ) 120 (814 )
Certain significant items - - - - -
AT&T Inc. $ 33,015 $ 22,546 $ 10,469 $ 4,696 $ 5,773
For the six months ended June 30, 2015
Revenue Operationsand SupportExpenses EBITDA DepreciationandAmortization OperatingIncome (Loss) Equity in NetIncome (Loss) ofAffiliates SegmentContribution
Business Solutions $ 35,221 $ 22,045 $ 13,176 $ 4,802 $ 8,374 $ - $ 8,374
Entertainment Group 11,442 9,772 1,670 2,130 (460 ) (18 ) (478 )
Consumer Mobility 17,533 10,743 6,790 1,936 4,854 - 4,854
International 727 747 (20 ) 121 (141 ) - (141 )
Segment Total 64,923 43,307 21,616 8,989 12,627 $ (18 ) $ 12,609
Corporate and Other 668 470 198 44 154
Acquisition-related items - 993 (993 ) 241 (1,234 )
Certain significant items - 217 (217 ) - (217 )
AT&T Inc. $ 65,591 $ 44,987 $ 20,604 $ 9,274 $ 11,330
12
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income.
Second Quarter Six-Month Period
2016 2015 2016 2015
Business Solutions $ 4,201 $ 4,232 $ 8,500 $ 8,374
Entertainment Group 1,651 (208 ) 3,246 (478 )
Consumer Mobility 2,574 2,619 5,068 4,854
International (184 ) (131 ) (368 ) (141 )
Segment Contribution 8,242 6,512 16,446 12,609
Reconciling Items:
Corporate and Other (97 ) 63 (218 ) 154
Merger and integration charges (233 ) (694 ) (528 ) (993 )
Amortization of intangibles acquired (1,316 ) (120 ) (2,667 ) (241 )
Employee separation charges (29 ) - (54 ) (217 )
Gain on wireless spectrum transactions - - 736 -
Segment equity in net (income) loss of affiliates (7 ) 12 (24 ) 18
AT&T Operating Income 6,560 5,773 13,691 11,330
Interest expense 1,258 932 2,465 1,831
Equity in net income of affiliates 28 33 41 33
Other income (expense) - net 91 48 161 118
Income Before Income Taxes $ 5,421 $ 4,922 $ 11,428 $ 9,650
NOTE 5. PENSION AND POSTRETIREMENT BENEFITS
Substantially all of our employees are covered by one of our noncontributory pension plans. We also provide certain
medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially
determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the
Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits
described in the plans to employees upon their retirement.
In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding
company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans.
The preferred equity interest had a value of $8,704 at June 30, 2016. The trust is entitled to receive cumulative cash
distributions of $560 per annum, which are distributed quarterly in equal amounts and accounted for as contributions. We
distributed $280 to the trust during the six months ended June 30, 2016. So long as we make the distributions, we will have
no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset
under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity
interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated
financial statements and instead has been eliminated in consolidation. We also agreed to make a cash contribution to the
trust of $175 no later than the due date of our federal income tax return for 2015.
We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual
measurement date of December 31, unless earlier remeasurements are required. The following table details pension and
postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A
portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net
expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and
expected return on plan assets are included within Corporate and Other (see Note 4).
13
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Three months ended Six months ended
June 30, June 30,
2016 2015 2016 2015
Pension cost:
Service cost - benefits earned during the period $ 278 $ 300 $ 556 $ 599
Interest cost on projected benefit obligation 495 473 990 947
Expected return on assets (780 ) (826 ) (1,558 ) (1,652 )
Amortization of prior service credit (25 ) (26 ) (51 ) (52 )
Net pension (credit) cost $ (32 ) $ (79 ) $ (63 ) $ (158 )
Postretirement cost:
Service cost - benefits earned during the period $ 48 $ 56 $ 96 $ 111
Interest cost on accumulated postretirement benefit obligation 243 241 486 483
Expected return on assets (89 ) (105 ) (178 ) (210 )
Amortization of prior service credit (319 ) (319 ) (638 ) (639 )
Net postretirement (credit) cost $ (117 ) $ (127 ) $ (234 ) $ (255 )
Combined net pension and postretirement (credit) cost $ (149 ) $ (206 ) $ (297 ) $ (413 )
The decrease in the combined net pension and postretirement credit of $57 in the second quarter and $116 for the first six
months of 2016 is primarily due to a lower expected return on assets resulting from a decrease in the value in the plan
assets.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings
plans. For the second quarter ended 2016 and 2015, net supplemental pension benefits costs not included in the table above
were $24 and $21. For the first six months of 2016 and 2015, net supplemental pension benefit costs were $47 and $41.
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described
below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.
Level 2 Inputs to the valuation methodology include:
· Quoted prices for similar assets and liabilities in active markets.
