REG - AT & T Inc. - Half-year Report 10-Q <Origin Href="QuoteRef">T.N</Origin> - Part 2
23/08/2017 16:50
- Part 2: For the preceding part double click ID:nRSW8233Oa
DepreciationandAmortization OperatingIncome (Loss) Equity in NetIncome (Loss) ofAffiliates SegmentContribution
Business Solutions $ 33,955 $ 20,489 $ 13,466 $ 4,647 $ 8,819 $ - $ 8,819
Entertainment Group 25,305 19,159 6,146 2,877 3,269 (17 ) 3,252
Consumer Mobility 15,531 9,048 6,483 1,744 4,739 - 4,739
International 3,955 3,531 424 601 (177 ) 45 (132 )
Segment Total 78,746 52,227 26,519 9,869 16,650 $ 28 $ 16,678
Corporate and Other 456 308 148 33 115
Acquisition-related items - 488 (488 ) 2,372 (2,860 )
Certain significant items - (282 ) 282 - 282
AT&T Inc. $ 79,202 $ 52,741 $ 26,461 $ 12,274 $ 14,187
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AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
Dollars in millions except per share amounts
For the three months ended June 30, 2016
Revenues Operationsand SupportExpenses EBITDA DepreciationandAmortization OperatingIncome (Loss) Equity in NetIncome (Loss) ofAffiliates SegmentContribution
Business Solutions $ 17,579 $ 10,857 $ 6,722 $ 2,521 $ 4,201 $ - $ 4,201
Entertainment Group 12,711 9,569 3,142 1,489 1,653 (2 ) 1,651
Consumer Mobility 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
Revenues 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
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AT&T INC.
JUNE 30, 2017
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
2017 2016 2017 2016
Business Solutions $ 4,459 $ 4,201 $ 8,819 $ 8,500
Entertainment Group 1,655 1,651 3,252 3,246
Consumer Mobility 2,400 2,574 4,739 5,068
International (32 ) (184 ) (132 ) (368 )
Segment Contribution 8,482 8,242 16,678 16,446
Reconciling Items:
Corporate and Other 142 (97 ) 115 (218 )
Merger and integration charges (281 ) (233 ) (488 ) (528 )
Amortization of intangibles acquired (1,170 ) (1,316 ) (2,372 ) (2,667 )
Actuarial gain (loss) 259 - 259 -
Employee separation costs (60 ) (29 ) (60 ) (54 )
Gain on wireless spectrum transactions 63 - 181 736
Venezuela devaluation (98 ) - (98 ) -
Segment equity in net (income) loss of affiliates (14 ) (7 ) (28 ) (24 )
AT&T Operating Income 7,323 6,560 14,187 13,691
Interest expense 1,395 1,258 2,688 2,465
Equity in net income (loss) of affiliates 14 28 (159 ) 41
Other income (expense) - net 128 91 108 161
Income Before Income Taxes $ 6,070 $ 5,421 $ 11,448 $ 11,428
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 $8,294 at June 30, 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 $280 to the trust during the six months ended June 30, 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. During the second quarter of 2017, a
substantive plan change involving the frequency of considering potential health reimbursement account credit increases was
communicated to our retirees. This plan change resulted in additional prior service credits recognized in other
comprehensive income, reducing our liability by $1,563. Such credits will be amortized through earnings over a period
approximating the average service period to full eligibility. Upon our adoption of ASU 2017-07, the amortization of these
prior service credits will be recorded in other income (expense) - net. The plan change also triggered a remeasurement of
our postretirement benefit obligation, resulting in an actuarial gain of $259 recognized in the second quarter of 2017.
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AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
Dollars in millions except per share amounts
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).
Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Pension cost:
Service cost - benefits earned during the period $ 282 $ 278 $ 564 $ 556
Interest cost on projected benefit obligation 484 495 968 990
Expected return on assets (784 ) (780 ) (1,567 ) (1,558 )
Amortization of prior service credit (31 ) (25 ) (62 ) (51 )
Net pension (credit) cost $ (49 ) $ (32 ) $ (97 ) $ (63 )
Postretirement cost:
Service cost - benefits earned during the period $ 34 $ 48 $ 75 $ 96
Interest cost on accumulated postretirement benefit obligation 202 243 424 486
Expected return on assets (79 ) (89 ) (159 ) (178 )
Amortization of prior service credit (366 ) (319 ) (702 ) (638 )
Actuarial (gain) loss (259 ) - (259 ) -
Net postretirement (credit) cost $ (468 ) $ (117 ) $ (621 ) $ (234 )
Combined net pension and postretirement (credit) cost $ (517 ) $ (149 ) $ (718 ) $ (297 )
The decrease in the combined net pension and postretirement costs in the second quarter and first six months reflects
higher amortization of prior service credits as well as decreasing corporate bond rates, which contributed to lower
interest costs.
As part of our second-quarter 2017 remeasurement, we decreased the weighted-average discount rate used to measure our
postretirement benefit obligation to 4.10%. The discount rate in effect for determining postretirement service and interest
costs after remeasurement is 4.50% and 3.30%, respectively. Including the effects of our plan change and remeasurement, the
total estimated prior service credits that will be amortized from accumulated OCI into net periodic benefit cost over the
last half of 2017 is $764 ($474 net of tax) for postretirement benefits.
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings
plans. For the second quarter ended 2017 and 2016, net supplemental pension benefits costs not included in the table above
were $23 and $24. For the first six months of 2017 and 2016, net supplemental pension benefit costs were $45 and $47.
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AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
Dollars in millions except per share amounts
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.
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:
June 30, 2017 December 31, 2016
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures 1 $ 142,816 $ 151,338 $ 122,381 $ 128,726
Bank borrowings 2 2 4 4
Investment securities 2,556 2,556 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.
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AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
Dollars in millions except per share amounts
Following is the fair value leveling for available-for-sale securities and derivatives as of June 30, 2017 and December 31,
2016:
June 30, 2017
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,276 $ - $ - $ 1,276
International equities 659 - - 659
Fixed income bonds - 370 - 370
Asset Derivatives 1
Interest rate swaps - 57 - 57
Cross-currency swaps - 294 - 294
Interest rate locks - 3 - 3
Liability Derivatives 1
Interest rate swaps - (42 ) - (42 )
Cross-currency swaps - (2,631 ) - (2,631 )
Interest rate locks - (82 ) - (82 )
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.
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 Derivatives 1
Interest rate swaps - 79 - 79
Cross-currency swaps - 89 - 89
Liability Derivatives 1
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 $220 have maturities of less than one year, $33 within one to three years, $32
within three to five years and $85 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.
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AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
Dollars in millions except per share amounts
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, 2017 and June 30,
2016, 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, 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 six months ended June 30, 2017 and June 30, 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 six months ended June 30, 2017 and June 30, 2016, no ineffectiveness was measured on foreign exchange
contracts designated as cash flow hedges.
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AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
Dollars in millions except per share amounts
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, 2017, we had posted collateral
of $2,297 (a deposit asset) and held collateral of $13 (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 $133. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB-
(S&P), we would have been required to post additional collateral of $239. 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:
June 30, December 31,
2017 2016
Interest rate swaps $ 10,775 $ 9,650
Cross-currency swaps 38,694 29,642
Interest rate locks 5,000 -
Total $ 54,469 $ 39,292
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, June 30,
2017 2016 2017 2016
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (23 ) $ 5 $ (48 ) $ 71
Gain (Loss) on long-term debt 23 (5 ) 48 (71 )
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
June 30, June 30,
Cash Flow Hedging Relationships 2017 2016 2017 2016
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ (717 ) $ (595 ) $ (697 ) $ (404 )
Interest rate locks:
Gain (Loss) recognized in accumulated OCI (79 ) - (79 ) -
Interest income (expense) reclassified from accumulated OCI into income (14 ) (14 ) (29 ) (29 )
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AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
Dollars in millions except per share amounts
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Auction 1000 On April 13, 2017, the Federal Communications Commission (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.