· Quoted prices for identical or similar assets or liabilities in inactive markets.
· Inputs other than quoted market prices that are observable for the asset or liability.
· Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
· Fair value is often based on developed models in which there are few, if any, external observations.
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs
and minimize the use of unobservable inputs.
14
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net
realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with
other market participants. The use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different fair value measurement at the reporting date. There have been no changes
in the methodologies used since December 31, 2015.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial
instruments, are summarized as follows:
June 30, 2016 December 31, 2015
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures1 $ 125,568 $ 137,112 $ 124,847 $ 128,993
Bank borrowings 4 4 4 4
Investment securities 2,550 2,550 2,704 2,704
1 Includes credit agreement borrowings.
The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value
measurements used for notes and debentures are considered Level 2 and are determined using various methods, including
quoted prices for identical or similar securities in both active and inactive markets.
Following is the fair value leveling for available-for-sale securities and derivatives as of June 30, 2016 and December 31,
2015:
June 30, 2016
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,111 $ - $ - $ 1,111
International equities 547 - - 547
Fixed income bonds - 621 - 621
Asset Derivatives1
Interest rate swaps - 202 - 202
Cross-currency swaps - 100 - 100
Liability Derivatives1
Cross-currency swaps - (3,821 ) - (3,821 )
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.
15
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
December 31, 2015
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,132 $ - $ - $ 1,132
International equities 569 - - 569
Fixed income bonds - 680 - 680
Asset Derivatives1
Interest rate swaps - 136 - 136
Cross-currency swaps - 556 - 556
Foreign exchange contracts - 3 - 3
Liability Derivatives1
Cross-currency swaps - (3,466 ) - (3,466 )
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 $95 have maturities of less than one year, $287 within one to three years, $62
within three to five years and $177 for five or more years.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and customer
deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term
investments and customer deposits are recorded in "Other current assets" and our investment securities are recorded in
"Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency
exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and
combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or
speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from
observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows
associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as
the item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps
is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt
of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying
principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated
statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized
losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest
rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early
termination of our fair value hedges are recognized in interest expense. In the six months ended June 30, 2016 and June 30,
2015, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.
16
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency
swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk
generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These
agreements include initial and final exchanges of principal from fixed foreign currency denominations to fixed U.S. dollar
denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance.
They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S. dollar
denominated interest rate.
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses
on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments
designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into
interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is
recognized as "Other income (expense) - net" in the consolidated statements of income in each period. We evaluate the
effectiveness of our cross-currency swaps each quarter. In the six months ended June 30, 2016 and June 30, 2015, no
ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of
fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest
rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be
ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of
income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the
amortization of net losses on historical interest rate locks.
We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated
transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at
a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are
amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be
ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of
income. In the six months ended June 30, 2016 and June 30, 2015, no ineffectiveness was measured on foreign exchange
contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing
collateral thresholds based on respective credit ratings and netting agreements. At June 30, 2016, we had posted collateral
of $3,154 (a deposit asset) and held collateral of $8 (a receipt liability). Under the agreements, if AT&T's credit rating
had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in June, we would have been
required to post additional collateral of $151. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB-
(S&P) and below Baa3 (Moody's), we would owe an additional $275. At December 31, 2015, we had posted collateral of $2,343
(a deposit asset) and held collateral of $124 (a receipt liability). We do not offset the fair value of collateral, whether
the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against
the fair value of the derivative instruments.
Following are the notional amounts of our outstanding derivative positions:
June 30, December 31,
2016 2015
Interest rate swaps $ 7,050 $ 7,050
Cross-currency swaps 29,642 29,642
Foreign exchange contracts - 100
Total $ 36,692 $ 36,792
17
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
Following are the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships Three months ended Six months ended
June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 5 $ (30 ) $ 71 $ 11
Gain (Loss) on long-term debt (5 ) 30 (71 ) (11 )
In addition, the net swap settlements that accrued and settled in the quarter ended June 30 were offset against interest
expense.
Three months ended Six months ended
Cash Flow Hedging Relationships June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ (595 ) $ (102 ) $ (404 ) $ (330 )
Interest rate locks:
Gain (Loss) recognized in accumulated OCI - (45 ) - (361 )
Interest income (expense) reclassified from accumulated OCI into income (14 ) (15 ) (29 ) (26 )
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
DIRECTV In July 2015, we completed our acquisition of DIRECTV, a leading provider of digital television entertainment
services in both the United States and Latin America. For accounting purposes, the transaction was valued at $47,409. Our
operating results include the results of DIRECTV following the acquisition date.
The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market
approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market
and are considered Level 3 under the Fair Value Measurement and Disclosure framework, other than long-term debt assumed in
the acquisition (see Note 6). The income approach was primarily used to value the intangible assets, consisting of acquired
customer relationships, orbital slots and trade names. The income approach estimates fair value for an asset based on the
present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate
of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which
estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used
primarily for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or
replacement cost for the property, less an allowance for loss in value due to depreciation.