Dispositions
YP Holdings LLC In June 2017, YP Holdings LLC was acquired by Dex Media. Our second-quarter results include a gain of $36
for our portion of the proceeds.
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 March 31, 2017, the
total transaction value is approximately $107,160. 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 and certain foreign jurisdictions. The 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.
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. As of July 31, 2017, seven states have opted-in to the program. We
do not expect FirstNet to materially impact our 2017 results.
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AT&T INC.
JUNE 30, 2017
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, 2017 and December 31, 2016, gross equipment installment receivables
of $3,920 and $5,665 were included on our consolidated balance sheets, of which $2,230 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 transfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the
receivables, referred to as the deferred purchase price. In June 2017, we modified the agreement with the Purchasers such
that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers.
Additionally, in the event a customer trades in a device prior to the end of the installment contract period, we agree to
make a payment to the Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record
a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. 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
$3,946.
The following table sets forth a summary of equipment installment receivables sold during the three and six months ended
June 30, 2017 and 2016:
Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Gross receivables sold $ 1,752 $ 1,845 $ 4,598 $ 4,327
Net receivables sold 1 1,599 1,671 4,220 3,927
Cash proceeds received 1,415 1,126 2,847 2,647
Deferred purchase price recorded 293 563 1,482 1,282
Guarantee obligation recorded 74 - 74 -
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently
carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment
payments expected to be collected and the expected timing and value of device trade-ins. The estimated value of the device
trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of
a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are
considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
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 and six months ended June 30, 2017 and 2016:
Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Fair value of repurchased receivables $ 337 $ - $ 714 $ 532
Carrying value of deferred purchase price 301 - 640 539
Gain (loss) on repurchases 1 $ 36 $ - $ 74 $ (7 )
1 These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.
20
AT&T INC.
JUNE 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
Dollars in millions except per share amounts
At June 30, 2017 and December 31, 2016, our deferred purchase price receivable was $3,648 and $3,090, respectively, of
which $2,232 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 total amount of our deferred purchase price and guarantee obligation.
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 4,598
Collections on cash purchase price (2,337 )
Collections on deferred purchase price (382 )
Fees (48 )
Trade ins and other (141 )
Fair value of repurchased receivables (714 )
Outstanding derecognized receivables at June 30, $ 8,208
NOTE 9. SUBSEQUENT EVENT
On July 27, 2017, we initiated a debt offering for $22,500 that will be completed on August 7, 2017. The proceeds will be
used for general corporate purposes, including funding the cash consideration for the Time Warner acquisition. Upon
settlement of the debt offering, we expect to terminate our bridge loan credit agreement.
Details for the offering are as follows:
· $750 of floating rate notes due 2023.
· $1,750 of 2.850% global notes due 2023.
· $3,000 of 3.400% global notes due 2024.
· $5,000 of 3.900% global notes due 2027.
· $4,500 of 4.900% global notes due 2037.
· $5,000 of 5.150% global notes due 2050.
· $2,500 of 5.300% global notes due 2058.
The notes detailed above, along with $7,301 of floating rate and global notes issued in June 2017, are subject to a special
mandatory redemption feature. If we do not consummate the Time Warner acquisition pursuant to the merger agreement on or
prior to April 22, 2018, or, if prior to such date, the merger agreement is terminated, then in either case, we must redeem
the notes at a redemption price equal to 101% of the principal amount of the notes, plus accrued but unpaid interest.
In conjunction with this offering, we settled our interest rate locks.
21
AT&T INC.
JUNE 30, 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 second quarter and for the first six months of 2017 and 2016 are
summarized as follows:
Second Quarter Six-Month Period
2017 2016 PercentChange 2017 2016 PercentChange
Operating Revenues
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