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the
fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of
the acquisition.
18
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
The following table summarizes the fair values of the DIRECTV assets acquired and liabilities assumed and related deferred
income taxes that existed as of the acquisition date.
Assets acquired
Cash $ 4,797
Accounts receivable 2,038
All other current assets 1,534
Property, plant and equipment 9,320
Intangible assets not subject to amortization
Orbital slots 11,946
Trade name 1,371
Intangible assets subject to amortization
Customer lists and relationships 19,508
Trade name 2,915
Other 445
Investments and other assets 2,375
Goodwill 34,619
Total assets acquired 90,868
Liabilities assumed
Current liabilities, excluding current portion of long-term debt 5,645
Long-term debt 20,585
Other noncurrent liabilities 16,875
Total liabilities assumed 43,105
Net assets acquired 47,763
Noncontrolling interest (354 )
Aggregate value of consideration paid $ 47,409
Purchased goodwill is not expected to be deductible for tax purposes. The goodwill was allocated to our Entertainment Group
and International segments.
Nextel Mexico In April 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless
business in Mexico, for $1,875, including approximately $427 of net debt and other adjustments. The subsidiaries offered
service under the name Nextel Mexico.
The purchase price allocation of assets acquired was: $376 in licenses, $1,167 in property, plant and equipment, $128 in
customer lists and $193 of goodwill. The goodwill was allocated to our International segment.
GSF Telecom In January 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for
$2,500, including net debt of approximately $700. GSF Telecom offered service under both the Iusacell and Unefon brand
names in Mexico.
The purchase price allocation of assets acquired was: $735 in licenses, $658 in property, plant and equipment, $378 in
customer lists, $26 in trade names and $956 of goodwill. The goodwill was allocated to our International segment.
AWS-3 Auction In January 2015, we submitted winning bids of $18,189 in the Advanced Wireless Service (AWS)-3 Auction (FCC
Auction 97), a portion of which represented spectrum clearing and First Responder Network Authority funding. We provided
the Federal Communications Commission (FCC) an initial down payment of $921 in October 2014 and paid the remaining $17,268
in the first quarter of 2015.
19
AT&T INC.
JUNE 30, 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months
and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have
the remaining unpaid balance satisfied. As of June 30, 2016 and December 31, 2015, gross equipment installment receivables
of $4,427 and $5,719 were included on our consolidated balance sheets, of which $2,512 and $3,239 are notes receivable that
are included in "Accounts receivable - net."
In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related
security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this
agreement, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the
receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect
the payments from our customers on behalf of the Purchasers. To date, cash proceeds received, net of remittances (excluding
amounts returned as deferred purchase price), were $3,673.
The following table sets forth a summary of equipment installment receivables sold during the three months and six months
ended June 30, 2016 and 2015:
Three months ended Six months ended
June 30, June 30,
2016 2015 2016 2015
Gross receivables sold $ 1,845 $ 1,728 $ 4,327 $ 4,363
Net receivables sold1 1,671 1,555 3,927 3,936
Cash proceeds received 1,126 1,049 2,647 2,573
Deferred purchase price recorded 563 505 1,282 1,363
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).
During the first quarter of 2016, we repurchased equipment installment receivables previously sold to the Purchasers, with
a fair value of $532. These transactions reduced our current deferred purchase price receivable by $539, resulting in a
loss of $7 during the first quarter. This loss is included in "Selling, general and administrative" in the consolidated
statements of income.
At June 30, 2016 and December 31, 2015, our deferred purchase price receivable was $3,426 and $2,961, respectively, of
which $1,901 and $1,772 is included in "Other current assets" on our consolidated balance sheets, with the remainder in
"Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to
the amount of our deferred purchase price at any point in time.
The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or
to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as
operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both
the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate
risk.
20
AT&T INC.
JUNE 30, 2016
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
RESULTS OF OPERATIONS
For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of
the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company
whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our
subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both
domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico,
and the following discussion of changes in our operating revenues and expenses is affected by the timing of these
acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from acquired
businesses prior to acquisition are excluded. You should read this discussion in conjunction with the consolidated
financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to
Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not
considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's
presentation.
Consolidated Results Our financial results in the second quarter and for the first six months of 2016 and 2015 are
summarized as follows:
Second Quarter Six-Month Period
2016 2015 PercentChange 2016 2015 PercentChange
Operating Revenues
Service $ 37,142 $ 29,541 25.7 % $ 74,243 $ 58,503 26.9 %
Equipment 3,378 3,474 (2.8 ) 6,812 7,088 (3.9 )
Total Operating Revenues 40,520
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